‘Valuations are below long-term average'

When we last spoke to him in July 2010, Vetri Subramaniam, Head, Equity Funds, Religare Mutual Fund, took the unconventional stance that stock valuations had already run up too much and that mid-cap stocks were unlikely to outperform. Now that both these calls have proved correct, we caught up with him for an update on the markets and how the Religare funds are navigating them.

Excerpts from an interview:

In July, you took the view that market valuations had captured much of the upside and that there was a risk of earnings downgrades to Indian companies. Have those downgrades happened?

I think the risks to earnings of Indian companies have gone up in recent months, with high inflation and fears of further monetary tightening to curb that inflation. I don't yet see that fully reflecting in the consensus earnings estimates.

Rising commodity prices for instance, have really increased input costs for companies across-the-board. You are already seeing signs of margin pressures in the earnings of the past quarter.

Smaller and mid-sized companies and companies operating in highly competitive segments may find it difficult to pass on those increases to their consumers.

There is also the risk of an increase in interest rates. Indian companies, especially small and mid-sized ones have always been quite sensitive to higher interest costs.

The way I see it is that the change in the global scenario calls for an upgrade in the earnings estimates for the commodity companies in the index basket and a downgrade in the estimates for the users of those materials.

However, as cyclicals typically enjoy lower valuations than other sectors, the overall PE multiple of the market has trended down.

Is this correction then a good opportunity to invest, for people with a five year view?

Yes, I think so. Valuations currently are below their long term average. The Sensex is now trading at 14.3 times one year forward consensus earnings. Assuming that the consensus estimates will be cut, which we believe is likely; earnings are still likely to grow at about 15 per cent in FY12 versus consensus estimates of 19 per cent growth.

Based on this reduced estimate the market is at about 15 times one-year forward earnings which compares well to the 15-year average PE multiple of 14.5 times. From this level of valuations, investors can benefit not just from the growth in corporate earnings but also an expansion in PE multiples at some point in the future.

How will rising oil prices play out for listed Indian stocks, if sustained? Are you altering your sector weights owing to this development?

The rise in oil prices is more negative for the Indian fiscal deficit than it is for Indian corporate earnings due to the lack of pass-through. But the public sector oil marketing companies will likely do poorly even though the government will provide them with compensation.

The cost structure of the airline companies would also be negatively impacted. The pass-through of the hike to petrol and diesel prices would be incrementally negative for the auto sector. We have made slight adjustments in our sector positioning based on these views.

Religare Contra Fund has a good three year record, but has underperformed the markets in 2010. What explains the slowdown in performance?

Religare Contra is typically the kind of fund that has a “value” approach to stock selection.

After the correction in 2008, the broader markets were trading at very attractive levels, with a large number of stocks available at throwaway prices.

The initial part of any up move, after a big correction is usually led by value stocks and Religare Contra capitalised on that. However, as the rally continues, growth stocks begin to outperform, and that is when the environment becomes more challenging for value stock pickers.

Even recently, though, you will find that this fund has contained downside quite well whenever the market corrected. That will continue to be its key advantage as we head into more volatile market conditions.

The top sector choices in many of your funds include technology and financials. Can you explain why?

If you look at our sector weights relative to the benchmark, you may find us a little underweight on financials. On technology stocks, yes we would be somewhat overweight, basically on account of the improving global environment which suggests good volumes and pricing for IT companies. In some of our funds, materials have a significant overweight position as well.

The call there is that if the global environment continues to improve, metal prices would continue to rise. With many metal companies seeing huge volumes coming onstream, volumes would remain quite strong too.

What is the outlook for Religare PSU Equity Fund?

PSUs did do well for a period, but premium valuations were not the norm. Only a few PSU stocks with very low liquidity enjoyed premium valuations. At this point of time, PSUs are vulnerable to a further fall because they are dominated by rate-sensitives and oil marketing companies. However, from a valuation and growth perspective, the PSU is one portfolio we think is quite attractive.

The growth expectations for the PSU basket too are quite resilient compared to the rest of the market. PSU stocks also enjoy advantages of low leverage and fairly strong cash coffers, except for the oil companies where the subsidy related issues really reduce visibility.

Which fund would you buy from your bouquet of funds in today's market environment?

The Religare Business Leaders Fund is very well positioned because it has the kind of companies that can survive these challenges. Large companies which don't have debt issues and have a lot of pricing power. They may not suffer margin damage that smaller companies do when input costs rise.

The other fund which we would recommend at all times is the Religare Growth Fund, given its balance between large cap and mid cap companies.

If the markets were to go down sharply from here, the Religare Contra portfolio too will get much stronger. It's a good fund to contain downside.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article1531983.ece?homepage=true

Avenues for NRIs to invest in

If you are in India, it is raining attractive investment options. With interest rates moving steadily up, even cast-iron investments like bank deposits today offer you a 10 per cent annual return. The stock market has fallen to more reasonable levels and top performing mutual funds investing in Indian stocks have recorded a 17 per cent annual return in five years.

Plus, there are mouth-watering one-off opportunities like the Coal India offer and SBI's bond issue, offering 9.75 per cent interest. However, if you are a non-resident Indian (NRI) looking to pep up your portfolio, can you participate in these options? If so, can you repatriate the returns from such investments?

There are restrictions on the avenues in which NRIs can deploy money in India. The SBI's recent bond issue was closed for NRIs, though not all public sector bond offers and corporate bonds are closed for this category of investors.

Non-resident Indians can subscribe to IPOs and also take up shares in public sector enterprises that are being disinvested by the government. Repatriation is allowed provided taxes are paid. We spoke to few tax experts and money managers to put together the following dos and don'ts for NRI investors.

BANK DEPOSITS

Non-resident Indians can open and operate specialised bank accounts in India classified as NRE, NRO and FCNR accounts. While FCNR (foreign currency non-resident) is a foreign currency account and can be opened only as a term (fixed) deposit account, the NRE/NRO (non-resident external/non-resident ordinary) accounts are denominated in rupees and can be opened either as a savings account or a fixed deposit account.

Before approaching a banker, you have to be clear about the purpose for which you are opening the account, as that decides the type of account. If you want to invest in India, you need to have a bank account denominated in Indian rupees — basically either a NRE or NRO account. Again, if you intend to repatriate the income arising from such investments, you need to make that investment only from a NRE account.

A NRO account is basically for making payments on dues in India and receiving rental and other income from your property here, if you own any. It allows credit of funds from your overseas account too. However, what needs to be noted here is that funds in this account have several restrictions on repatriation. Money in this account can be repatriated within a limit of US$1 million in a year on paying the applicable charges to the banker.

A FCNR account , however, saves you from forex rate fluctuations by allowing you to hold the foreign currency without converting it into Indian rupees. Now let's move into the more interesting part — interest income.

A NRE/NRO savings account earns an interest of around 3.5 per cent p.a. currently and this is on par with savings accounts for resident Indians. On a term deposit of maturity period over one year but less than two years, a NRO account will get you 9 per cent p.a. interest while a NRE deposit will get around 2.5 per cent interest — the differentiation is probably account of the source of the deposit. On a FCNR account that is denominated in US dollars, Kotak Mahindra Bank gives an interest of 1.79 per cent p.a. for deposits with maturity period over a year but less than two years. Interest rates here are based on LIBOR rates for the respective currency.

Debt instruments

On paper, NRIs are also permitted to invest in corporate deposits, non-convertible debentures, government securities and PSU bonds issued in India, both on a repatriable and a non-repartiable basis. However, in practice, companies or issuers need to specifically enable the ‘NRI window' in an offer (with permission from the Reserve Bank of India).

Quite a few of the recent PSU bond offers or non-convertible debenture offers did not open their gates to NRI investors. Under the corporate deposits category, a couple that are currently open to NRI investors is DHFL's Aashray deposit (from Dewan Housing Finance Corporation) and the deposit offer from JK Tyres. Running through the application form for each deposit will tell you if the offer is open to NRIs.

EQUITIES

Regulations allow non-resident Indians to invest in primary market (initial public offers) and also in stocks traded in the secondary market. However, for investments in equities in the secondary market (as also convertible debentures), a non-resident investor is required to open a Portfolio Investment Scheme account — also called PINS account — with a bank. The RBI monitors all transactions of NRIs in the secondary market through this PINS account. Individual banks report on transactions in this account to RBI.

Information in the RBI website states that an NRI investor can purchase shares up to 5 per cent of the paid-up capital of a company. Aggregate investments by all NRIs in a particular company, however, cannot exceed 10 per cent (this limit can, however, be raised by the companies by passing a special resolution). A PINS account is basically an NRE/NRO account. Transfers to/from NRE/NRO accounts, foreign inward remittances, and debit/credit from the stock broker are the only transactions allowed in a PINS account.

When non-residents want to make investments in equity shares, they thus need to apply for a PINS (Portfolio Investment Service) bank account, in addition to opening a new NRO demat and a trading account with an Indian broker, says Mr B. Gopkumar, Head-Broking, Kotak Securities. NRI investors, however, need to note that brokers may have internal restrictions on the clients to whom they may offer broking services, based on geography or other considerations. Make enquiries before you plan your investments.

Real Estate Property

Investment by NRIs in immovable property in India is permitted provided it does not fall under the definition of agricultural land. Mr Sandip Mukherjee, Executive Director, Tax & Regulatory Services, PricewaterhouseCoopers, says: “Non-resident Indians are permitted to acquire any immovable property in India, other than agricultural property or plantation or a farm-house under FEMA regulations”.

Now that you can parcel off residential real estate through funds designated as real estate funds, can NRIs invest in them? Mr Mukherjee states: “While the RBI had expressed its concerns that investment by NRI and FIIs could be tantamount to indirect foreign investment in the real estate sector, the Finance Ministry held that there was no specific restriction imposed upon NRIs to invest in real estate funds.”

Sorry, no entry!

There are certain investment classes that are completely sealed off for NRIs by the regulator. These include investments in Public Provident Fund and post-office saving schemes, says Mr Vineet Agarwal, Director, Tax and Regulatory Services, KPMG. From RBI's document on - ‘Facilities available to NRI for investment in India', it is further clear that even on a non-repatriation basis investments are not allowed in money market mutual funds and bearer securities (that includes Kisan Vikas Patrika).

The document however states that investments in National Savings Certificates are permitted on a non-repatriation basis through a NRO account where the source of income is from India. A resident investor who subsequently becomes NRI can, however, hold the above instruments till maturity, adds Mr Vineet Agarwal.

Source: http://www.thehindubusinessline.com/features/investment-world/article1531980.ece

Getting smart with gold savings

Are you gripped by a burning desire to own gold, like that posse of outlaws in Mackenna's Gold? No? Even if you aren't , the returns notched up by the yellow metal makes it a hard-to-ignore investment option today. Gold, in Indian rupees, has served up a 20 per cent annual gain in the last five years, trouncing the stock market's 12 per cent annual appreciation. That's why investment options to own gold in paper form have mushroomed in the form of jewellery savings schemes, futures contracts in the commodity exchanges and gold exchange traded funds that are listed and traded much like stocks.

Gold fund of funds

These paper-gold options however, are for investors who already dabble in commodities or stocks. What if you wouldn't touch stocks with a barge pole and would yet want to invest in gold? Mutual fund houses have come up with a new avenue recently - Gold ‘fund of funds' that don't require you to have a demat account to invest. Kotak Gold Fund and Reliance Gold Savings Fund, the two new products collect money from investors and use that to buy units of Gold Exchange Traded Funds (ETFs). While Reliance Gold Savings Fund invests in Reliance Gold ETF, Kotak Gold Fund does likewise with Kotak Gold ETF. As Gold ETFs mirror the market price of physical gold, your investment gets to jive to every gold price move!

No demat

Why would you want to take this convoluted route, while you can buy Gold ETFs on the stock exchanges? Two reasons. First , if you don't own a demat account, taking the fund-of-funds route is more cost-effective. Suppose you were to open a demat account just to invest in Gold ETFs, this will entail expenses - a flat annual maintenance charge of between Rs 100-900, brokerage charges of 0.05 to 0.50 per cent and a one per cent annual recurring expense charged by the ETF manager. Which means that on an investment of Rs 10,000 a year, up to 10 per cent (if you drive very bad bargains with your broker) of the annual return may be swallowed up by expenses! Now, compared to that, you can buy the Gold fund-of-funds from fund houses, at an annual recurring fee of just 1.5 per cent, leaving you with much higher returns.

However, this comparison is slightly flawed because we are applying the entire demat charges only to your Gold ETF holdings. In practise you may have to open a demat account anyway, to hold stocks, bonds and mutual funds, not just ETFs.

Auto-pilot

Gold fund-of-funds also score over Gold ETFs on affordability and convenience. Both Kotak and Reliance Gold Fund offer a monthly systematic investment plan (SIP) facility.

This allows you to make gold investments for as little as Rs.100 a month (over five years) in the case of Reliance Gold Fund or Rs.1000 (for 6 months) in Kotak Gold Fund.

SIPs are also a sensible way to invest, with gold prices are hovering at a record high by averaging your purchases over many price points.

Taking the SIP route is far easier with the Gold fund-of-funds products, as you can issue post dated cheques or an ECS mandate.

Fee and returns

If you've decided to opt for the Kotak or Reliance Gold fund, what are the returns you can expect?

Suffice it to say that returns from these funds will closely track the gains in the actual market prices of gold in India, before adjusting for the fund's costs.

Gold as of today has delivered a five-year return of 20 per cent, three year return of 19.6 per cent and one year gain of 23 per cent.

However, expecting such high returns to sustain over the next five or 10 years may be unrealistic. The final returns that you earn from these funds may be between 1.5 and 2 percentage points lower than the gold price returns, on account of fund management fees and tracking error. Both Reliance and Kotak have capped the overall expenses on their gold funds at 1.5 per cent a year. Now that is not exactly cheap, given that these funds do not actively manage money. However, this is still the most cost effective option to hold gold today, as others - jewellery (making charges, wastage, lower purity) and bars from banks (12-15 per cent premium) – impose far stiffer costs.

Tracking error

A final advantage that the Kotak or Reliance products offer over plain Gold ETFs is their ability to shadow gold prices more closely (lower tracking error) . Retail investors trading Gold ETFs on the stock exchange often find their market prices straying far away from their NAV. Because ETFs are not heavily traded, buying or selling a large number of units may impact their price.

You can't do much about these distortions as a small guy. But investing through the Kotak or Reliance Gold funds allows you to take the institutional route.

These funds will be able to buy gold units directly from the ETF at their NAV, helping them minimise tracking error. Kotak Gold Fund (open until March 18) expects its tracking error to be capped at 2 per cent, with a likely level of 1.5 per cent a year. Watch out for the following when you invest:

With gold prices at a record, ‘safety' is illusory. Take the SIP route.

Hold for at least 5 years to make the most of the SIP.

Opt for growth, not dividends. Gold doesn't provide regular income.

Don't put more than 5-10 per cent of your savings in gold.

Source: http://www.thehindubusinessline.com/features/investment-world/personal-finance/article1532005.ece

Regulators plan new rules to monitor wealth managers

The Securities and Exchange Board of India , along with the Reserve Bank of India and the government of India, is working on new rules to regulate the flourishing wealth management business, a senior official from Sebi said on Friday.

The wealth management industry, estimated to be at $1 trillion, offers investors a range of financial products across different asset classes cutting across regulatory turfs. "We need to integrate with regulators not just at the policy level but at the operating and surveillance level as well," said KN Vaidyanathan, executive director of the investment management department in the Securities and Exchange Board of India.

"Markets are far too advanced, the wealth managers of today straddle products which cut through banking, capital markets and insurance regulatory framework. We can't remain silent. We need to come together, better address how to regulate wealth managers. That process is in progress and we will come out with it soon," he said.

To address these kinds of inter-regulatory challenges, the government has recently formed the Financial Stability and Development Council (FSDC) that serves as an interface between all the financial sector regulators.

Regulators have already met a couple of times at this common forum, which is chaired by the finance minister since it was set up last year.

Mr Vaidyanathan said from an investor's standpoint, the risk in the wealth management business is the relationship manager. "His remuneration is not fully aligned with investor interest," he said.

"The institution guards its risk by getting certain documents from the customer, so the risk of the relationship manager is actually borne by the customer," he said.

Adding that one of the challenges facing regulators is the cost of non-compliance as a lot of people want light-touch and tissue-paper-thin regulation.

"People will respect when there is a fear of non-compliance. Till the time you establish that cost of non-compliance clearly in the system, you can't afford to be a light-touch regulator. But there is a risk in this non-compliance and I must say it is tempting to confuse socialism with capitalism."

Sebi will soon come out with the guidelines to allow foreign nationals to invest in domestic mutual funds.

"We are in the process of working on it with RBI and the finance ministry. Hopefully, we will soon come out with those guidelines. I would say it is a matter of weeks not months," Mr Vaidyanathan said.

"The next set of liberalisation will be allowing any foreign national who complies with know-your-client norms. So if you want to grow the asset management industry in the country, you need to give them an opportunity to manage different stakeholders.

"What we are saying is that you need to make sure you don't dilute any of those while implementing this proposal," he said.

Finance Minister Pranab Mukherjee had proposed this decision last month while presenting the Budget. At present, only FIIs and sub-accounts registered with Sebi and non-resident Indians are allowed to invest in domestic mutual fund schemes.

The Indian mutual fund industry manages assets worth 7.07 lakh crore.

Source: http://economictimes.indiatimes.com/markets/regulation/regulators-plan-new-rules-to-monitor-wealth-managers/articleshow/7683759.cms

Mutual funds assets rise by Rs 25K cr

Equity funds have continued to witness inflows for the third consecutive month, while average assets of the fund industry surged by over 2.3 per cent in the month of February.

According to the data available from the Association of Mutual Funds in India (Amfi), the MF industry witnessed inflows of Rs. 25,757 crore in all the schemes with equity and money market schemes seeing inflows of Rs. 2,495 crore and Rs. 8,770 crore respectively in February.

The data from the Amfi also showed that assets under management (AUM) of the industry stood at Rs. 7.07 lakh core in February against Rs. 6.91 crore in January. The AUM was Rs. 6.65 lakh crore in 2009 and Rs. 6.26 lakh crore in 2010. Total equity assets stood at Rs. 1.59 lakh crore fall of over 4 per cent against January which was at 1.65 lakh crore.

Market participants feel that banks and corporates and banks are again willing to invest in MFs aggressively for better returns. A big chunk of money is flowing into the FMPs (fixed maturity plans) before the end of the financial year in order to get double indexation benefit.

“Also several fund houses have declared huge dividends in the last one month, attracting more retail investors. In the last few months we have been witnessing lot of distributors again selling mutual funds,” said a top official from a leading fund on condition of anonymity.

Systematic investment plans (SIPs) are also becoming popular again. “Inflows in equity schemes were coming through systematic investment plans. Income schemes also saw inflows of Rs. 13,708 crore largely due to launch of several fixed maturity plans in February,” he said.

Krishnamurthy Vijayan, managing director & CEO of IDBI MF said, “Inflows in equity schemes indicate that investors are coming in despite markets being weak and volatile.

This is very positive sign. Apart from that, new SIP accounts have been built up over the past few months and now we are witnessing sustained inflows from that section.”

Source: http://www.financialexpress.com/news/mutual-funds-assets-rise-by-rs-25k-cr/760188/0

Motilal Oswal MF to launch first US-equities based ETF tracking NASDAQ-100 Index

Motilal Oswal Mutual Fund today announced the launch of MOSt Shares Nasdaq 100, India's 1st US equity based ETF, which seeks to track the Nasdaq-100 index.

The NASDAQ Stock Market is the largest electronic screen-based equity securities trading market in the United States and second largest by market capitalisation in the world. The NASDAQ-100 is an index of 100 of the largest (by market capitalisation) non-financial companies listed on the NASDAQ.

With the launch of Motilal Oswal Mutual Fund's MOSt Shares Nasdaq 100 fund offer, Indian investors will now have an exposure to top 100 domestic and international non-financial securities like Apple Inc, Google, Microsoft, Ebay and Amazon listed on the Nasdaq stock market.

Source: http://articles.economictimes.indiatimes.com/2011-03-10/news/28675381_1_nasdaq-100-etf-nasdaq-stock-market