Are sectoral funds worth making an investment into?

Banking sector funds as a category topped the performance charts in the past three months with 23.62% return. But the same category of funds is the worst performer if you look at the one-year performance - the category lost 14.58% during the period. The story is same with infrastructure funds, too: they have gained 15.32% in the past three months, but lost 12.75% over the past one year.

Similarly, most Sectoral funds with higher exposure to the power sector have outperformed other funds by a wide margin in the last quarter of 2007 (calendar year), but they lost heavily in the first quarter of CY2008, as the market corrected. As you can see, the data - sourced from Value Research, a mutual fund tracking firm - presents a confusing picture.

Especially for investors who are in search of sectoral funds to beat the broader market. But that is the hallmark of sectoral funds, which can be cyclical or extremely sensitive to even a minute change in their respective business environment.

RATIONALE
Alpha - the extra returns over the overall market returns - is a dream for many investors. And sector dedicated funds sometime do deliver on this count. According to Morningstar India , another mutual fund tracking firm, if you had invested in FMCG funds, you would have earned an average 10.57% return in CY2011.

On the other hand, if you had invested in large-cap oriented equity schemes, you would have lost 24.46% during the same period. A look at the accompanying table will tell you that sectoral funds have occupied slots for top three performing ranks in the past seven years, except for a stray year of CY2009, when small- and mid-cap diversified funds as a category occupied the second rank with 95.36% returns.

In short, if you expect a sector to grow faster than the economy, you can consider investing in a fund dedicated to the sector. "Banking sector should benefit from the secular growth of the Indian economy in the long term, while recent the Budget provisions should be beneficial for the infrastructure and power sectors. Investors can consider investing in funds dedicated to these sectors," says Naresh Kumar Garg, CEO & CIO, Sahara Mutual Fund.

However, a higher return is not the only reason why investors should look at a sector fund. "A sector fund can be used sparingly in times of volatile market conditions to make your portfolio defensive. You can invest in a healthcare fund or an FMCG fund for this purpose," says Devangi Bhuta, vice president, Gurukshetra.com, an investment advisory and training portal.

According to Morningstar India, FMCG and healthcare funds as a category have shown lower volatility over the long term compared to diversified equity funds. Over five years, healthcare funds and FMCG funds have recorded lower standard deviation of 27.63 and 22.14, respectively; compared to large cap funds (29.78) and mid- & small-cap funds (32.49).

 

BE MINDFUL ABOUT THE RISKS
A sector fund leaves the fund manager with limited options, as he has a mandate to invest only within the sector. If the sector enters a bad phase, the fund manager can do very little. A look at the performance of these schemes (See Table) also underlines the fact that you cannot simply invest in the 'best performing sector fund' of last year and sit quietly for it to deliver.

To your surprise, you may find that the same sector is not in the top league anymore. That is why it is extremely important that you should have a clear view of the sector. Also, never invest too much in a sector fund as it increases risk. For example, if a professional employed in an information technology firm, with stock options of his company , invests in a technology sector fund thinking that it is a high growth sector, he may be sitting on a huge risk.

Here most of his cash flows, fortune and investment are tied to the future of IT sector and any adverse development in that sector can have a devastating impact on his finances. If you are convinced with the growth prospects of a sector, you can invest in that sector's funds; but restrict your exposure to these funds to 10-15 % of your equity portfolio.

HOW TO CHOOSE ONE
"Short-term performance may give a distorted picture to investors due to high volatility, especially in the case of sectoral funds, where the stock universe is rather small. Always look at the long-term performance, say, more than three years, to arrive at an informed decision," says Naresh Kumar Garg. Long-term track record is just one parameter to start with.

Another important factor you have to look at is the portfolio composition. "If you are considering a healthcare fund while building a defensive portfolio, a high MNC exposure may be better than a fund portfolio comprising Indian midand small-cap companies during volatile market conditions," says Devangi Bhuta. If you are in a volatile market such as the one we are in now, probably a large-cap oriented sector fund may be better to start with.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/are-sectoral-funds-worth-making-an-investment-into/articleshow/12499286.cms?curpg=2

Rajiv Gandhi Equity Scheme must include mutual funds to control the risk for investors: Akshay gupta, CEO & Managing Director, Peerless Mutual Fund

Akshay gupta, CEO & Managing Director, Peerless Mutual Fund

Peerless Mutual Fund focuses on smaller tier II and tier III towns. Its CEO and managing director Akshay Gupta tells Babar Zaidi how the proposed Rajiv Gandhi Equity Scheme will add depth to the markets, how difficult it is to convince first-time investors and why the scheme should include mutual funds as well.

What's there for small investors in the Rajiv Gandhi Equity Scheme?
Paying tax is a big concern for Indians and this new deduction will certainly be a big incentive to enter the market. Right now there are about 3.5 crore equity investors in India, but over 10 crore people earn more than Rs 2 lakh a year. My guess is that many of them will want to avail of this new exemption after they exhaust their Section 80C limit. They may not invest Rs 50,000, maybe Rs 10,000-20,000. Even so, this will bring long-term money into the market. It is a step in the right direction because it will give a fillip to equity investing. Besides, Rs 50,000 a year is a sizeable limit and will add depth to a market that is on FII steroids.

Should mutual funds be included?
Mutual funds should certainly be a part of this because a fund manager can handle the risk much better than a first-time investor in equities. There are indications that the scheme will be confined to the top 100 stocks but I don't think this is enough of a safeguard for small investors. Satyam Computer was an index-based stock and look what happened. Institutional investors had started exiting Satyam much before the scam broke out. Similarly, they got rid of Unitech much before the writing was on the wall. However, small investors got stuck with these stocks. Mind you, both Satyam and Unitech were in the top 100 stocks by market capitalisation. If a small investor is left holding such scrips and cannot get out before the lock-in period, he will be ruined.
 

What is the way out?
The government should open the scheme to mutual funds. Let mutual funds manage it and diversify the risk for the investor. Remember, these are first-time investors, who may not understand the risks involved. An investment of Rs 50,000 is a big sum for a person earning Rs 5 lakh a year-it's more than the money he earns in a month. Mutual funds will allow him to invest systematically through SIPs, which will reduce his risk.

Peerless Mutual Fund focuses on tier II and tier III towns. What has been your experience there?
The concerns of the first-time investor are no different from those of the repeat investor. The risk-reward ratio is the uppermost concern. They compare the returns with those of fixed deposits and real estate. The memory of the Indian investor is very short and his investment strategy is sharply focused on certainty of returns. He will prefer to lock in at 9% assured returns offered on a fixed deposit for five years even though equity investments would yield a better return.

How difficult it is to convince a first-time investor to put money in stocks?
It is an uphill task. You have to show them charts of SIP returns, tell them the India growth story and explain why stocks will do well in the long term. In smaller towns, real estate is the preferred investment choice, followed by gold and fixed deposits. People don't understand stocks as an asset class, so it is very difficult to convince them to invest in equity mutual funds. In large cities, people are familiar with stocks and the acceptance ratio is far higher.

Are the KYC norms a major hurdle in smaller towns?
They are because a lot of people don't have the basic documentation in place. Investors in tier II cities have PAN cards but in tier II towns, many don't have these. They have either not applied or may have applied but the issuance has become an operational hazard.

Have the unified KYC norms been of any help?
They have, but I will be happier if all the regulators come together and have a common KYC platform. I believe this is happening and will ease the investment process for the customer as well as lower the costs for the industry.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/rajiv-gandhi-equity-scheme-must-include-mutual-funds-to-control-the-risk-for-investors-akshay-gupta-ceo-managing-director-peerless-mutual-fund/articleshow/12482361.cms?curpg=1

FMP mania grips investors.

It's the season of fixed maturity plans (FMPs). Mutual fund houses launched as many as 149 FMPs in March, as investors rushed to lock themselves into high interest rates and also take advantage of the double-indexation benefits provided by this product. Uncertain and volatile equity markets also contributed to demand for these fixed income products, mutual fund executives said.

FMPs are close-ended funds with a fixed tenure and invest in a portfolio of debt products, whose maturity coincides with the maturity of the product. The primary objective of an FMP is to generate income while protecting the capital, by investing in debt and money market securities.

The fourth quarter of FY12 was robust in terms of FMP launches. During the period, the domestic fund industry launched 313 FMPs. According to data from fund tracking firm Value Research, there is a rise of 30 per cent in FMP launches in March this year compared with the same period last year.

“Prevailing rates are very attractive. Investors have a feeling that they may not get such high rates for long and hence such a good demand for FMPs,” said Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund. Currently, FMPs are offering as high as 10-11 per cent, in many cases better than bank fixed deposits.

In the last few weeks of the financial year, there’s been a mad rush to invest in FMPs. This is thanks to the availability of the benefits of double indexation for those who stay invested in these instruments for a little over a year. That is, those who invest this March in an FMP which matures after 13-14 months, will get the benefits of both FY12 and FY13.

Since inflation has been high throughout the year, the inflation index, too, will be high for this financial year. As a result, when investors redeem the FMPs next year in April or later, they will get handsome indexation benefits. This will reduce their tax burden substantially.

“By entering during such times, investors avail the double indexation benefits,” said Sanjay Sachdev, chief executive officer of Tata Mutual Fund. “Investors have a clear preference for fixed income products and the trend has been visible for quite some time now. People are parking their funds in FMPs to benefit from the high interest rates,” he added.

Since the investments made during the last few days of the fiscal spill over into a financial year that represents a two-year holding period, though the actual holding tenure is just over a year, investors can avail of indexation benefits, say officials.

Industry executives say institutional investors had always been fond of such products. Now, there is a large participation from retail investors, too.

“Investors are wary of volatile equities and they are waiting for an appropriate time to enter. But for the time being, they are showing preference for fixed income products,” said UTI MF’s Bhattacharya.

However, industry executives do not see continuation of large number of launches in the coming months as interest rates are expected to come down.

Source: http://www.business-standard.com/india/news/fmp-mania-grips-investors/469780/

CNBC-CRISIL Awards - HDFC is Best Equity, Best Fund House, Birla Best Debt Fund house

HDFC Mutual Fund bagged the Best Fund House and Best Equity Fund House awards while Birla Sun Life Mutual Fund walked away with the Best Debt Fund House of The Year Award. Reliance Gold Savings Fund, which allows investors to invest through SIP without a demat account, won the Most Innovative Fund Of The Year Award.

The winners

Large Cap Equity Funds	Fidelity Equity Fund
Diversified Equity Funds	Mirae Asset India Opportunies Fund
Small and Mid Cap Equity Funds	HDFC Mid-Cap Opportunities Fund
Equity Linked Savings Schemes	Fidelity Tax Advantage Fund
Index Funds	Kotak Sensex ETF

Balanced Funds	HDFC Balanced Fund
Income Funds	UTI Bond Fund
Monthly Income Plans	HDFC Monthly Income Plan

Income Funds	Short Term  JPMorgan India Short Term
Ultra Short Term Fund	Retail  HDFC  Cash  Management
Liquid Funds	Retail  Principal Cash Management

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=1197&MainType=New&NewsType=Industry&id=21

NSE to launch corporate debt ETF

The National Stock Exchange plans to introduce a ‘Corporate Debt Exchange Traded Fund (ETF)' in this calendar year.

 

ETFs are essentially index funds that are listed and traded on exchanges. In this sense, an ETF is a basket of stocks or assets such as gold or even money market instruments. Its trading value is based on the net asset value of the underlying assets that it represents.

According to a source, “We believe that exchange traded funds on corporate debt can help in bringing more liquidity and depth in the corporate bond market. Investors will be able to invest in a basket of corporate bonds, getting thereby the benefit of a portfolio for investment.”

One medium

The new product is in line with the Government's emphasis on expanding and deepening the corporate debt market. It will help investors put money in a basket of corporate bonds with just one medium. The price discovery will be better. Simultaneously, the new product will give better enter and exit facility, the source added.

ETFs have gained wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many an investor. These instruments are beneficial for investors who find it difficult to master the tricks of the trade of analysing and picking stocks for their portfolio.

Various mutual funds provide ETF products that attempt to replicate the indices on NSE to provide returns that closely correspond to the total returns of the securities represented in the index.

At present, NSE provides ETF in four different categories — equity, debt, gold and world indices. There is no exchange fee on debt and world indices ETFs, while charges vary on gold and equity ETFs.

Gold ETF attracts an exchange fee of Rs 1 for a lakh while equity ETF is charged between Rs 3-3.25 a lakh. There are indications that the corporate debt ETF may get fee waiver too.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article3258855.ece