Debt scores over equity but bond market far from perfect

Bonds, especially tax-saving bonds, were a hot favourite among investors in 2011-12, as volatility in the Indian markets prevented retail participants from investing in equity IPOs.

Retail investors' flight for safety has helped corporate India raise Rs 35,610.7 crore through public issuance of debt which was 33 percent higher than funds mopped up through equity offerings during the year, said an Economic Times report today.

High bank deposit rates, a volatile, range-bound equity market, and uncertainties over ELSS (equity-linked savings scheme) due to the Direct Tax Code overhang are the factors that have led to a fall in inflows into equity funds last year.

Tax-free infrastructure bonds, which offer assured returns of 8 to 9.25 percent, turned out to be a major draw, as opposed to ELSS schemes.

Also mutual funds saw high net worth individuals (HNIs) pulling their money out of the equity schemes in 2011-12 due to the bearishness that prevailed.

Clearly, when the market goes down, high net worth investors (HNIs) shift money to safer havens like tax-free bonds and term deposits. These instruments bear a coupon rate exceeding 9-9.5 percent on an annualised basis, making them more attractive than equity funds.

With foreign investors shying away from investing in India, the finance ministry plans to create a $1 billion sub-limit for QFIs in corporate bonds and mutual fund schemes. As of now, foreign investors are allowed to invest $20 billion in the country's corporate bond market. With the latest ministry move, that ceiling will increase to $21 billion.

But tapping only institutional investors rather than retail investors is not going to reinforce investor confidence in the Indian markets as in the Indian investor understands equities better than markets.

According to Nilesh Shah, president, (corporate banking), Axis Bank, retail particpation in corporate bonds can be increased by making them an acceptable security in collateralized borrowing and lending obligation with reasonable margin, incentivising insurance companies to sell them, allowing PF trusts to invest in higher credit corporate bonds and allowing them to sell the shorter maturity corporate bonds in the market to create liquidity at the short end and appetite for investment at the long end.

It is clear that the government is banking on public debt to woo investors. But there is no denying that the corporate bond market in India is relatively underdeveloped and illiquid, which makes pricing of new credit instruments difficult.

Moreover, the corporate bond market is dominated by high-rated papers, which are few in number. According to ratings agency Crisil, not even 5 percent of the companies it rated in India carried the premier 'AAA' rating, which leaves limited options for foreign investors looking for papers with investment grades in the country.

Source: http://www.moneycontrol.com/news/mf-news/debt-scores-over-equitybond-market-farperfect_717954.html

Axis AMC floats fund focused on large caps

Axis Asset Management Company (AMC), the mutual fund arm of Axis Bank, has launched a new fund offer, Axis Focused 25 Fund, an open-ended equity fund. The fund will invest in large-cap companies selected from the top 200 companies.

“The fund will have a concentrated focus on select 25 best ideas at any point of time, with a majority of companies being drawn from the top 200 Indian companies (based on market capitalisation),” Axis AMC said in a release.

Portfolio will be biased to larger companies with up to 90 per cent in top 200 companies by market cap.

The fund is expected to outperform market in adverse situations based on the fact that quality companies tend to maintain their growth trajectory despite downturns.

Data from 2003 to 2011 performance analysis of the companies show the top 10 companies within the BSE 100 Index delivered an average return on equity of 37 per cent, compared with 26 per cent for the BSE 100 index, the fund house quoted a Bloomberg analysis.

The share prices too, for these companies have witnessed significant outperformance.

The share price of these top 10 companies appreciated by as much as 30 per cent, compared with a negative-15.8 per cent for the bottom 10 BSE 100 companies, Axis AMC added.

“Axis AMC will rely strongly on its internal research capabilities to identify these companies,” the fund house said adding, “Axis Asset Management will ensure that the portfolio though restricted to a maximum of 25 companies, is well-diversified across sectors and is not illiquid.”

Rajiv Anand, MD and CEO, Axis AMC said, “The key feature of the fund is the fact that we will attempt to nurture these companies over their business cycle without being unduly concerned by short-term market volatility. It is thus ideal for patient and long-term equity investors with an investment time horizon of more than five years.”

Chandresh Nigam, head investments, Axis AMC said, “We believe sustainable business performance drives stock returns. Picking business cycles therefore is important.”

The new fund offer closes for subscription on June 25.

Investors can either invest in the new fund offer through monthly instalments of Rs 1,000, or a one-time investment of Rs 5,000.

Source: http://wrd.mydigitalfc.com/mutual-funds/axis-amc-floats-fund-focused-large-caps-916

Appreciation of rupee key for Indian markets to rally

A weakening rupee is a big negative for the market, says Anoop Bhaskar, the head of equity at UTI Mutual Fund. In an interview with Ashley Coutinho, he says investors should not try to time the market, but invest systematically over the next 12-18 months.

Your outlook on Indian equities...

Two weeks ago, the mood was very despondent. Now, things are looking up a bit. Growth expectations have been toned down and expectations for earnings growth have come down over the past three quarters. There is a belief that the government’s inaction on the policy front has hurt the economy. I believe the rupee depreciation is a very big negative for the market. The rupee has to be stable with an upward bias for the markets to rally from here on. There are very few examples, if any, of an emerging market where the domestic currency kept weakening yet the market received robust overseas inflows. The rupee will appreciate over the next few months if global crude oil prices continue to fall, the global situation doesn’t deteriorate, RBI takes some action to cut interest rates and government takes decisions on issues that really need fixing. This appreciation (of the rupee) can then become the foundation on which our markets rally.

What are some of the key positives for the market?

Market participants are trying to see things in a positive light. In India, a GDP growth rate of below 6% will be fairly unacceptable to the political class and they will make all efforts to ensure we stay above that level. With the GDP numbers so low, the RBI will be forced to cut interest rates. The rupee is showing some signs of stability and is not headed to the 58-59 levels it was assumed to be headed to earlier. Global crude oil prices have come off and there are hopes of something positive happening on the policy front.

Your advice to retail investors...

Investors should not try to play the market at different levels; enter every time the Nifty touches, say, 4,700 and exit when the market reaches 5,200 or 5,300 levels. It is better to take a certain view and buy quality companies that will do well over a cycle. Investors should not feel that they have missed out on a rally just because they failed to enter at the 4,700 levels or stay away just because they find the market expensive at the current levels. Rather than trying to time the top and bottom, they ought to invest systematically over the next 12-18 months. We will see significant volatility during this period and it will be very difficult to time each of the rallies and falls.

Which sectors do you like?

We are adopting a cautious stance. Several of our funds are equal weight on banking, a sector with the highest beta. A cut in interest rates will benefit banks. We are also equal weight or overweight on defensives like pharmaceuticals and consumer staples. We want to play selectively on industrials or capital goods. Our view on infrastructure is they are stressed assets where the element of dilution is difficult to calculate. If a company’s debt to market cap is 3.5 times, it cannot repay debt from its operations and raise equity to pay off the debt. It can only sell assets. So, we would rather look at these companies when the asset sales start to happen.

What is the outlook on FII money?

Surprisingly, money hasn’t flown out of India despite the spate of bad news. But the inflows are difficult to predict. The quantitative easing, as and when it happens, will change the mood and perception on risk-on assets rather than actually bringing in any tangible inflows into emerging markets like India.

How will the global headwinds impact Indian equities?

Last year, there were 11 European summits and the world markets rallied for 2-4 days after these summits. The same will be the case in 2012. However, you can’t build a portfolio based on events for which the probability varies from 30% to 60%. The only thing a fund manager can do is adopt a more cautionary stance.

Source: http://www.financialexpress.com/news/appreciation-of-rupee-key-for-indian-markets-to-rally/961208/0

Dormant status on account statements sows confusion among investors.

AMCs are looking at calling dormant accounts by another name.

AMCs are contemplating changing the nomenclature of ‘dormant’ folios which has lately been creating confusion among investors. SEBI had asked AMCs to send half-yearly consolidated account statements to investors who have not transacted during a six-month period ended March or September.

AMCs are questioning the logic behind this move. “On one hand we are talking of long-term investing, and on the other, we are telling investors that there have been no transactions. Some NRI investors are also concerned when they see ‘dormant’ in their account statements,” says the marketing head of a large fund house.

A few AMCs are planning to change the terminology. “We might call such folios a different name so that there no confusion in the minds of investors,” says the sales head of a top AMC.

“We are trying to change the terminology. We are mentioning these folios as ‘inactive’ currently. We are thinking of telling investors that ‘inactive’ doesn’t mean that they have to carry out some transactions or complete certain formalities. People are equating dormant folios with dormant bank accounts. The reason for mentioning folios as ‘dormant’ was to keep investors updated on a half-yearly basis,” says an operations head of a mid-sized AMC.

Most AMCs call accounts ‘dormant’ while others are calling them ‘inactive’. AMCs tag the folios as ‘dormant’ if there are no financial transactions like purchase, redemption, switch, dividend payout, dividend reinvestment, SIP, SWP, and STPs during a six-month period ended March or September.

Industry officials say that mentioning ‘dormant’ against accounts with no transactions is not serving any purpose. They are of the view that this terminology could be altogether dropped as well. Often investors tend to forget their investments and many forget their folio numbers. Distributors tell Cafemutual that some of their clients are worried after noticing the term ‘dormant’ in their statements. A few clients have gone ahead to redeem their investments.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=1546&MainType=New&NewsType=Industry&id=21

Strong inflows into liquid funds shore up MFs' asset base in May

Strong inflows into liquid funds helped Indian mutual funds log a near-3% rise in their asset base in May.

The fund industry added over Rs 26,742 crore during the month, taking the overall asset base to Rs 6,99,284 crore, according to data released by the Association of Mutual Funds in India.

Most fund categories witnessed inflows during the month. Equity funds posted inflows worth Rs 506 crore in May. Liquid funds netted over Rs 25,000 crore, making them the largest contributors to the industry asset base.

Income fund assets swelled by over Rs 1,580 crore while gilt funds posted outflows worth Rs 371 crore. Redemptions outpaced investments in ELSS funds, which lost over Rs 86 crore last month.

Gold exchange traded funds logged outflows of Rs 41 crore while balanced funds saw positive inflows worth 61crore.

"Redemptions from equity funds were lower in May. On the flip side, money trickled in through systematic plans. Liquid funds received investments from corporates, which helped the industry record positive numbers last month," said Vijai Mantri, CEO of Pramerica Asset Management.

Income funds, which include short-term debt funds and fixed maturity plans, saw inflows for the second month in a row.

The rising interest rates in the economy over the past two years have seen the share of FMPs in the category grow to 43% in May from 8% in May 2010, a recent Crisil report said. Inflows into this category can be attributed to several fixed maturity plans launched during the month.

"Money has to come into equity funds for asset managers to make money," said the chief executive of a leading fund house. "These are bad times... The number of live SIP folios has come down significantly over the past four months. The industry needs more investors to stay afloat," the official said.

Markets, too, have not been very conducive for new investors; the 30-share Sensex corrected over -6.26% in May.

Returns of most equity funds have also not offered any cheer. Large cap, diversified equity and small & mid-cap funds yielded an average -5.5%, -5.6% and -4.9% returns, respectively, during May, going by the data sourced from Crisil.

Source: http://articles.economictimes.indiatimes.com/2012-06-09/news/32140764_1_liquid-funds-equity-funds-short-term-debt-funds