Debt funds provide highest returns in November: CRISIL

CRISIL FundMonitor, CRISIL’s monthly review of the mutual fund industry points out that debt funds provided investors the highest returns in November 2008. Within the debt fund category, the monthly returns of gilt funds were the highest (3.07 per cent), followed by long-term bond funds, short term bond funds and liquid funds in that order. Returns from equity funds were negative, as the downtrend in equity markets continued.

Summarising the trends in the industry, Krishnan Sitaraman, Head, CRISIL FundServices explained : “After two consecutive months of sharp declines, the month end industry AUM finally showed an increase to Rs. 4.05 trillion from Rs.3.95 trillion, due to significant inflows in the second fortnight of the month as liquidity in the economy improved and investors once again turned to mutual funds. Most of the accretions flowed to open-ended income funds and liquid funds.”

In November 2008, open ended income funds and liquid funds were the key beneficiaries with the former seeing net inflows of almost Rs.190 billion while close ended income schemes (largely Fixed Maturity Plans or FMPs) saw net outflows of a similar magnitude. AUMs of liquid funds increased by Rs.175 billion, a growth of nearly 25 per cent over the October-end AUM. The decline in equity AUM of around Rs.70 billion was largely on account of mark-to-market losses. The share of debt funds AUMs in the Indian mutual fund universe thus continued to rise in 2008 from 61 per cent in January 2008 to 71 per cent in November 2008.

Of the 35 mutual fund houses analysed as part of the CRISIL FundMonitor, only two saw a growth in average AUM in November 2008 - Tata Mutual Fund registered a little over 3 per cent growth in its average AUM followed by UTI Mutual Fund which saw a very marginal increase in its average AUM to Rs.384 billion in November from Rs.383 billion in October. Reliance Mutual Fund, ICICI Prudential Mutual Fund and HDFC Mutual Fund saw a decline in the range of 3-6 per cent while smaller fund houses like Taurus Mutual Fund (34 per cent), Edelweiss Mutual Fund (28 per cent) and Mirae Asset Mutual Fund (69 per cent) registered much sharper declines. Reliance Mutual Fund continued to be largest fund house with an average asset base of Rs.678 billion in November 2008, though down by nearly 5 per cent from the previous month.

On an overall basis, the environment of lower interest rates, lower inflation and the beginning of a slight easing in liquidity conditions, facilitated the improved performance of debt funds. Given falling interest rates, funds which had taken a higher duration call out-performed. This is because of the direct relationship between debt fund returns and duration in a declining interest rate scenario, i.e. when interest rates decline, funds which are invested in longer duration securities out-perform as such securities appreciate more in an environment of declining interest rates.

Differential load on MFs may be history

The Securities and Exchange Board of India (Sebi) is set to discontinue the differential
loads on high-value investments to provide a level playing field to mutual fund investors. This move will benefit the retail investors, who often end up subsidising their institutional counterparts.
A Sebi committee found it undesirable to have differential loads between corporates/high networth individuals (HNIs) and retail investors under the aegis of the same scheme. Retail investors subsidise large corporate investors as the latter are exempted from paying an entry load in return for putting huge money into the scheme.
There cannot be zero expenses for managing large investor funds, the Sebi committee concluded. The regulator is also looking at restricting the tenure of debt instruments held by liquid funds. In order to meet sudden redemption pressures, liquid funds may be disallowed from holding securities with a maturity exceeding 90 days.
Fixed maturity plans (FMPs) and liquid schemes were affected the most by a tsunami of redemption requests in October. A large chunk of portfolio was invested in papers with maturity ranging from six months to a year. The liquid schemes initially used their cash reserves to meet the redemption pressures. However, when cash reserves proved insufficient, mutual funds resorted to fire-sale of assets (largely money market instruments).
This, in turn, resulted in huge losses to the remaining investors. Sebi is mulling a ban on the tendency of fixed maturity plans to promise indicative returns/yields. Fund houses currently differentiate themselves by assuring indicative returns. This leads to mis-selling of these products as definite returns based instruments.
The market regulator may impose a sectoral cap of 20-25 % on the portfolio investments of mutual funds to enable risk-diversification. A recent analysis revealed that fund houses restrict investments to the banking, finance, telecom and construction sectors.
In a move that will bring cheer to the retail investors, the regulator may soon approve variable entry load. The application form will have an option for distributor commission to be paid by the investor. The draft standard form will be submitted by Amfi to Sebi shortly.

Source: http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/MF_News/Differential_load_on_MFs_may_be_history/articleshow/3849162.cms

Funds pump cash into CDs

Mutual funds On Tuesday stepped up investments in one-year certificates of deposit (CDs) as they received inflows in their fixed maturity plans (FMPs) and on expectations that short-term rates may fall further, dealers said.

Mutual funds had avoided purchasing short-term papers since last week due to outflows on corporate advance tax payments.
On Tuesday, banks placed around Rs 2,300 crore through CDs, while none was placed on Monday.
Mutual funds expect short-term rates to fall as the Reserve Bank of India (RBI) may cut interest rates by January.
The rates on CDs and commercial papers (CPs) have fallen by 100 basis points in the past two weeks after RBI cut the reverse repo rate and repo rate by 100 bps each.
Three-month CPs were quoted at 13-14 per cent On Tuesday, unchanged from Monday, while three-month CDs were quoted at 7.40-7.60 per cent compared with 7.20-7.30 per cent.
On Monday, Adlabs had placed Rs 10 crore of three-month commercial papers at 14 per cent.
CDs maturing in December were dealt at 5.75-6.00 per cent, unchanged from Monday. CDs maturing in March were quoted at 7.75-7.95 per cent.
Corporate bonds riseMutual funds continued purchasing corporate bond papers On Tuesday due to inflows in their income funds, dealers said.
Insurance companies and a few banks were also seen buying papers on expectation that rates would ease further, while primary dealers were selling papers to book profits.
Power Finance Corporation’s 10-year bonds were traded at 9.15-9.20 per cent On Tuesday compared with 9.05-9.15 per cent on Monday.
Mutual funds have been investing heavily in corporate bonds in the secondary market for more than two weeks as they have been receiving inflows in their income fund schemes, dealers said.
Corporate bond yields fell by 5 basis points On Tuesday tracking government securities. The benchmark 8.24 per cent, 2018 government paper ended at 5.9854 per cent compared with 6.1672 per cent on Monday.

Source: http://www.business-standard.com/india/storypage.php?autono=343471

Global giants eye 26% in UTI Asset Management Company

UTI Asset Management Company (AMC), the oldest fund house inthe country, is in advanced talks with top global players for offeringa 26% Global Mktsstrategic stake.
The AMC is understood to have shortlisted four international players.Among the names under consideration are the US firm T Rowe Price,Shinsei Bank of Japan and two European firms, according to a personfamiliar with the negotiations.
According to plans approved by the finance ministry, the four sponsorsof UTI AMC — State Bank of India, Life Insurance Corporation of India,Bank of Baroda and Punjab National Bank, will offload part of theirholdings to the strategic partner. The four state-owned entitiescurrently hold 25% each in the asset management company. UTI AMC’sCMD, UK Sinha, was not available for comment.
The plan to induct a strategic partner was announced a few months agoby the then finance minister P Chidambaram , while addressing the AMCboard at its Mumbai headquarters.

LIC MF gets mega bailout from parent

Insurance firm picks up illiquid realty bonds worth Rs1,755 crore from mutual fund arm amid a credit crunch

State-owned Life Insurance Corp. of India Ltd (LIC) may have bought illiquid debt paper, largely of real estate firms, worth at least Rs1,755 crore from its unit LIC Mutual Fund Asset Management Ltd (LIC MF) in October, according to people familiar with the matter.The off-market deal was effected to provide liquidity to LIC MF to meet redemption pressure without resorting to distress sale of assets, an option not readily available to other mutual funds.LIC, India’s largest insurer, had assets under management of Rs5.59 trillion at the end of fiscal 2007, the latest period for which figures were available from the Insurance Regulatory and Development Authority, more than the sum of assets managed by the entire mutual fund industry in India.The acquired debt included bonds worth Rs650 crore sold by BPTP Ltd, Rs543 crore by Housing Development and Infrastructure Ltd, Rs195 crore by Unitech Ltd and Rs117 crore by Sobha Developers Ltd, among others, said at least three people with knowledge of the matter who didn’t want to be named.At the end of September, LIC MF held bonds of realty firms worth about Rs2,180 crore in its so-called liquid and liquid-plus funds, which are popular debt schemes among corporate investors and bank treasuries for parking surplus funds.By October-end, when a liquidity crunch had taken a firm hold on the markets, the liquid and liquid-plus funds only had about Rs425 crore of real estate paper, suggesting that LIC MF had disposed of assets worth Rs1,755 crore in an illiquid market. A transaction between LIC and LIC MF would have been off the market and not reflected on the corporate bond market.Neither Thomas Mathew, managing director of LIC, nor Sushobhan Sarker, chief executive of LIC MF, responded to emails and phone calls.Large-scale early withdrawals since mid-September, after the collapse of investment bank Lehman Brothers Holdings Inc., plunged the global financial system into an unprecedented liquidity crisis which also hit Indian fund houses hard. Mutual fund investors redeemed at least Rs96,000 crore from debt schemes in September and October.The turnover in the corporate bond market dipped to Rs7,803 crore in October compared to an average of at least Rs11,000 crore in the first nine months of 2008, according to data on the website of the capital market regulator Securities and Exchange Board of India.“Lack of liquidity and risk aversion killed the (corporate bond) market then,” said J. Moses Harding, vice-president, wholesale banking, IndusInd Bank Ltd. “It has not improved since.”A flight to safety among investors further sucked liquidity out of the system. Despite the central bank extending a Rs60,000 crore credit line for banks to lend to mutual funds, debt managers working in an illiquid corporate bond market had a tough time selling bonds to meet redemption demands.LIC is not the only firm to bail out its mutual fund unit. Housing Development Finance Corp. Ltd, India’s largest home loan company, and its partner Standard Life Plc. have taken a similar route. Standard Life holds a 40% stake in HDFC Asset Management Co. Ltd.“The fund has certain property assets owned by Indian property companies and those assets have now turned out to be not as good quality as we thought they would be,” said Gerry Grimstone, chairman of Standard Life, in a recent interview with Mint.“The promoters have found a way of removing those assets from the fund to the benefit of the investors in the fund,” Grimstone said, explaining that the firm has “substituted some of the assets of the fund which have a longer duration with high-quality short-term assets to make sure that the fund’s liquidity is preserved”.

Source: http://www.livemint.com/2008/12/14234611/LIC-MF-gets-mega-bailout-from.html

FMPs lose vogue as investors shy away

Fixed Maturity Plans (FMPs) are in the news again with the regulator looking at further tightening norms, but investors may be losing interest.

FMPs remain on top of the mind for Securities Exchange Board of India (SEBI). The market regulator's Mutual Fund Advisory committee met on Friday to debate the further tightening of asset-liability norms, but amongst investors, interest in the product is waning. 

AP Kurien, Chairman, Association of Mutual Funds of India, said, “The New guidelines will bring discipline among fund managers to structure their products almost perfectly." 

SEBI is leaving no stone unturned to ensure that the recent run on FMPs remains a distant memory.

On Friday, keeping the FMPs on the top of its agenda, the SEBI meet discussed about a compulsory alignment of portfolio with scheme tenure, making trustees more accountable and segregating funds of corporate and retail investors. 

Even with this, interest in FMPs is coming down. The more popular are income funds, as markets expect a further softening on interest rates and FMPs don't offer the upside. 

Parijat Agrawal, Head of Fixed Income of SBI MF, said, "In a falling interest rate scene, the FMP rates are not attractive. Today the 90-day rate is at 7-7.25 per cent, which is not attractive. So there will be a slight slowdown in FMPs and people will move to open ended income funds." 

Clearly, the market regulator is doing what it should, but a large section of investors believe that the FMP boom may be on its last leg.

Hence, the only lifeline now is the tax advantage and who knows when that might go.

Source: http://profit.ndtv.com/2008/12/13002932/FMPs-lose-vogue-as-investors-s.html

Fiscal Deficit

What is fiscal deficit?
Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.
When the net amount received (revenues less expenditures) falls short of the projected net amount to be received. This occurs when the actual amount of revenue received and/or the actual amount of expenditures do not correspond with predicted revenue and expenditure figures. This is the opposite of a revenue surplus, which occurs when the actual amount exceeds the projected amount.
For example, consider an organization with budgeted revenue of $325,000 and budgeted expenditures of $200,000, which equates to a net amount of $125,000. During the fiscal year, the organization's total revenue is actually $300,000, while its total expenditure is $195,000. The net amount received by the organization is $105,000, which is $20,000 less than the projected receipt of $125,000. Therefore, although the organization generated a positive net amount of proceeds, it fell short of the projected amount, creating a revenue deficit.
India's fiscal deficit was brought down to 3.17% (Rs 1, 43,653 crores) of the gross domestic product in 2007-08 from 3.8% in 2006-07. The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crores) by the end of 2008-09, but looking at the way things are going, economists say, it is unlikely the government will meet its target
India's fiscal deficit continues to be among the highest in the world and underlying pressures are not entirely showing up in headline fiscal numbers, Reserve Bank of India Governor Y. V. Reddy said on Monday.
Earlier in the Budget document, the government's revenue expectations are realistic, but expenditure appears to be underestimated. This may be because expenditure to the tune of 2.0-2.5 per cent of GDP remains off budget. There is no provision in the budget for the loan waiver of $16.8 billion to the farmers (earlier Rs.60,000 crores and now it is increased to Rs.71,680 crores) and huge amount of $6.36 billion arrears to the Central Government employees (Rs.27145 crores for the Central sixth pay commission recommendations), which is expected to 1.85 per cent of the official GDP for 2008-09. The loan waiver scheme will benefit 3.69 crore small and marginal farmers and 59.75 lakh other farmers. This is the vote bank for the next 2009 general elections to the Congress Party.
The budget document also says that the Plan expenditure is going to rise by around Rs 38,000 crores or around 19 per cent. Non-plan expenditure will rise by a much smaller amount, by Rs 64,806 crore or 17 per cent. The actual figure may be much higher.
The fiscal deficit for 2008-09 is forecast at 2.5 per cent of GDP, lower than the deficit for 2007-08 of 3.1 per cent of GDP for 2007-08, and also lower than the 3 per cent of GDP mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. It is highly unlikely that the government will achieve its forecast.
While net borrowings for 2008-09 have been budgeted at Rs 1 trillion and the gross borrowing estimate is at Rs 1.45 trillion. Critically, it does not include oil bond redemptions of Rs 13000 crores. It remains to be seen how the government finances maturing oil bonds. Therefore there appears to be a considerable upside risk to market borrowings for 2008-09. Though aimed populist in nature, many of the announcements made could fuel inflation and put pressure on the fiscal deficit in 2008-09.
Economists point out that all oil bonds and a part of fertilizer bonds are not accounted for in the Budget. This means that the government does not have to include these expenses while calculating the surplus or deficit for the year.
SO IF WE INCLUDE THIS WHAT CAN BE THE FISCAL DEFICIT……..
Tax collections were at a record Rs 5, 88,000 crores in 2007-08 helped by robust economic growth and corporate profitability. However, with growth likely to slow down in 2008-09, it remains to be seen whether the same buoyancy will be maintained.
Also, not every expert believes fiscal deficit is worrisome. Dr Ashima Goyal, professor at Indira Gandhi Institute of Development Research, believes a high fiscal deficit is an indication that the government is spending more on "productive expenditures."
India aims to bring down its fiscal deficit to 2.5 percent of GDP for the 2008-09 financial year, compared to 3.1 percent in 2007-08, but financial analysts fear a $17 billion scheme to write off the debts of millions of small farmers and tax cuts could trip up efforts. According to the Fiscal Responsibility and the Budget Management Act operationalised in 2004-05, the government must reduce its fiscal deficit to 3 pct of GDP and wipe out its revenue deficit by 2008-09.
But it has already missed its revenue deficit target and expects it to be 1 percent of GDP in the year to end March 2009. Reddy said the fiscal deficit as a percentage of gross domestic product continues to be among the highest in the world.
Market borrowings finance more than half of the gross fiscal deficit and the rest of the gap is filled by small savings, provident funds, reserve funds and deposits and advances.
The gross fiscal deficit covering both state and central government is estimated at 5.5 percent in 2007-08, according to official estimates, down from 9.5 percent in 2002-03.

ING MF files papers for US Opportunistic Equity Fund

ING Mutual Fund (MF) has filed papers with Securities and Exchange Board of India (SEBI) for ING US Opportunistic Equity Fund, an open-ended fund of fund scheme. The units of the scheme will be available at Rs 10 per unit.
Objective
ING US Opportunistic Equity Fund`s primary investment objective is to seek capital appreciation by investing predominantly in ING (L) Invest US Opportunistic Equity Fund. The scheme may, at the discretion of the investment manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. The scheme may also invest a certain portion of its corpus in money market securities, in order to meet liquidity requirements from time to time.
What is Inside?
The minimum application amount is Rs 900 and Rs 1 thereafter.
The scheme offers growth option and dividend option. The dividend option shall have payout and reinvestment facility.
The scheme will offer for redemption of units at daily intervals at NAV based prices.
The scheme will charge an entry load of 2.5% and exit load of 2% if redeemed within and including 365 days from date of investment and 1% if redeemed after 365 days but before 2 years.
Asset Allocation
The scheme aims at investing 65% to 100% in ING (L) Invest US Opportunistic Equity Fund, 0% to 20% in money market instruments including reverse repo and 0% to 35% in other overseas mutual fund schemes.
Investment Strategy
The ING US Opportunistic Equity Fund in India will act as a feeder fund into the Luxembourg based ING (L) Invest US Opportunistic Equity Fund.
The investment strategy of the Luxembourg based fund is to identify and invest primarily in a diversified portfolio of big capitalisations issued by companies established, listed or traded or which have a major portion of their business activity in the United States of America. The fund`s approach encompasses bottom-up investment process supported by top-down macroeconomic analysis and quantitative screening. The investment process will aim to add value by also following theme based approach which shall enable to capture all relevant long term growth drivers. Up to 50% of the portfolio`s foreign currency exposures may be hedged back into the USD as and when permitted by RBI and SEBI from time to time.
Performance and Management
The performance of the scheme will be measured against S&P 500 Index and the fund manager is Jasmina Parekh.