Gilt funds would be a viable investment opportunity from a one year and beyond perspective

Kotak Mahindra Asset Management Company (KMAMC), a wholly owned subsidiary of Kotak Mahindra Bank, is the Asset Manager for Kotak Mahindra Mutual Fund. KMAMC started operations in December 1998 and has over 10 lakh investors in various schemes. Kotak Mahindra Mutual Fund manages average AUM of Rs 28636.86 crore as on June 2010. To know more about current scenario of Indian fixed income markets and investment options available to retail investors, Capital Market's D. Emerson Mcenley conducted an e-mail interview with Lakshmi Iyer - Head (Fixed Income and Products), Kotak AMC. Excerpts:

1) Give us an insight on the current scenario of fixed income markets in India? Share with us the views on G-Sec bonds and corporate bond spreads. How much percentage of your schemes portfolio has investment in corporate bonds?

The fixed income market in India is currently grappling with the transition in monetary policy from an accommodative mode to a normalized mode. In the process, benchmark interest rates are being increased. Consequently, the g-sec and corporate bond markets have been negatively impacted. Benchmark 10yr yields have risen to 7.85% levels. Also we have migrated from a liquidity surplus system to a deficient liquidity scenario which has lead to the shorter end of the yield curve spike up on an average 1.5%-2% over the last couple of months.

2) Which is the more lucrative investment option-short to medium term g-secs or corporate bonds, in current market scenario? Is it advisable to invest in long term government securities, in the wake of rising interest rates in the economy?

With 10yr benchmark g-sec yield approaching the 8% yield levels, it is our view that gilt funds would be a viable investment opportunity from a 1yr and beyond perspective.

3) What is your view on global bond market? What are the likely consequences of the forex-market trends for bond market yields?

Most of the global economies are still grappling with subdued growth which could inhibit them from raising rates in a hurry. This would be supportive for global bond yields which have been seen in the past few months. Even the US 10yr benchmark yield is currently trading at sub 3% levels.

As far as Indian markets are concerned the $ Rupee movements would be keenly watched. An orderly movement in forex market would be required for stable bond markets.

4) What's your take on the inflations numbers? How would inflation impact the debt market?

Inflation continues to be an area of concern as highlighted in the recent monetary policy review. There are concerns of inflation being more generalized in nature which could further aggravate the situation. Apart from significant evidence of demand-side pressures as seen in higher prices of non-food manufactured products, structural bottlenecks in commodities (pulses, milk, and vegetables) and de-regulation of petrol prices have resulted in higher inflation expectations. Also, the outlook on inflation would be guided by rainfall, commodity prices & domestic demand going forward.

The RBI has upward revised its guidance on inflation to 6% from 5.5% by the end of this financial year.

One of the ways to combat rising inflation is also to affect a hike in key benchmark rates which was one of the foremost reasons quoted by the RBI also for a mid meeting hike done last month. Hence rising inflation means rising interest rates, thereby negatively impacting debt markets.

5) What are the investment options available to retail investors, within the fixed income market, at this stage?

Rising interest rates should not be a reason for investors to shy away from the fixed income market. One must appreciate the fact in fixed income one does not lose his capital, unless there is a credit default as the higher yields tend to compensate for capital loss on account of lower prices. Fixed maturity plans offered by fund houses are a good way to benefit from the rising interest rate scenario.

6) What is your debt schemes' investment philosophy? As a fixed income fund manager what are your major concerns now?

The philosophy for us at Kotak Mutual involves around managing liquidity, duration, and credit across all our fixed income schemes. Investments are done taking into consideration the investment objective of the respective schemes and more importantly the time the investor would intend to stay invested in the particular scheme. For instance our Kotak Liquid fund would maintain a very low average maturity given that the investor would come in to this fund for even 1 day. Also on an ongoing basis the macro economic variables as also domestic events are monitored to fine tune the portfolios accordingly. To give a case in point, in today's environment liquidity is the key, hence most of our fixed income portfolio have shortened durations.

The major concern today as a fixed income manager is the movement in yields in a very short span of time. The effective overnight rate from 3.75% in April (reverse repos) has moved to 5.75% (repos rate) in under 3 month's time. Hence the market is still realigning itself to this eventuality - though the rise in yields is an opportunity from an investor perspective.

7) Kindly share your views on the recent credit policy review.

The recent policy has narrowed the liquidity adjustment facility (LAF) corridor from 150 bps to 125 bps by hiking reverse repos by 50 bps and reverse repos by 25 bps. It is very clear that the RBI desires lower volatility and has hence chosen to narrow the corridor. The concerns on inflation also have been highlighted with RBI of the view that inflation is now generalized in nature. The positive this is that the RBI will now do a policy review 8 times in a year which would also remove a lot of guess work that usually prevails between two meetings (since the review was done every quarter ).

8) How would you define your overall approach in managing interest rate and credit rate risks in an income fund?

We as a fund house have been pretty conservative on credit exposures and would not see that approach change very significantly in the near future. Interest rate views are actively managed depending on a host domestic as also global variables. At the current juncture, given that the yields have backed up quite a bit, we would favor adding duration to our portfolio.

9) What is your take on Rupee over near and medium term?

Near term $ Rupee is likely to remain volatile with a weakening bias due to higher than expected current account deficit. Also after the recent run up in Indian equities, there could be some apprehensions on valuations in the near term which could stall inflows. However, long term for the rupee continues to be positive as the fundamental outlook for India as an investment destination sees no change. Infact the RBI has also upward revised its GDP guidance to 8.5% for the current financial year.

Source: http://www.indiainfoline.com/Markets/News/Gilt-funds-would-be-a-viable-investment-opportunity-from-a-one-year-and-beyond-perspective/3216411660

India Mutual Funds' Average Assets Slip 1.6% On Month In July

The average value of assets managed by Indian mutual funds in July slipped 1.6% from a month earlier.

Mutual funds' average assets under management fell to about INR6.65 trillion ($144.03 billion) in July from INR6.76 trillion at the end of June, data from the Association of Mutual Funds in India showed Tuesday.

Assets had dropped nearly 16% on month in June as banks and other companies withdrew investments from debt funds to meet cash needs, and also due to a proposed change in the method of valuation for certain debt securities.

But average assets under management at Reliance Mutual Fund, the largest Indian fund house by assets, rose a little under 1% to about INR1.02 trillion at the end of July. Its average assets had slipped nearly 15% in June from the previous month.

Source: http://www.automatedtrader.net/real-time-dow-jones/9414/india-mutual-funds039-average-assets-slip-16-on-month-in-july

Reliance MF assets rise in July; that of ICICI, UTI decline

The country's largest fund house, Reliance Mutual Fund, witnessed an increase of over Rs 800 crore in its average assets, while that off ICICI MF declined by Rs 5,000 crore in July.

According to data available with the Association of Mutual Funds in India (AMFI), Anil Ambani Group firm Reliance MF witnessed an addition of Rs 859 crore to its average assets under management (AAUM) at Rs 1,02,179 crore during the month.

Besides this, the country's third largest fund house, ICICI Mutual Fund, witnessed an erosion of Rs 5,080 crore from its AUM in July to Rs 68,715 crore.

UTI MF also saw its asset base declining by Rs 2,238 crore during July to Rs 62,208 crore.

Of the 33 fund houses that have so far disclosed their AUM figures, 18 have registered growth.

The assets of SBI MF grew by Rs 4,779 crore to Rs 38,513 crore while that of Baroda Pioneer MF rose by Rs 879 crore to Rs 3,954 crore.

However, certain fund houses -- including Birla SunLife MF, L&T MF, Tata MF and Taurus MF -- witnessed a substantial erosion from their asset book.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Reliance-MF-assets-rise-in-July-that-of-ICICI-UTI-decline/articleshow/6249310.cms

Want investment advice? Ask for the menu card

Looking for advice on how and where to investin mutual funds?

First, order for the menu card.

Huh? Yes, it’s the result of new Securities and Exchange Board of India (Sebi) norms that require investors to pay up commission to agents directly, unlike earlier where a portion of the investment made used to be handed over to the distributor as commission directly.

It is learnt that a distributor incentral Mumbai is handing out pamphlets to people stating “Fee for mutual fund form — Rs 25, Investment only (cheque collection) — Rs 100, mutual fund advice — Rs 250 per investment. For monthly and yearly advice fees, contact us....”

Other independent financial advisors (IFAs) are forming groups and mulling a standard charge across the board. “Pursuant to the present Sebi regulatory issues and the need to charge

the clients for the advice and levels of services offered by us,

we are in the process of preparing a tariff card and notice to

investors based on Sebi notifications (on) the need/ practice to charge fee,” a mail sent to DNA Money by a group of IFAs said.

There are 63 IFAs who form this group.

Another network operating in Mumbai called MF Chain, which involves around 25-odd distributors in the city holding large chunks of assets under them too have decided on a fee structure.

“Location-wise the assets are segregated. So, a distributor servicing in Bandra will not service a client in Borivali as that area is serviced by another distributor,” said a source privy to the information.

“There is a price list that is formed. Because these distributors are operating all across the city it will not be possible for investors to negotiate,” said the source.

He claimed the entire idea to is just like other associations that are run by barbers, laundry operators in Mumbai. “The rates are fixed,” he said.

“As an IFA he can knock out 30% of his competition by fixing rates across. The competition will not be from IFAs, it will be from banks and national distributors,” he added.

Delhi too has a broker syndicate called DFDA, where leading independent financial advisors unite to earn asset under management muscle. “Their agenda is sangathan mey shakti hai (there is strength where there is unity),” a head of a mutual fund house said.

Other distributors too have started asking for yearly fee from investors. Kirit Nagda, who runs Relationship Life & Services, told DNA Money on an earlier occasion, “We have started charging a yearly fee of Rs 2,000 per family.”

Many have realised that when they ask for per transaction fee, they are not sure whether the client will come back to them the next time. “A yearly fee ensures that the client will come to me for each transaction during the year,” said a distributor.

There is another Vadodra-based advisor Durgesh Pandya, has now initiated a life-time advisory fee of Rs 40,000. “Some of my customers have agreed to pay up,” he claims. But asked aren’t people wary of him not continuing in the industry forever, he replies, “People trust me as they have been investing through me for the past five years now. They also invest crores in each transaction, so if you see on a per transaction basis the advisory for life-time turns out to be cheap for them.”

This fixing of fee is against the idea of Sebi. C B Bhave, chairman of Sebi had said while addressing the mutual fund summit last month, “Don’t tell the investor how much he has to pay. Investors should be able to negotiate a fee for the value that the advisor is providing.”

Source: http://www.dnaindia.com/money/report_want-investment-advice-ask-for-the-menu-card_1417988

Equity exposure boosts MIPs’ yields

With the markets remaining buoyant, monthly income plans (MIPs) have increased their equity exposure significantly. The best performing schemes in the category have nearly touched the mandatory ceiling and this has enabled them generate higher returns. MIP's typically have 10-30 % exposure to equity.

While a higher equity exposure has helped these schemes log in 6.4% to 8.4% returns since mid-October during which markets have traded within a band and with a largely upward trend, MIPs with lower equity holdings have remained laggards , analysis shows.

The net asset value (NAV) of top ranking MIPs touched their 52-week highs on July 22-23 and as a result many schemes have given dividends ranging from 1.5% to 2%. In all, four MIPs feature in the top 10 debt schemes for the six month period (till July 26). "MIPs have increased allocation to equity as there is much less uncertainty about the market (movement ) in the near term," says Lakshmi Iyer, head, fixed income and products, Kotak Mahindra mutual fund.

Moreover, the performance of the fixed income portfolio of MIPs was not in line with expectations in the past two months prompting fund managers to shore up equity allocations, she says. Some large fund houses have seen a significant increase in sales of hybrid and MIP products in the past year, say industry officials. Though MIPs have managed to ride on the market momentum now, equity allocations in the future would largely hinge on market direction, say industry officials.

Since MIPs, which invest mainly in government securities and corporate bonds, usually make payouts on a monthly basis they would not be able to take aggressive market calls, officials say.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Equity-exposure-boosts-MIPs-yields/articleshow/6246274.cms

As NAV math changes, raters seek volatility gauge

With volatility in debt funds set to increase on account of a change in their valuation methodology with effect from today, rating agencies and institutions are hard at work trying to figure out the appropriate rating mechanism for these funds.

Debt mutual funds collect money from investors and invest the proceeds in bonds and other securities.

Hitherto, these funds were rated on the basis of their credit quality, or the quality of the securities they held.

However, now they may also have to be rated to account for the daily fluctuation in the market prices of their securities.

As per an order of the Securities and Exchange Board of India (Sebi) issued in February this year, money market and debt securities with residual maturity over 91 days (or with maturity up to 182-days) have to be valued on a mark-to-market basis. The order takes effect today.

This change is likely to increase the volatility of investments in these funds, something the rating agencies are trying to accommodate in their models, although there is no regulatory mandate to this effect yet.

The changed norm also introduces the possibility that some funds could show negative returns.

According to an industry source, a number of mutual funds which outperform have a markedly different maturity and liquidity profile when compared to their peers. While this increases the risk of negative returns when following a mark to market system, it would not be reflected in the credit rating.

In effect, there would be no easy way to distinguish a fund which has been given the highest credit rating but is more volatile than another with the same credit rating but with lesser risk of

seeing negative returns. And without such a rating, the net

asset value of debt funds may be set for a rocky ride, with unwary investors running the risk of getting hurt.

Going by experts, it is this possibility of a ‘safe’ investment —- as debt investments are generally deemed to be —- showing negative return that has investors looking for a means of rating not just the soundness of the papers the fund holds but also the downside risk that it may carry.

“There has been some interest in the market recently with investors as well as funds asking about rating on the basis of volatility in addition to credit quality of paper,” said Deep N Mukherjee, director, Fitch Ratings.

Since Sebi announced its decision in February, eight out of the top ten fund houses have approached the agency for a volatility based rating, said Mukherjee.

Others may consider following suit sooner than later. “There have been some discussions on the introduction of a volatility aspect to ratings, but something concrete is yet to emerge,” said D R Dogra, managing director at Care Ratings.

“Internationally, the volatility rating is used widely. Going forward, one may want to look at the possibility of its introduction in India,” said Karthik Srinivasan, co-head of financial sector ratings at ICRA.

Currently, debt funds account for two-thirds of the Rs 6.3 lakh crore worth of assets under management of mutual funds.

Source: http://www.dnaindia.com/money/report_as-nav-math-changes-raters-seek-volatility-gauge_1417588

Hefty gains for MFs in downturn

Buy when there is blood in the streets, even if the blood is your own. The old adage on investing seems to have helped funds that were launched even in the thick of the stock market downturn in 2008-09. Most diversified equity mutual funds (MFs) that were launched between April 2008 and March 2009, a period during which benchmark indices plunged to new lows, have managed to beat benchmark indices and their category average.

Of the 10-odd diversified equity MFs that were launched during the period, a vast majority have moved ahead of key indices for the 1-year and the year-to-date period. Several funds have given a yearly return of between 22.2% and 39%. Principal Emerging Bluechip that hit the market during the height of the global financial crisis was the best among the lot gaining 44% in one year compared to the category return of 28.1% and the 17.1% return generated by sensex.

"During March 2009, when sensex was at (around) 8000 levels, the equity allocations of top ranked new entrants in the diversified equity category was above 90% as compared to 80% of its peers," said Tarun Bhatia, director, capital markets, CRISIL Research. "So when the markets rebounded from the lows of March 2009, the call of higher equity allocations of these funds paid rich dividends and the rest of the funds had to play catch up."

In fact, first time entrants bagged top ranks in the equity category in the latest CRISIL Mutual Fund Ranking announced for the quarter ended June 2010. The equity category saw 10 new entrants - six funds in the diversified equity segment and two funds each in the large cap and small & mid-cap equity categories. In all, three out of the six new entrants in the diversified equity category bagged the CRISIL Fund Rank 1.

The toppers also scored high on the risk-adjusted returns parameter compared to their category peers, CRISIL said. "Any fund that invests in a downturn gets a good brand value," said Sankaran Naren, CIO, equity, ICICI Prudential MF. "A downturn helps (a fund) in increasing absolute returns. Investors are more interested in getting better absolute returns," he said. Absolute return measure how much an asset has gained over a particular period and investing in a downturn helps in boosting it as units are picked at a low point.

Source: http://timesofindia.indiatimes.com/business/india-business/Hefty-gains-for-MFs-in-downturn/articleshow/6245757.cms

SEBI proposes change in PMS fee model

The Securities and Exchange Board of India (SEBI) has proposed that portfolio management service (PMS) firms should charge profit sharing/performance related fees on the basis of high water mark principle.

In a consultative paper issued on July 27, the market regulator said that once the portfolio rises to a certain peak and the portfolio manager charges fee for it, the next time he could charge a fee only if the portfolio value is above the previous peak.

For example, consider that frequency of charging performance fees is annual. A client’s initial contribution is Rs 10,00,000, which then rises to Rs.12,00,000 in its first year, a performance fee/profit sharing would be payable on the Rs 2,00,000 return. In the next year, the base value of the portfolio becomes Rs 12,00,000 and the portfolio manager can charge fee only if the portfolio rises above Rs 12,00,000. If in the second year, the portfolio drops to Rs 11,00,000, no performance fee would be payable. If in the third year the Portfolio rises to Rs.13,00,000, a performance fee/profit sharing would be payable only on the Rs1,00,000 profit which is portfolio value in excess of the previously achieved high water mark of Rs 12,00,000.

For the purpose of charging performance fee, the frequency should not be less than quarterly.

In case of partial withdrawal of funds by investors, all fees and charges should be charged proportionately and the high watermark should be adjusted accordingly.

The regulator further said that in order to ensure transparency and adequate disclosure regarding fees and charges, the client agreement should contain a separate annexure that should list all fees and charges payable to the portfolio manager.

“The client is required to separately sign the annexure on fees and charges and add in his own handwriting that he has understood the charge structure,” SEBI said.

Head of the PMS group of a mutual fund house said on the condition of anonymity that it is good step towards bringing more clarity on the issue of fee. “Investors would certainly benefit if there is more clarity on such issues,” he added.

Source: http://new.valueresearchonline.com/story/h2_storyView.asp?str=101395