Investing in fund of funds

When markets behave like they have in 2011, the one who loses less is called a winner. Fund of Funds by their very design are meant to lose less. Still, only 1 per cent of the Indian mutual fund industry's AUMs are made up of Fund of Funds (FoF). One would think there must be a good reason for it. Actually, allow me to give you three. But first, what is a FoF?

At its simplest - a mutual fund that invests in other funds is a fund of funds. Conceptually it does what you do, create a portfolio of funds. The difference being, when you buy funds yourself, you buy them individually and hold and track them separately, while when you buy a fund of funds, you hold just one fund which in turn holds other mutual funds inside it.

Coming back to the reasons; first is plain boring mathematics. Because it holds many funds in it, a fund of funds will not deliver performance equal to or better than the single best performing fund that it has invested in. The return of a fund of funds will always be closer to the weighted average returns of the funds it has invested in, quite like the return of your own portfolio of funds.

And by the very same logic, a FoF will not go down as much as the worst performing fund it holds inside it. For this very reason, fund of funds are known to give superior risk adjusted returns.

Secondly, FoF until very recently were perceived as competition by distributors. If one single fund of funds itself can buy, hold, sell, over-weight, under-weight the funds it invests in, then how will a distributor add value to the investor. This misplaced perception has begun changing in the last one year. FoF AUMs have more than doubled in the last 15 months to over R 8,000 crore as of Oct'11.

Thirdly, the larger share of fund of funds currently available in India actually invest in funds of only their own fund house. This limits the diversification benefits an investor aims for when he himself buys mutual funds from different fund houses. Globally, several fund of funds pick the best of breed funds from across different fund houses and put them together into one. These are called Multi Manager fund of funds. It's like putting together the best cricket players from across the world into one team.

Fund of funds bring several advantages too. Briefly, it's a great way to start investing into mutual funds for a first time investor. No need to worry on how to pick, retain or change a fund. If you are an SIP investor, just a Rs 1,000 SIP could actually give you access to 4-5 best of breed managers in one funds of funds Vs you having to take out Rs 1,000 minimum subscription for every manager you will invest in separately by yourself.

And for those who already hold too many funds and see managing them a hassle, they too can simplify and consolidate their holdings through a fund of funds, as long as they can find one that is similar in objectives to the funds they hold. And the good news is that options do exist.

Amongst the least known but significant advantages of a fund of funds is the short term capital gains tax that you can save. If I assume that you do change some if not all the funds you hold at least once within the first 12 months of investing in them, the gains you make on them become taxable.

However, when a fund of funds manager changes any fund it has invested in, there is no tax liability that 

accrues on to you.

Now if you combine all of the above benefits, it becomes easier to appreciate the rapid growth of FoF in India recently. FoF are now available here for single asset classes and for multiple asset classes too. Globally, fund of funds are often preferred by super HNIs for just two reasons - their superior risk adjusted returns and equally importantly, their convenience.

Source: http://www.indianexpress.com/news/investing-in-fund-of-funds/897338/0

Link for AMFI refresher or CPE program

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http://ciel.co.in/index.php

You will find Training calendar at left side bottom of the web. Just click on alert me and get registered you self for CPE program.

Mutual funds’ AAUM falls 4.35% in Q3

The Indian mutual fund industry saw fall of over 4.35% in its average assets under management (AAUM) for the October-December quarter following a lack of participation from retail investors.

According to data from the Association of Mutual Funds in India (AMFI), the total AAUM of 44 fund houses at the end of the October-December quarter stood at R6,817,07.83 crore, a fall of R31,033.89 crore against R7,127,41.73 crore for the July-September quarter.

HDFC Mutual Fund continued to retain its number one slot with an AAUM of over R88,628.02 crore. However, its AAUM for the December quarter was down by 3.48% against that in the previous quarter.

According to Crisil, as many as 24 out of 44 fund houses logged a fall in the average AAUM in the December quarter with Reliance Mutual Fund registering the highest fall in average AAUM in absolute terms by around R8,354.79 crore or 9.22% toR82,305.80 crore in the December quarter.

SBI Mutual Fund saw its average AUM falling by nearly R6,179.88 crore or 12.95% to R41,551.51 crore in the latest quarter. In percentage terms, Union KBC Mutual Fund saw the highest fall at around 37.87% to end with assets of R54,015 crore.

Among gainers, JP Morgan Mutual Fund registered the highest growth in average AUM, with its AUM rising R2,011.02 crore or 42.36% in the quarter to R 6,758.71 crore.

Deepak Chatterjee MD and CEO of SBI MF says, “Overall, the trend in the assets is declining, which is very dissatisfying and distressing. Also there is no fresh money flowing into the equity schemes , following weak equity markets. We are witnessing some growth on fixed income side, where retail investors are coming in fixed maturity plans (FMPs), but in the last few months they have remained out of equity funds.”

Crisil in its reports also states that mutual funds AAUM was down by 4.4% in Q42011 on withdrawals by corporates, banks and weak equities. The fall can be attributed to redemption by corporates and banks besides the ongoing slide in the equity market.

“Corporate withdrawals were on account of quarter-end advance tax payments, which were reported at around R30,000-40,000 crore for the December quarter, much lower than R68,000 crore in the September quarter. As per inflow-outflow trends seen in the past, corporates typically reverse these outflows in the month following the quarter end,” says Crisil report.

The report further adds “Banks withdrew due to two reasons; on account of balance sheet capital adequacy requirements for the quarter end and secondly due to Reserve Bank of India (RBI) circular to reduce banks’ exposure to short maturity mutual funds to 10% of their net worth by end-January 2012.

Banks’ investment in mutual funds fell to R49,300 crore as on December 16, 2011 as compared to R65,800 crore as on September 23, 2011.”

Source: http://www.financialexpress.com/news/mutual-funds-aaum-falls-4.35-in-q3/895878/0

Foreign investor participation likely to be limited: Experts

After allowing qualified foreign investors (QFIs) to invest in equities indirectly through the mutual fund (MF) route in August, the government on Sunday paved the way for QFIs to invest in Indian equities directly as well. Individual QFIs will soon be allowed to invest up to 5% of the paid-up capital in any company and up to 10% of the paid-up capital on aggregate basis (all foreign individuals put together). These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and NRIs who can directly invest in the Indian equity market.

The government hopes that the move will help in widening the class of investors and reduce market volatility. It also hopes to attract more foreign funds. Amid slowing economic growth, FIIs pulled out as much as around Rs 2,800 crore in 2011 from the Indian stock markets.

Will QFIs invest?
Experts are of the view that the step is in the right direction but it would only have a meaningful impact in the long run. "A big chunk of investment in the stock market is driven by perception," said Aseem Dhru, MD and CEO, HDFC Securities Ltd. "Due to a slowing economy and lack of policy initiative, the perception about India is not very bullish overseas. Hence, not much investment will be made in the short run. But as Indian growth story is likely to attract investors in the long run, the move may counter the volatile behaviour of FIIs."

"Investment by foreign nationals would depend upon the way Indian growth pans out," said Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities.

The limited impact the move may have in the near term can also be gauged from the fact that none of the MF firms have taken any initiative to expand their reach outside India despite government allowing QFIs to invest in equity schemes of MF houses last year. And probably this is the reason why the capital market has not reacted much to the news.

The other factor that could deter foreign investor from investing in India is exchange rate fluctuation. "While, it is relatively easier to evaluate a particular company, predicting currency movement would not be easy," said Vinay Agarwal, executive director, equities brokerages, Angel Broking Ltd.

Source: http://www.hindustantimes.com/business-news/Features/Foreign-investor-participation-likely-to-be-limited-Experts/Article1-792461.aspx

2012 will be a good year for debt funds: Dhirendra Kumar, Value Research

In an interview with ET Now, Dhirendra Kumar , CEO, Value Research, shares his outlook for mutual funds. Excerpts:

2011 has been a sort of write off for equity investors. What should they be doing with their fund portfolios right now? Is this the time for a cleanup and if yes, which funds should be done away with?

No, I do not think investors should be behaving in an erratic manner because one is faced with a declining value of the scale. One has to look at it, one should not lose the sense of proportion here. If you look at funds on an average, in fact 2011 was a year of contractions because we normally expect that large caps will be able to withstand a market decline much better followed by midcaps and small caps will see a massive erosion.

What we find is that small caps and midcaps were able to withstand the market decline much better than the large caps and large caps on every possible occasion or they were looking for an excuse to fall primarily because most of the big declines in a brief period came from FII actions. So that impacted large caps and that was visible.

That is why we see a little difference but investors need to really take lessons from 2011. If investors sided with funds, the emphasised funds in their portfolio which were not mainstream, for example the most popular fund in 2010 was the banking funds. Likewise in the year before that, investors still kept patience with an infrastructure fund which showed no symptoms and people are expecting for the good time to be back with those.

Investors have not exited these funds as aggressively as they should have in the hope that they will be able to recover even the money which came before 2008, that money stays there. So keeping away from anything which is stylish, fashionable and has lost its charm, investors need to really get out of those, but with a mainstream fund, it is time to stay on course and investors have largely remained that way. It is reflected in the consistent inflows into equity fund through 2011.

Whereas there is a serious case that via equity allocation, they need to be increased for 2011. Is there a case to also increase allocation to debt because if interest rates they correct which they will in 2012, debt funds will also surprise you?

Yes, it is going to be another good year for debt funds. Of course internal dynamics of debt funds will change. It will be unreasonable to expect the same kind of return what investors got from the liquid fund or the short term fund or the ultra short term fund. Those returns are unlikely to be met, but what I feel is that income funds will come on the forefront.

There will be an appreciation component and that gain will start or has already started in a certain sense with the change in outlook for the interest rates, but I do not think investors should behave, Indian investors typically they work in a fairly binary fashion. They either are fully into equity or fully into debt.

That is very undesirable way of allocating because you normally do it at the wrong time. Once the equity values are down, then you move to debt. I do not think one should behave that way. Fixed income should be part of anybody's allocation, but should one be heavily into debt because there are good times ahead? No, equities turn around when you least expect it and be prepared for the unexpected.

The positive surprise last year came in from global schemes run by several AMCs like a Birla Sun Life International gave an 8% return in 2011. How much allocation should investors have to such funds in their portfolios considering that local markets are likely to remain bearish at least towards the start of this year?

International funds do present a case and the fundamental case for international fund is that the reason why you invest in a mutual fund is to diversify and with these funds, you will be able to diversify across geographies. It just takes one step ahead. But the problem has been that the kind of funds available to Indian investor, the absence of a diversified vehicle.

We hardly have only the Birla Sun Life or the Principal Global Opportunity Fund. They are the only diversified vehicle. Otherwise everything is something exotic. You get a Brazil fund, you get a Latin America fund or you get specific geography or specific commodity, agriculture fund and things like that.

The absence of generic diversified vehicle which helps investors diversify across geography is not available, but it presents. Why it has not taken off so far in all these years, they have been available. Because Indian markets have done consistently well, have been through a bull phase ever since these were made available, but 2010-2011 is a reminder that you need to diversify and it could well be up to 25-30-40% and not necessarily from the viewpoint that outlook is bleak for India. It should be a fixed component. You just need to diversify for your returns to be more consistent.

What about gold ETFs because they have jumped a good 31% last year? What should be the percentage in the total corpus when gold has already surged each year for the past 11 years?

It was very difficult to resist gold and it should be a very small component, not exceeding 5-7%, but so far it has been that investors, what to see of investors even politicians in Tamil Nadu had needed gold in their manifesto to win.

Source: http://economictimes.indiatimes.com/opinion/interviews/2012-will-be-a-good-year-for-debt-funds-dhirendra-kumar-value-research/articleshow/11375646.cms

Sebi allows UTI Asset Management to launch new schemes after gap of 5 months.

The Securities and Exchange Board of India (Sebi) has allowed UTI Asset Management, India's fifth-largest mutual fund, to launch new schemes again after a gap of almost five months. The move comes as a relief to UTI, which was barred by the regulator from launching any fresh scheme in August 2011, till it gets a new chief, as the mutual fund was losing out on opportunities to garner money for its short-term debt products in a firm interest rate regime.

Sebi, in a communication to the fund house last week, said it could launch the five-series of fixed-term income schemes and a gold fund for which it had applied to the regulator earlier. But the letter is silent on whether the fund house could apply for new schemes other than the ones approved now.

A top UTI Asset Management official confirmed the development. "In a high interest rate scenario, FMP as a product category has done well and is expected to be an attractive opportunity," said Jaideep Bhattacharya, group president and chief marketing officer of UTI AMC.

UTI Asset Management has been headless for almost a year now since its former CMD UK Sinha moved to Sebi as its chairman. After Sinha moved out, the daily operations of the fund house is being overseen by four officials - Jaideep Bhattacharya; Imtaiyazur Rahman, chief finance officer; Anoop Bhaskar, head-equities and Amandeep Chopra, head of fixed income.

But rules do not permit a mutual fund to launch products without the approval of its chief executive officer. With an impasse over the appointment of a new chief for UTI, the fund house has been losing out to its peers in terms of product launches.

"We had written to Sebi to allow us to launch new schemes as the processes are already in place," said another senior executive of the fund house. The independent directors of the UTI AMC board have already written twice to all the five shareholders, asking them to speed up the appointment process.

"Independent directors have raised concerns on the delay in appointment as they are forced to be involved with the daily operations of the fund house since they don't have the expertise for the same," said a person familiar with the development.

UTI Mutual Fund's five shareholders are SBI, LIC, PNB, Bank of Baroda and T Rowe Price. Late last year, two independent directors, Anita Ramchandran, who was the acting chairperson of UTI AMC, and Prithvi Haldea stepped down from the board citing personal reasons. They are yet to be replaced on the board.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/sebi-allows-uti-asset-management-to-launch-new-schemes-after-gap-of-5-months/articleshow/11370658.cms