SEBI fiat: Fixed maturity plans, liquid, floating funds may have to act fast

The recent SEBI circular on exposure to short term bank deposits by mutual funds will require the asset management industry to rationalise its investments in such deposits, a measure that not all concerned can take immediately.

While there are no definite indications as to how much is exactly at stake, it is believed that liquid funds, floating rate funds and fixed maturity plans will be immediately impacted by the move initiated by the regulator.

At the heart of the matter is SEBI's definition of `short term' for parking of funds, `short term' will relate to a period not more than 91 days. Such a period, notes Mr A.P. Kurian, Chairman of Association of Mutual Funds in India, may be a bit short for a section of the industry, especially players, which are into longer term deposits.

Fidelity brings International investment expertise to India

Fidelity Fund Management is bringing its world renowned expertise in international investment to the Indian market. Investors will now have the opportunity to add an element of geographical diversification to their portfolios with a fund house that has a strong track record in investing globally.

The Fidelity International Opportunities Fund is Fidelity’s first international offering in India and other global products will be introduced once guidelines are issued under the recently announced $50,000 remittance scheme. This new fund is an open ended equity growth scheme that seeks to invest 65% in Indian equities and around 35% in international equities, with a focus on Asia, to generate long term capital appreciation.

Fixed Maturity Plan from MFs

The soaring inflation rate and plunging stock market has made retail investors reluctant to invest in equities and in bonds. To solve investors’ dilemma Fund houses are always in queue with crafted products that would enable investors to earn higher returns in turbulent market and also one that would help their assets to grow.

Fund houses are back in trends of launching Fixed Maturity Plans and the rates offered by them this time is between 10-13%.

FMP are more flexible and less risky products. FMP offers 10-13% rate of interest on minimum 90-365 days which is lowest time horizon than investor earn 10-12% returns on three years fixed deposits in banks.

Recently Reliance Mutual Fund offered 11.20% rate of return on investment for 92 days whereas Sundaram BNP Paribas Mutual Funds offered 11.30% yield on investment for 90 days.

Fixed Maturity Plans are flexible debt series products structured with fixed tenure.

All FMP launched comes with different maturities and therefore invest in selected debt securities. For instance, The FMP with one year maturity will invest its funds in debt securities of one year tenure. As such portfolios are not traded; fluctuation in market value does not affect Investors investment.

High yields on short term investments, investors are parking their funds in these smart funds and also fund houses are swiping cash under management.

MFs catching up with FIIs in equity spending - FE

... invested over $2 bn in FY07

The Indian mutual fund (MF) players are fast catching up with their international counterparts-- the foreign institutional investors (FIIs) -- in terms of net investments in the stock market. Indian MF players were net buyers to the tune of $2 billion (Rs 9,000 crore) while FIIs, on the other hand, as expected, were net buyers to the tune of over $5 billion during April ’06-March ’07 (FY07). An interesting trend was also witnessed during the volatile year: FIIs were net buyers in equities in those months when the MFs were net sellers and vice-versa.

The FIIs have purchased equities worth Rs 25,646 crore in FY07 and MFs were net buyers at Rs 9,030 crore during this period. The liquidity provided by both the sets of institutional players has played a crucial role in the market achieving new highs during the year. Bombay Stock Exchange (BSE)’s Sensex gained 16% to close the year at 13,072 points on Friday.

According to data released by Sebi, FIIs were net sellers at Rs 7,354 crore in the May meltdown, when the US Fed decided to hike interest rates by 25 basis points. The MFs, on the other hand, were net buyers at Rs 7,893 crore in May 06. Apart from May, FIIs were also net sellers in December '06 at Rs 3,667 crore, while MFs were net sellers at Rs 1,976 crore in June ’06, at Rs 160 crore in July ‘06 and at Rs 24 crore in November ‘06.

Commenting on this trend, Sailav Kaji, analyst, Pioneer Intermediaries, said, “The investment pattern of both MFs and FIIs indicates that MFs are gradually emerging as bigger players in the Indian stock market. That the FIIs’ net inflows will be more than any other set of investors is a foregone conclusion as they are really big in size and operate in various parts of the globe. FII investments are determined by global trends, while investments by MFs is mainly governed by the liquidity situation prevailing in the market at that point of time and the prevailing market level.”

Another interesting aspect of the MFs’ investment pattern is that they were net sellers in the first three months of calendar 2007.

They were net sellers at Rs 944 crore in January,and Rs 274 crore in February. However, both FIIs and MFs were net sellers in March. The FIIs have made net sales of Rs 722 crore and MFs were net sellers at Rs 1,741 crore in March when the market was volatile through the month.

Is Fixed Maturity Plan better than FD?

It just may be your last chance to get more than 10% on your fixed deposits as many banks are windng up their schemes on March 31. But CNBC-TV18 reports that even if you have missed these schemes, there are better options from mutual funds.

Just three more days for depositors to get that 10% interest rate on fixed deposits! PSU Banks like Canara, Bank of Baroda, Bank of India, SBI and Union Bank have all higer deposit rates to attract depositors, but only for a limited period - till March 31. Foreign and private banks are also willing to pay interest rates up to 20%, but only for bulk deposits over Rs 1 crore.

Financial planners say they are advising clients to reinvest their existing FDs for better returns. Surjit Mishra, Senior VP, Bajaj Capital says, "When the inflation rate is as high 7%, we have advised clients to break their FDs which are at lower rates and re-invest with the current bank or any other bank."

Though bank FDs are offering 10% returns, post tax returns will be only 7.5%. Besides, when depositors break their FDs before the maturity date, then they have to bear a pre-mature withdrawal penalty of 1-1.5%, which means post tax returns will be even lower.

In comparison, Fixed Maturity Plans, or FMP offered by the mutual funds offer higher returns. "If you looked at the alternative then there is a much superior alternative funds' fixed maturity plans, which are giving you a 10% post-tax return and pre-tax returns of 13.5-14%; so it is like investing in a 14% FD," says Rajiv Bajaj, Managing Director of Bajaj Capital.

Fixed maturity plans are currently the rage and the mutual fund industry has managed to garner around Rs 70000 crore to Rs 80,000 crore through these schemes because they earn a better post-tax return.

But for those who prefer the simplicity of FDs, the good news is that even if some high yielding deposit products close on March 31, bank FDs will continue to fetch high returns given the RBI's preference to keep rates high.

Beware Buyer of MF Products - ET

Several intermediaries in the financial market are treading the regulatory twilight zone in mobilising funds from investors to run unofficial, self-styled mutual funds. The pool of money, collected without regulatory approval and on the back of a loose agreement between investors and these players — primarily mutual fund distributors — are being put into various mutual fund schemes. In a way, the product is like a regular ‘fund-of-fund’ (F-o-F), albeit entirely unofficial.

This may reflect the underbelly in the financial market, but there are reasons why investors are taking the bait. Market sources said such services from the unregulated distributor segment have mushroomed mainly because of the unfavourable tax treatment for Fo-Fs. The pitfall is that investors have little to fall back on if the bets go wrong.

Crash may make things difficult

As in most market stories, the going is good as long as the sensex behaves; but if there is a crash, the investor may find it difficult to salvage any money in the absence of a legally enforceable contract between them and the MF distributors who are doubling up as F-o-Fs.

In the past, there have been instances of private pools of money going into stocks and MFs through unregistered operators who act as portfolio managers. The F-o-F by distributors is somewhat similar to these, though a little more sophisticated. Sources said the money raised through such arrangements is more than what has been collected through official F-o-F schemes sold by fund houses. The total AUMs of domestic F-o-Fs as on February 28 was roughly Rs 2,300 crore.

The point is, why is it thriving? Official Fo-Fs are not classified as equity under income tax laws. As a result, F-o-F schemes are hit by dividend distribution tax, while investors do not enjoy tax exemption on long-term capital gains. Since F-o-Fs invest a large amount, at least 65% in equity schemes, fund houses have been asking the government to correct the anomaly. Thus, unofficial F-o-Fs are a way to side-step the tax. Besides, mutual funds have not paid dividends for their F-o-F schemes in recent times.

The modus operandi is simple. An investor, mostly with deep pockets, gives a power of attorney to a trusted distributor for operating his bank account.

The distributor, in turn, uses the money in the account to invest in schemes of his choice on behalf of the investor. In this arrangement, which is solely based on trust, the investor is just concerned about the net returns and gives the distributor a free hand in operating it. The distributor also takes care of the paper work.

Host of fixed maturity plans ending today - BL

Shorter-term plans may remain active, expect distributors

In a background marked by rising indicative yields and the rush to collect assets before the close of the fiscal, a host of FMPs (fixed maturity plans) are set to close this week even as fund houses make it tough for investors to exit these plans before maturity.

March 28 happens to be a particularly crucial date for the asset management industry — a number of FMPs are closing on that day, many of them carrying indicative yields in the 10.5-11.25 per cent range.

In a lot of cases, the fund houses concerned have set an exit load of 2 per cent for clients who may wish to pull out before the plans mature.

Steeper exit load even for shorter-term funds is to discourage investors, some of whom have perfected the practice of withdrawing early, said Mr Brijesh Dalmia, CFP.

Exit load

FMPs in this group include those offered by the likes of SBI MF, Standard Chartered, Principal and DWS.

These will join the long list of plans that have closed in the last few weeks, each adding to the year-end numbers that asset management companies will log when the next round of assets under management figures are released.

In a few odd cases, the exit load will depend on the time period for which an investor stays put. Two of Standard Chartered MF's plans, for instance, will charge 2 per cent for those who move out before six months and 1.5 per cent for those who do it later (but before maturity).

Both plans — their closing date is March 28 — have a duration of a little over 12 months, distributors indicate.

March 28 is also the key date for Kotak Mahindra MF's 3-month Series 14.

The plan, with an indicative yield of 11.25 per cent, opens and closes on the same day.

That date is also an opening date for a quarterly plan from the UTI MF stable.

Short-term plans

On another front, distributors suggest that the market for shorter term plans will remain quite active, thanks to fund houses' willingness to launch these products.

A few of these have reopened in recent days.

Lotus India MF's short-term plan, for instance, has just reopened and is expected to invest in short- and medium-term debt instruments carrying nine-15 months' maturity.

Plans such as these are mostly positioned for clients who need fixed returns and security of capital for shorter time periods, it is pointed out.

HDFC Prudence Fund - Invest by Business Line

Smart management of the debt portfolio has helped the fund even out returns, given the volatile equity market.

HDFC Prudence Fund, a balanced fund, appears to be a good investment option offering investors the opportunity to benefit from the improved return potential on debt investments, as well as long-term returns from equities. With a 13 per cent return over the past one-year, HDFC Prudence has fared better than the majority of pure equity funds over this period.

Active management of the debt portfolio to take advantage of higher interest rates on corporate debt appears to have helped the fund's performance in a scenario where equity returns have flagged as a result of market volatility. The fund's 3 and 5-year performance, which shows a compounded annual return of 34 per cent and 37 per cent respectively, is superior within the universe of balanced funds.

Suitability: HDFC Prudence is a balanced fund that has the flexibility to allocate between 40 and 75 per cent of its portfolio to stocks, with the balance invested in debt and money market instruments. In practise, though, the fund has consistently carried an equity tilt.

In recent months, the equity allocation has been consistently pegged close to the 74 per cent mark. The stock choices in the equity portfolio have tended to be unconventional, with a distinct mid-cap bias.

Though the balanced portfolio provides a degree of protection to investors against downside when compared to pure equity funds, the fund's mid-cap bias has made for significant vulnerability to corrective phases in the market (The fund's NAV witnessed a 20 per cent decline during the 29 per cent fall in the Sensex between May 10 and June 14 2006). The fund may not be well suited to investors who are completely averse to risk.

Performance: The 13 per cent return on HDFC Prudence over the past one year compares favourably with the CRISIL Balanced Fund benchmark, which delivered 9.4 per cent.

Given that the fund's equity allocation was capped at 70-75 per cent during this period, it has also fared quite well relative to the Sensex (14.4 per cent).

A couple of balanced peers — FT India Balanced Fund and Birla Sun Life`95 — have managed marginally higher returns than HDFC Prudence over a one-year period. Over longer time frames such as three and five years, Magnum Balanced is the only fund in the peer group that has managed to do as well as HDFC Prudence.

Portfolio: The fund maintains a well-diversified equity portfolio with a distinct mid-cap bias.

The fund's sector exposures are splintered across a wide range of sectors, with businesses such as pesticides, chemicals, textiles and transport finding representation in the portfolio.

Capital goods, auto ancillaries and FMCGs were the top sector picks in February 2007.

The stock picks have been quite unconventional. For instance, within capital goods, the portfolio featured AIA Engineering, Crompton Greaves and Elecon Engineering as key exposures.

In recent times, the fund also appears to have taken advantage of the expanding investment options in the debt space by more actively managing the debt portfolio.

The debt portfolio has a short-term bias, with a high allocation to corporate debt, reflective of the relatively attractive returns available in this segment.

Though the debt portion of the portfolio has been a drag on performance over a three-year time frame, this appears to be changing now, with relatively attractive interest rates, especially in the short-term segment.

HDFC Prudence appears to be a good vehicle for investors looking to capitalise on equity returns, with an added debt allocation for stability.

Fund facts: Launched in 1994, HDFC Prudence is one of the few balanced funds with a 10-year track record in the Indian market. It is managed by Mr Prashant Jain.

Quantum Long Term Fund - Business Line

Quantum Long Term Equity Fund is an open-ended scheme with an objective to achieve long-term capital appreciation by investing primarily in shares of companies that will typically be included in the BSE-200. The fund follows a value-investing style.

Over the last six months the asset size of Quantum has grown by 32 per cent even as some funds floated during the same period saw erosion in their assets.

The fund prefers to limit its portfolio to 20-40 stocks and exposures to any single stock below 6 per cent of the assets. Its mandate permits the fund to hold cash up to 35 per cent and it used the option during the peak rally until May 10. The fund preferred value picks rather than momentum plays, with sectors such as construction and metals not finding a place in the portfolio. Here is a look into the portfolio changes made during the period between September 2006 and February 2007.

The fund preferred to accumulate stocks it held rather than make new additions. Only few stocks, such as Aditya Birla Nuvo, Gujarat State Petronet, Hero Honda and Wire and Wireless India, were the new faces in the portfolio. Software continued to enjoy the support of the fund and retained the top slot in the portfolio. Frontline stock TCS and mid-cap player 3i Infotech were added afresh, while Infosys and Geometric Software Solutions were retained without any significant change in the holding.

In the banking space, HDFC Bank was the new entrant. Corporation Bank was accumulated.

ING Vysya Bank and State Bank of India were other stocks from the sector.

Arvind Mills, which has fallen close to 50 per cent over the past six months, continued to find favour and was added to. Exposure to Aditya Birla Nuvo and Raymonds were enhanced.

Pharma stocks, despite underperformance, continued to corner on an average 8 per cent of the portfolio. Ranbaxy, Aventis Pharma and Dr Reddy's Laboratories were added to the existing ones.

In the auto space the fund enhanced exposure to Tata Motors, while holdings in Bajaj Auto remained unchanged.

Quantum Long Term Equity was launched in February 2006 and is managed by Mr I. V. Subramaniam. The fund distributes its products directly and does not have any distributor's network.

MFs can have dedicated fund for foreign investments

IN A bid to enable retail investors to diversify geographically, the government is looking to allow dedicated MFs that only invest in foreign equities. Such funds will offer the advantages of a diversified foreign portfolio to investors.

The current ceiling of $3 billion per annum on aggregate investment by MFs in overseas instruments may be enhanced in the process while the cap for individual investors at $50,000 annually is likely to stay.

“Dedicated MFs investing in foreign equities will provide a platform to individual investors who want to invest in overseas instruments but lack knowledge about global markets. The $50,000 limit for individuals is unutilised for this reason,” a finance ministry official said.

“Although the $50,000 limit for individuals investing overseas existed, there hadn’t been too many takers given the complexity of investing overseas,” said Fidelity Fund Management MD and country head Ashu Suyash.

Currently, some MFs exercise options to invest in foreign equities subject to a cap. The proposed dedicated MFs for foreign equities will, however, need to be extra savvy because they’ll be subject to foreign equity as well as currency risks. “Some AMCs launching dedicated funds in India may have offshore partners whose services can be leveraged for Indian clients. Retail investors will have the advantage of well-researched markets to invest in,” a source said.

JM MF launches Small and Mid Cap Fund - Not sure whether the timing is right

JM Financial Mutual Fund has announced the launch of its JM Small & Mid-cap Fund. The scheme seeks to provide capital appreciation by primarily investing in small and mid cap stocks. The portfolio will include those companies, which have the potential to become tomorrow’s bluechips.

Speaking on the occasion, Nimesh Kampani, Chairman, JM Financial Group, said, “The Indian economy has shown robust secular growth for the last decade and this trend is expected to continue, fueling the growth of Indian companies. The engine of economic growth is shifting the momentum from large cap stocks to small and mid-cap segments.” JM Small & Mid-cap Fund is an open-ended equity oriented scheme providing regular and institutional plans with growth and dividend options in each plan. The scheme will invest in small cap stocks in the range of 20% - 40% and in mid-cap stocks in the range of 20% - 80%. An individual investor can start by investing as little as Rs 5000. There is no upper limit for investment.

Sandip Sabharwal, CIO of JM Financial Mutual Fund added, “The small and mid-cap stocks are generally under-researched and under-owned by institutional investors but these stocks have a huge demand and re-rating potential to give medium to long term growth to an investor's portfolio. We would identify and research the companies poised for take–off on behalf of our investors and constantly monitor the performance to give the best possible returns.”

The New Fund Offer for JM Small & Mid-cap Fund commences on March 9 and closes on April 7.

Debt funds grab spotlight on back of fall in equities

For mutual funds, the returns spectrum has witnessed a complete reversal of roles in the last one month.

Debt has come to the fore, much of it scoring in terms of capital preservation and more, while all classes of equity funds have gone down the tube, the worst affected losing over 15 per cent during the period.

The last one month, marked by a serious retraction of valuations on the equities front, has come as a bonus of sorts for investors who have dabbled in certain categories of debt products, especially funds in the short-term genre.

The difference in returns becomes more conspicuous when the best- and worst-performing categories are compared. These, as one estimate has determined, are roughly 0.6 per cent and minus 17 per cent respectively.

The trend, seen in the context of declining equity prices, may well sustain for some more time and even gather strength, sources said.

They added that this will turn the lay investor's attention even more firmly towards debt funds.

The latter are already in the limelight, thanks to recent developments in the debt market.

Equity fund managers mostly agree that a large section of investors, typically with low appetite for risks, may generally prefer conservative options for the time being.

"While some may see this as the time to get into good stocks commanding attractive valuations, some others may want to wait till it all settles down. This happens whenever there is such uncertainty," said Mr Mihir Vora of HSBC MF.

Not surprisingly, equity funds that have lost money in the past month include sectoral products.

Auto and banking sector funds were the worst hit, each losing over 15 per cent.

FMCG and pharma funds were a shade better, at minus 11 per cent and minus 12 per cent respectively.

Diversified funds, which do not have the luxury of investing in just a few sectors, have averaged a negative 14 per cent.

Shorter-term debt products, specifically liquid funds, have found a mention in the recent Budget, which has increased the dividend distribution tax for these funds to 28.3 per cent (including surcharge and cess at 10 per cent and three per cent respectively).

Liquid funds have been in the news ever since, a situation triggered by claims that these products will lose their attraction when compared to bank deposits which offer higher rates.

The sources, however, said that it is not liquid funds that are commanding all the attention from intelligent investors. Instead, fixed maturity plans (FMPs), which have come up in a big way in recent times, are emerging as a big draw.

This category is expected to continue to hold sway in the days ahead.

Mr Vikaas Sachdeva of ING Vysya MF said that FMPs will be able to firmly sustain their position even as fund houses seek to attract "smart money" through that route. "We see enough scope in rolling out attractive products, including those aiming at relatively higher yields, on the FMP front."

Realty ETF high on MF companies’ plans

It seems that the Indian mutual fund companies are not only dazzled by the glitter of gold but also by the shine of an estimated Rs 1,30,000-crore worth realty sector.

Till now, two companies have launched their Gold Exchange Traded Funds (ETFs) and many more companies, including Lotus

India AMC, are planning to launch their gold ETFs within a few months. These companies are also awaiting the Securities and Exchange Board of India (Sebi) guidelines on real estate ETF.

Country’s second Gold ETF after Benchmark AMC’s Gold ETF called ‘Gold BeEs’ was launched in Ahmedabad on February 27 and the company’s next product will be a real estate ETF.

Similarly, many more companies have applied for the ETF of the precious metal. New companies are also eying a share in the gold and realty business. Lotus India AMC, a pretty new MF company is planning to launch its Gold ETF within a couple of months and it is also preparing itself for the real estate ETF pie while waiting for the Sebi guidelines.

Talking to Business Standard, Arvind Mittal, regional sales head (west), UTI MF, said, “After the Gold ETF, the company plans to launch real estate ETF as soon as the Sebi guidelines are announced. Though the business potential in realty is huge, it cannot be compared with gold ETF business. We were quite ready to launch the Gold ETF when Sebi had issued guidelines one-and-a-half months ago. Similarly, we will be ready to launch realty ETF too once the guidelines are out.”

Ajay Bagga, CEO, Lotus India AMC, said, “We will launch Gold ETF within the next couple of months and are ready to enter into the real estate ETF market also once the guidelines are issued by Sebi.”

When asked how much time it might take for Sebi to launch the guidelines, he said, “We expect that the Sebi might launch the guidelines within the next six months. But it might come up even earlier.”

Talking about the enormous potential in the real estate ETF business in India, he said, “According to an estimate, the total real estate market size is near about Rs 1,30,000 crore. Just imagine if one per cent of this investment is converted into mutual fund then what will be the realty ETF market size in the country!”

“The gold ETF also has a bright future in India. Traditionally, the Indian investor has always been investing in gold. Indians will always prefer to invest in Gold as no ups and downs in the stock market can affect the prices of gold. On the other side, Indian MF investors are not so aware of other commodities like silver and oil. But these commodities will also foray into MF market once the gold market grows fully.”

Talking about UTI’s gold ETF, Mittal said,”The company targets an investment of around Rs 600 crore through this product. The total Gold ETF market size in India is projected to go up Rs 2,000 crore by the end of 2008 and by the end of 2009 it will grow up to Rs 7,000 crore. The total gold consumption of India is around 750 tonnes per annum. Of this 35 per cent is consumed as investment. The target of MF companies will be these investors.”

On how the Gold ETF will grow in the Indian market, Mittal said, “Initially five to six per cent of the total 35 per cent of gold investment will be converted into ETFs. After that there is only growth in the sector as Indian investor is traditionally a gold investor and the product has succeeded in countries like Australia, Turkey and many European countries. These countries are not traditionally into gold investment so in India gold ETF will surely be a major success.”

About possibilities of ETF in other commodities like oil and silver, Ravi Bhatia, research analyst of UTI MF, said, “The market will respond to gold far better than other commodities like silver and oil as gold does not have many spot exchanges while other commodities have spot exchanges. However, discussions are on between the Forward Market Commission (FMC) and Association of Mutual Funds in India (AMFI) in this regard. Depending on the outcome of these discussions many more commodities like oil and silver may be added in the country.”