• January 2019

    The consistent performance of all five funds in the January 2018 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the January 2019 GEMGAZE.

    HDFC Balanced Advantage Fund (formed from the merger of erstwhile HDFC Prudence Fund and HDFC Growth Fund) Gem

    HDFC Balanced Advantage Fund is the largest fund in the category with assets amounting to Rs 38,502 crore. The fund, managed by Prashant Jain, widely regarded as one of the most competent money managers, has delivered an annualised return of 18.55% since its inception. HDFC Balanced Advantage Fund, with its long-standing stellar track record of delivering 18.62% compounded annually over the last 10 years, towers over the category average of 12.97% annually over the same period. Over a three- and five-year horizon, the fund returned an annualised return of 11.93% and 15.99%, respectively as against the category average returns of 8.9% and 11.75%, respectively, over the same period. The fund earned a return of -3.97% in the past one year as against the category average of 1.02%. But in the past 3 months the returns have been 6.8% as against the category average of 3.44%. HDFC Balanced Advantage Fund has a diversified quality portfolio with a blend of growth and value. The allocation to a single stock has been capped at around 9.03%, with the highest currently allocated to ICICI Bank. There are 73 stocks in the portfolio and the top three sectors are finance, energy, and construction, which constitute 56.95% of the portfolio. The portfolio turnover is 18% and it has an expense ratio of 1.98%. The fund is benchmarked against NIFTY 50 Hybrid Composite Debt 65:35.

    ICICI Prudential Equity and Debt Fund (erstwhile ICICI Prudential Balanced Fund) Gem

    Launched in November 1999, ICICI Prudential Equity and Debt Fund is a very popular product in this category. The fund has earned a return of -2.47% over the past one year as against the category average of -4.28%. But in the past one month the fund has earned a return of 3.83% as against the category average of 2.35%.The three-year and five-year returns are also more than the category average of 10.36% and 13.85%, respectively at 12.93% and 15.88%, respectively. The fund has 71.24% of its portfolio invested in equity comprising 86 stocks. This Rs 26,695 crore fund has 41.71% of the portfolio in the top three sectors, energy, finance and metals. The fund has traditionally featured a high equity allocation, hovering at well over 70%, and it continues to maintain it at 71.21% of the portfolio. In terms of style, the fund follows a blend of growth and value styles. On the debt portion, the fund does take aggressive duration calls. Throughout 2015-16, for instance, the average maturity was higher than 10 years. This has been toned down lately to four to five years as interest rates have headed lower. While the fund seeks to add to returns based on rate calls, it is very conservative about taking on credit risks. Sovereign and money-market securities dominate its portfolio. Traditionally, the equity portfolio has been mid-cap biased. But in the last one year, its weight has veered sharply towards large-cap stocks. The fund is now significantly overweight on large-caps relative to the category. The expense ratio of the fund is 1.95% while the portfolio turnover ratio is 234%. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. Sankaran Naren, the veteran fund manager, manages this fund along with Manish Banthia and Atul Patel.

    Tata Hybrid Equity Fund (erstwhile Tata Balanced Fund) Gem

    This consistent fund has managed an impressive performance amid the swinging markets of the last seven years. It has been among the top ten funds in the balanced category in eight of the last ten years. This fund has handsomely outperformed the benchmark as well as the category over the last ten years. Ten year returns have been 17.18%. This compares very well with the category average of 14.99%. The one-year return of this Rs 4,822 crore fund is -4.17% as against the category average of -4.28%. Returns of 7.16% and 14.02% respectively, as against the category average of 10.36% and 13.85% during a three- and five-year period, reflects the fund’s ability in stock selection. The fund did not fare well in the bear market of 2008, but it navigated 2011 quite well. The fund has a 75-25 equity-debt allocation, with its equity exposure consistently above 70%.  Large-cap stocks usually make up 60 to 70% of the exposure, but the proportion has been pegged up sharply to over 84% lately. The fund is now quite overweight on large-caps compared to its peers. The fund follows a growth at reasonable price (GARP) style of investing. It believes in buying businesses with good earnings growth prospects over the medium term and those which are run by quality managements. Each sector is played through a basket of five to eight companies. The top holdings are capped at 4 to 5% to reduce concentration and to capture more opportunities. The debt portion has allocations mainly to G-secs and AAA rated paper. The average maturity stood at about five years in January 2018. Finance, automobile and FMCG are the top three sectors. In terms of portfolio construction, the top three sectors comprise 46.15% of the portfolio mix. The fund has 29 stocks in the portfolio. The fund is benchmarked against CRISIL Hybrid 25+75 Aggressive Index. The portfolio turnover ratio of the fund is 204% and the expense ratio is 2.13%. The fund is managed by Murthy Nagarajan and Chandraprakash Padiyar.

    Reliance Equity Hybrid Fund (erstwhile Reliance Regular Savings Fund)   Gem

    Reliance Equity Hybrid Fund is an equity-oriented balanced fund with 73.81% in equity. The one-year return of this Rs 13,171 crore fund is -6.29% as against the category average of -4.28%. Returns of 9.57% and 15.15% respectively, as against the category average of 10.36% and 13.85% during a three- and five-year period, reflects the fund’s ability in stock selection. 46.42% of the portfolio is in the top three sectors, finance, construction and energy. The fund has a very compact portfolio of 58 stocks. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. The portfolio turnover ratio of the fund is 131% and the expense ratio is 1.97%. The fund is managed by Mr. Amit Tripathi and Mr Sanjay Parekh.

    Canara Robeco Equity Hybrid Fund (erstwhile Canara Robeco Balanced Fund renamed as Canara Robeco Equity Debt Allocation Fund) Gem

    Canara Robeco Equity Hybrid Fund is the oldest balanced fund that has exhibited smooth sailing across market cycles. The one-year return of the fund is 0.75% as against the category average of -4.28%. The fund’s three-year and five-year returns of 10.36% and 15.4% respectively are higher than the category average of 10.36% and 13.85% respectively. Canara Robeco Equity Hybrid Fund has 51 stocks in the portfolio. 38.74% of the portfolio is in the top three sectors, concentrated in finance, energy and construction sectors. The good performance of Canara Robeco Equity Hybrid Fund across market cycles is attributable to its bias towards safety and stability. This is reflected in the significant proportion of large-cap stocks in its portfolio. The fund is benchmarked against CRISIL Hybrid 35+65 Aggressive. The expense ratio of this Rs 1,883 crore fund is 2.41% with a portfolio turnover ratio of 394%. The fund is managed by Mr. Avnish Jain, Mr Shridatta Bhandwaldar and Mr. Krishna Sanghvi.


  • January 2019

    A Balanced Fund is a mutual fund which provides a one-stop investment mix by investing its portfolio in a mix of debt and equity investments with an aim to balance the risk-reward ratio and ensure to provide a return which over time provides a perfect blend of equity and debt exposure. In this, the fund manager allocates your money in both debt and equity as an asset class in a certain proportion. The equity: debt proportion depends solely on the orientation of the fund. In India, Balanced Mutual Funds typically invest 50% to 70% of their portfolio in stocks and the remainder of their resources in bonds and other debt instruments. Balanced funds help you to ride the equity wave while still maintaining a low-risk profile. They invest the fund’s assets in equity shares as well as debt instruments in a specific ratio according to the investment mandate of the fund. 
    Balanced funds, the most popular type of hybrid funds, are essentially divided into two types – Equity-Oriented Balanced Fundand Debt-Oriented Balanced Funds. Until a few months ago, Balanced Funds were synonymous with equity-oriented Hybrid Funds that invested over 65% of their assets in equity. Clearly, Balanced Funds were not true to their name. But there was a reason for this lopsided allocation. In order to qualify as an equity scheme, a minimum equity allocation of 65% is required. Since, equity schemes enjoy a tax advantage over debt schemes, an additional 15% exposure did not seem to do much harm. At the end of the day, investors would benefit. However, most schemes classified as Balanced Funds were free to vary their exposure to equity, ranging from a minimum 65% to as much as 80%. This drew a lot of flak from the regulator. After years of deliberation, the regulator had its way by coming out with the Categorisation and Rationalisation of Mutual Fund Schemes. This reform has the sole objective to create uniformity among the different categories of schemes managed by various fund houses.
    As per the new norms of SEBI on recategorisation of mutual funds, there are 7 categories of hybrid funds.

    •  Conservative hybrid – These schemes invest around 75-90% of the total assets in debt instruments and 10-25% in equity instruments.
    •   Balanced hybrid – True to its name,Balanced Hybrid Funds are pure balanced funds that invest around 50% of their assets in equity and the balance in debt. Here, hedged equity positions or arbitrage exposure is not allowed. While these funds offer investors an equal exposure to equity and debt, they are not very tax efficient. In terms of performance, schemes investing according to such an assetallocation have been virtually non-existent, as fund houses preferred keeping the exposure in excess of 65%, so as to avail of tax benefits. Hence, there are no funds with a reliable track record of performance.
    •  Aggressive hybrid – The composition of these funds includes investments of around 65-80% of total assets in equity related instruments and the remaining in debt instruments, a minimum of 20% debt allocation is specified. These funds have the flexibility to include an arbitrage exposure.
    •  Multi asset allocation –This category invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes.
    •  Arbitrage funds – These schemes, as the name suggests, follow arbitrage strategy and invest at least 65% of total assets in equity related instruments.
    •  Equity savings funds – These are open ended schemes investing a minimum of 65% of the total assets in equity and a  minimum of 10% of the total assets in debt.
    •  Dynamic asset Allocation – These are also known as Balanced Advantage funds. As the name suggests, the funds under this category can dynamically manage the asset allocation with no restriction on the minimum or maximum exposure. The fund can choose to be fully allocated either to equity or debt instruments depending on the fund manager’s view of the market. CertainDynamic Funds have a formula driven approach that takes into consideration market valuations and other factors. The allocation is pre-decided based on the formula that defines the equity exposure based on the different variables. Though Balanced Advantage funds also set their asset allocation as per the direction of the market, they tend to keep a minimum 65% exposure to equity at all times.

    As an investor, you need to take a closer look at the asset allocation strategy of such funds. If the fund chooses to continue with the investment strategy as before, you need not worry. However, if there is a change in investment attributes, it will warrant a closerlook – the past performance of such schemes cannot be considered. Such funds suit moderate-to-high risk profile investors, given that the funds would invest predominantly in equity assets. While the fund may try to reduce volatility by dynamically managing the unhedged equity exposure, very few funds have been successful in doing so. Hence, it will be pertinent to have a look at the historical performance of the fund before investing. How well such funds perform is highly dependent on the fund managers’ skill and experience, as well as the formula adopted to set the asset allocation.Which of these fund categories is a better option? The Aggressive Hybrid Fund category is the most promising of the lot. The asset allocation will be stable and the returns tax-efficient, hence, you will be able to fit in such funds seamlessly into your financial plans.


    Advantages of Balanced Mutual Funds

    Best of Both Worlds
    Balanced funds are suitable for investors who want to enjoy the returns from equity investments but with a safety cushion. Normally this is true for first time investors or investors who have low to moderate risk appetite. Since balanced funds are a mix of Equity and Debt, they have lower volatility than the Equity Funds and their returns are higher than the Debt funds. Though in a bull market these funds will not give you as much return as pure equity funds, the loss would be lower than those funds in a downward moving market.
    The Balanced funds have to maintain the portfolio according to their mandate. For example, debt oriented balanced funds have to keep at least 65% of their investments in Debt instruments hence whenever Equity portfolio of the fund crosses 35%, the Fund Manager will book profit from equities and rebalance the portfolio. The fund manager rebalances the portfolio based on market conditions and asset allocation limits periodically and maintains the asset allocation without any tax implications or exit load. This will reduce the volatility and also preserve the gains. This obviates the need for manual re-balancing.
    Tax Efficiency
    For taxation purpose, equity-oriented balanced funds are treated as equity funds. Hence, even though such funds have a certain portion of debt portfolio, the debt portfolio will also be tax-free.This seems to be the biggest advantage to many. In case you separate your assetallocation between debt and equity by investing separately in debt funds or equity funds, then for debt part, whether in short term or long term, you have to pay the tax (based on tax rules shared above). However, with equity-oriented balanced funds, such debt part is completely tax-free.
    Balanced Mutual Funds provide the convenience of diversification in the form of a single docket of a mutual fund. An investor thus need not go through the hassle of analyzing and selecting a bouquet of funds. A professionally trained and experienced fund manager does this job for the investor. A calculated combination of debt and equity components makes the funds less vulnerable to market volatility. The equity components of the fund are aimed at generating capital appreciation and their debt components serve as securities to shield the investment from unforeseen market corrections.Better risk-based returns

    Balanced Mutual Funds have given better risk-adjusted returns in the long run compared to equity returns. The 5-year rolling return of balanced funds is 13.2% as against 12.9%, 13.96% and 14.91% in the case of large cap, mid cap and diversified funds respectively. The Standard deviation of balanced funds is 2.9% as against 3.47%, 3.82% and 3.96% in the case of large cap, mid cap and diversified funds respectively.


    Disadvantages of Balanced Mutual Funds


    While it might seem that balanced funds are virtually risk-free, it is not entirely the case. Balanced Mutual Funds have their own share of risk. In the case of a direct investment across a number of stocks and debt instruments, one can relocate the resources among different funds as diversification for tax planning or wealth creation. However, in balanced funds, since the decision of resource allocation is with the fund manager, customised diversification is not possible.
    Myopic viewDue to the advantages, many investors, in fact, many advisors are recommending equity-oriented balanced funds for short-term goals which may be even less than 5 years. They completely neglect the equity exposure of such funds.
    Poor understanding of the portfolio
    Many investors are of the opinion that debt part of the portfolio is totally safe. But they fail to understand the type of debt instruments they are investing. Even in case of the equity portfolio, analysis of the stocks the fund is holding is of paramount importance. If the fund has higher exposure towards mid and small cap stocks, then it is riskier than holding a pure large cap fund.

    Selection Factors for investment in Balanced Mutual Funds

    • You should consider the following factors for selecting balanced funds:
    •  Asset size of a fund should be a reasonable threshold level. A minimum asset size of Rs.500 crore can be considered.
    •   Past performance is one more indicator for the selection of the right mutual funds. Past five years’ fund performance history can be considered.
    •  Fund manager profile is a key factor. Fund manager should be experienced and capable of generating good returns.
    •  Asset allocation by balanced funds that allocates properly between equity and debt helps the investor to diversify. If your risk appetite is low, it is better to choose funds which do not have more 70% exposure to equity.
    • Consistent performance of the funds is one of the key parameters
    • As per latest categorization balanced fund category is renamed as Hybrid Fund. This includes conservative hybrid fund, balanced hybrid fund, aggressive hybrid fund and dynamic asset allocation fund. You should select fund category carefully.
    •  Another factor to consider while selecting a mutual fund is the reputation of the fund house. A fund house should be renowned and should be at least 5-10 years old.
    • Mutual fund rating is another important factor for consideration. You should select a mutual fund with a higher rating. Consider rating given by CRISIL and Value research for the selection.
    • Expense Ratio plays a major role in deciding fund performance. The expense ratio is a fee charged by the investment company to manage the funds of investors. Lower the expense ratio, better the fund performance.

    Factors an investor should consider


    a. Risk

    Even though they have a certain percentage of the fund’s assets allocated to debt instruments, balanced funds are not completely risk-free. The equity component of the balanced fund makes the fund vulnerable to market risks. Market risk causes the fund value to fluctuate in accordance with the movements of the underlying benchmark. Balanced funds are less risky as compared to pure equity funds; but in order to gain the maximum out of your investment, you need to exercise caution and rebalance your portfolio regularly.

    b. Return

    If you are a moderately aggressive investor, then you might think of investing in balanced funds. Historically, equity-oriented balanced funds have been found to deliver average returns in the range of 10%-12%.  In spite of having the debt component in its portfolio, balanced funds do not offer guaranteed returns. The performance of underlying securities affects Net Asset Value (NAV) of these funds and may fluctuate due to market movements. Moreover, these might not declare dividends during market downturns.

    c. Cost

    Balanced funds charge an annual fee for managing your portfolio which is known as expense ratio. It is shown as a percentage of fund’s average assets. It reflects the operating efficiency of the fund and becomes an important criterion at the time of fund selection.  Before investing in a balanced fund, you need to compare its expense ratio with that of competitive funds. Ensure that it has a low expense ratio as compared to peer funds. This will translate into higher take-home returns for the investor.

    d. Investment Horizon

    Balanced funds may be ideal for a conservative investor who is ready to invest his savings in 5-year bank fixed deposits (FDs). As compared to an FD, balanced funds may deliver higher returns over a medium-term investment horizon of say 5 years. In addition, you would get the benefit of indexation on long-term capital gains on the debt components. If you want to earn a risk-free rate of return, you may go for arbitrage funds which bet on price differentials of securities in different markets.

    e. Financial Goals

    Balanced funds may be used for intermediate financial goals which can be achieved in a period of 5-7 years. If you have goals like buying a car or funding higher education, you may consider balanced funds as a means to finance these goals. Even budding investors who are not opting to manage their portfolio actively but have a low-risk appetite may also invest in balanced funds. Retirees may invest in balanced funds and go for a dividend option to supplement their post-retirement income.

    f. Tax on Gains

    The capital gains on balanced funds are taxed based on the orientation of the fund. Equity-oriented balanced funds are taxed just like pure equity. If you hold your investment for more than a year, the capital gains are treated as long-term capital gains. Long term Capital Gains (LTCG) in excess of Rs 1 lakh on equity component are taxed at the rate of 10% without the benefit of indexation. Short-term capital gains on equity component are taxed at the rate of 15%. The debt component of balanced funds is taxed like debt funds. STCG from debt component is added to the investor’s income and taxed according to his income tax slab. LTCG from debt component is taxed at the rate of 20% after indexation and 10% without the benefit of indexation.

    Why Balanced Mutual Fund is the Best Investment Option?

    Balanced Funds are the most convenient investing option for the investors who want to gain good earnings on mutual funds, but do not wish to take the risk of stock market fluctuations. By making investments in equities and debts, they provide the benefits of both the worlds. The equity-oriented balanced fund offers capital growth in the medium to long run, while the debt-oriented fund aims to generate steady returns. Thus, the investors can gain substantial income on their investments.In balanced funds, equities provide the benefits of shielding the battle of inflation which if not managed can erode the purchasing power in the later years.The equity market faces many swings as things are never certain in the stock exchange market and investors wish to invest in the funds which provide greater benefits. The best balanced funds provide an advantage of asset allocation as per the market conditions. When the market performance is poor, the fund manager shifts the asset allotment in the debt instruments, and when the market is expected to rise, funds are parked in the equity stocks. This way, the returns are balanced, and investors do not face fluctuations in their earnings. The balanced fund is the vintage bicycle of investing. It may be old fashioned but it endures because of its sturdy simplicity and its sheer usefulness.  

  • FUND FULCRUM (contd.)

  • December 2018

    The asset under management (AUM) of the mutual fund industry rose by 13% to Rs 24 lakh crore in 2018 by the end of November itself, up from Rs 21.26 lakh crore at the end of December 2017, according to data available with the Association of Mutual Funds in India (AMFI). However, the final AUM figure at the end of December 2018 might be slightly lower than that of November 2018 as there could be a dip in liquid funds due to the quarter-end phenomenon. The industry’s AUM had crossed the milestone of Rs 10 lakh crore for the first time in May 2014 and in a span of about four-and-a-half years, the asset base is up more than two-fold to Rs 24 lakh crore in November 2018. It had crossed the Rs 25 lakh crore mark also at the end of August 2018. The year 2018 would mark the sixth consecutive yearly rise in the industry AUM after a drop for two preceding years. Mutual funds have added a whopping Rs 3 lakh crore to their asset base in 2018 and the uptrend may continue in 2019, helped by consistent rise in the SIP flows and a strong participation of retail investors despite volatile markets. Moreover, a sharp rise in SIPs shows more people moving away from the concept of large lump-sum investments. Fund houses have garnered over Rs 80,600 crore through SIPs –a preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk. The industry added close to 10 lakh SIP accounts each month on an average in 2018 with SIP collection on a monthly basis increasing to over Rs 6,700 crore this year from more than Rs 4,950 crore in 2017. Another highlight of 2018 was a surge in the number of investor accounts and equity folios contributed tremendously to this growth. Overall, investor folios climbed by 1.32 crore to 8 crore while retail investor accounts — defined by folios in equity, ELSS and balanced categories — alone grew by 1.25 crore to 6.7 crore. Besides, equity and equity-linked saving schemes (ELSS) attracted an impressive inflow of Rs 1.15 lakh crore. The pace of growth, however, declined for the asset size in 2018 as compared to 2017. The industry had seen a surge of 32% in the AUM or an addition of over Rs 5.4 lakh crore in 2017. The IL&FS default and the consequent blow to the NBFC sector because of the credit crunch exposed mutual funds to lakhs of crore worth of ill-liquid debt funds. This coupled with volatile markets could be some of the reasons for a slower growth in assets base this year. The factors that will drive the growth in 2019 include the untapped potential, rising investor awareness about mutual funds as an investment alternative and a spirited promotion campaign by AMFI.

    Regulatory Rigmarole

    Markets regulator SEBI has issued new norms to cap total expenses for investment in mutual funds at 2.25%. The regulator has capped the maximum TER for closed-ended equity schemes at 1.25%, and other than equity schemes at 1%. The maximum TER for open-ended equity schemes will be 2.25% and 2% for other open-ended schemes. With regard to open-ended equity schemes, SEBI said that the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25%. As AUM increases, the expense ratio will have to come down. For the next Rs 250 crore, it will be 2%; for further Rs 1,250 crore, it will be 1.75%; for the next Rs 3,000 crore, the fee will be 1.6%; and again on the next Rs 5,000 crore of the daily net assets, the charge will be 1.5%. In the case of equity mutual funds with the daily net assets of Rs 40,000 crore, SEBI said that total expense ratio will be a decline of 0.05% for every increase of Rs 5,000 crore of daily net assets. Rationalising the total expense ratio (TER), the fee that mutual funds collect from investors every year to manage their money, SEBI said the new fee structure would come into force from April 1, 2019.

    Distributors earning over Rs.20 lakh a year can update their GST identification online on AMFI website. These distributors can avail of the benefits of input credit. GST norms mandate distributors earning over Rs.20 lakh a year to take GST registration. The limit is Rs.10 lakh for distributors from special states comprising Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. Currently, the government has put distributors earning less than Rs.20 lakh a year and those who do not have GST registration from GST under reverse charge mechanism (RCM) until March 31, 2019. This means, such distributors will get gross commission.

    AMFI has reintroduced online ARN renewal process for distributors. Earlier in October 2018, following the Supreme Court’s verdict on Aadhaar, AMFI had discontinued online registration and renewal of ARN for mutual fund distributors. However, the trade body has restarted online renewal process for distributors through Aadhaar. The process of ARN renewal is completely paperless and based on Aadhaar. Aadhaar is required to be linked with the mobile number to avail this online facility. In addition, the mark sheet of NISM Mutual Fund Distribution examination is no longer required to renew ARN. The renewal fees can be paid through net banking facility. Currently, distributors have to send their certificates to CAMS along with a DD of Rs.1,770 in favour of the Association of Mutual Funds in India as renewal fee. For new ARN and EUIN registration, distributors will have to go through physical process i.e. visit CAMS office with relevant documents such as PAN, Aadhaar, two passport size colour photos, DD of Rs.3540 in favour of Association of Mutual Funds in India, ARN registration form, KYD form and NISM pass certificate. They will have to undergo biometric for KYD.

    SEBI will soon prescribe guidelines on pricing corporate bonds. All mutual funds will have to follow the valuation methodology. This will ensure uniformity in terms of valuation of corporate bonds across mutual funds. Moreover, SEBI would develop a supervisory and regulatory framework for pricing agencies, which would provide corporate bond pricing services related to mutual funds. Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on rating agencies to derive NAV. Often rating agencies look at accrual to value debt securities. Credit rating agencies reflect the rating agencies’ opinion about the credit risk of debt securities based on historical data and some assumptions about the future, which tends to underplay the possibility of default. Following IL&FS default, SEBI wants to reduce risk in debt funds. One of the proposals being reportedly considered is allowing mark-to-market valuation of debt securities having maturities of less than 60 days. Furthermore, the pricing agencies may seek advice from mutual funds while evaluating the fair price of illiquid lower rated instruments. SEBI’s proposal to develop a framework for pricing agencies might help bring better transparency and uniformity in this segment and facilitate better risk management across the industry.

    Sebi is planning to allow mutual funds to undertake ‘side pocketing’ of debt and money market instruments in case of a credit event while ensuring fair treatment to all unitholders. ‘Side pocketing’ is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio. It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets. The proposal comes in the wake of the liquidity squeeze triggered by the Infrastructure Leasing & Financial Services (IL&FS) default. IL&FS and its subsidiaries have defaulted on several debt repayments recently due to liquidity crisis. Under the proposal, side pocketing may be permitted for debt instruments in mutual fund schemes based on credit events at issuer level. It may be optional for mutual funds to exercise such mechanism. Further, activation of side pocketing would be subject to trustee approval and there should be monitoring by trustees to ensure timely recovery of side pocketed assets as per the proposal. Also, there should be adequate disclosure to existing and prospective investors to enable informed decisions.

    The long-awaited Self-Regulatory Organisation (SRO) for distributors is close to becoming a reality. SEBI has asked AMFI to start preparations for SRO. The SRO will assist SEBI and AMFI in regulating fund distributors and ensuring a cordial relationship with mutual fund houses. The SRO for mutual fund distributors will be responsible for micro-regulations of its members, spread awareness about mutual fund products among people, educate and train distributors and conduct screening test for them. The decision to set-up a SRO followed concerns about mutual fund distributors not being regulated and complaints against them for mis-selling products.

    A recent CII and McKinsey report estimates that Indian mutual funds will grow at a CAGR of 18% to reach an AUM of Rs.50 lakh crore by 2023. The report said that the Indian market is on a strong growth trajectory. However, compared to other global markets, the Indian mutual fund industry is still at a nascent stage. The report predicts the key trends that will contribute to the growth of the Indian mutual fund industry. Mutual Funds are becoming a key investment vehicle as assets parked in cash and deposits are moving to investment products. Mutual funds as a share of bank deposits have grown from 12% to 20% in the last three years. Regulatory push (in terms of TER incentive) to spread mutual funds beyond top cities has led to B30 cities gaining prominence in the industry AUM mix. Retail investors are slowly increasing their allocation via the direct route. The effect is expected to be more pronounced with new-age online channels providing a low cost and easy investment option. Regulatory push for transparency and simplicity, organising financial inclusion programs country-wide, focus to reduce the cost of investment through rationalisation of TERs and change in the pay-out framework are some of the investor-centric measures initiated by the regulator and the industry.


  • December 2018

    The asset base of the Indian mutual fund industry rose to a little over Rs 24 lakh crore in November 2018, an increase of 8% from a month ago led by strong inflows into liquid schemes. According to Association of Mutual Funds of India (AMFI) data, the asset under management (AUM) of the 42-player mutual fund industry jumped from Rs 22.23 lakh crore in October 2018, to Rs 24.03 lakh crore in November 2018. Amid intermittent bouts of volatility, Sensex and Nifty rose slightly over 4% in November 2018. The industry received Rs 7,985 crore through the SIP route in November 2018, a rise of 35.44% compared to the previous year. SIP flows continue to hold their position at Rs. 7,985 crore during November 2018, indicating resilience on part of retail investors to continue to invest in the India growth story. Though there was no increase in SIP flows when compared to the previous month, 3 lakh new SIP accounts were added during the month indicating that new investors are entering the SIP fold. The total number of SIP accounts stand at 2.52 crore at the end of November 2018.

    Mutual fund inflows grew more than four times to touch Rs. 1.42 lakh crore compared to Rs. 35,529 crore during October 2018, shows AMFI data. A key contributor to this increase is the sharp rise in liquid fund flows which grew from Rs. 55,296 crore in October 2018 to Rs.1.36 lakh crore in November 2018. Liquid funds that witnessed significant redemption in the last two months due to liquidity crisis are back in action. The liquid or money-market category inflows rose for the second consecutive month to Rs 1.36 lakh crore, up by nearly two-and-half times. With the latest inflow, the total infusion in mutual fund schemes reached about Rs 2.23 crore in the first eight months (April-November) of the current fiscal, latest data with AMFI showed. The latest inflow has been mainly driven by contributions to liquid funds and equity-linked saving schemes. Liquid funds attracted Rs 1.36 lakh crore, while Rs 8,400 crore was invested in equity-linked saving schemes and Rs 215 crore in balanced funds. Interestingly, gold exchange-traded funds (ETFs) saw a net inflow of Rs 10 crore after witnessing pull-out in the past several months. In contrast, income funds saw a pull-out of Rs 6,518 crore. While AUM of the mutual fund industry and the total inflows went up, inflows in equity schemes, fell by nearly 33% compared to the previous month to Rs 8,414 crore in November 2018, according to data released by the Association of Mutual Funds in India. This is due to increased market volatility, global trade war tensions and uncertainty over the state elections.

    The latest SEBI data on mutual fund industry folios shows that the industry added 7.05 lakh folios in November 2018. The number of folios added during the month was 4.32 lakh lower than what the industry added in October 2018. In line with the lower inflows in equity funds, the folio growth in the category dampened too. Compared to October 2018, which recorded healthy folio creation in equities to the tune of 10.6 lakh, the industry added 6.6 lakh new folios in November 2018. The lower growth numbers can be attributed to lump sum investors taking the wait and watch approach in the face of higher volatility. Mirroring previous month’s trend, liquid funds recorded the highest growth in folios in percentage terms. Folios in liquid funds grew at a robust 3.4% during the month. However, owing to smaller base effect the actual increase in liquid folios is 49,631 folios. The growing interest in liquid funds can be attributed to investors leaning towards safety in the aftermath of the NBFC credit event. Moreover, advisors recommending staggered investments in equities through STP in liquid funds (instead of lump sum) may have also helped shore up their popularity. Gold ETF, which saw folio erosion to the tune of 2,628 folios in October 2018, added 6,009 folios during November 2018. Dhanteras, a festival when investors typically purchase gold, fell in November this year.  This may have led to the increased interest in gold ETFs.  Overall, all categories of funds reported a growth in their folios except income funds, which saw a decline in their folio count.

    Retail investors have been the key drivers of mutual fund industry in the last few years. Retail AUM grew at 31% on an annual basis since 2014, according to the latest CII and McKinsey report titled ‘India Asset Management: Coming of Age’. A major portion of the retail AUM growth (84%) came from inflows while the rest came from mark to market gains.  The trend reversed in the institutional segment. Here, only 37% of the growth came from inflows. The institutional AUM grew at 23% per annum during the period. Overall, the industry grew by 27% per annum to reach Rs. 21 lakh crore in March 2018. Over 65% of this growth was contributed by increased inflows while the balance 35% came from performance of the funds. Analysing the data further, the report found that 45% of the inflows came from equity funds. The impact was even more pronounced in retail segment where 65% of the retail flows were in equity funds. The AUM growth has been complemented by growth in profitability. The profit margins grew by 47% of in the last four years (covers around 80% of the industry AUM with 18 participants in annual McKinsey India asset management benchmarking). In absolute terms, there has been a massive growth in profit pools by around 3.5X compared to the FY 2014 levels according to the report. Around 80% of overall cost reduction was contributed by better efficiencies in middle back office sub function due to economies of scale.

    Individual investments in mutual funds are expected to grow at 21.04% CAGR in the next five years to reach Rs. 30.34 lakh crore by FY 2022-23, according to the ninth edition of Karvy Wealth Report. Currently, individual investors have assets of close to Rs.10 lakh crore in mutual funds. Individual investors include HNIs and retail investors. Subsequently, mutual funds will occupy 5.86% wallet share of individual investors’ financial assets. Moreover, as of FY 17-18, 68% of individual wealth invested in mutual funds is in equities. This number is expected to increase in the coming years as more investors will look at mutual funds as one of the easiest ways to participate in the Indian equity markets. The report also mentions that with a sustained bull run expected in equity markets in the coming years, direct equities are likely to remain the favourite of investors. According to Karvy estimates, direct equities will reach Rs. 145.98 lakh crore by FY 22-23 growing at 24.41% CAGR. Direct equities include promoters’ shares as well. Following direct equities, fixed deposits and insurance will take the next two spots in terms of investor’s allocation to financial assets. The predominance of fixed deposits can be attributed to the fact that many Indians have entered the financial asset space for the first time by opening a bank account in the last few years. Moreover, the safety associated with fixed deposits makes it a safe option for senior citizens and low wage earners.

    Piquant Parade

    Pramerica Financial (Pramerica), a brand name used by Prudential Financial, Inc. of the United States, is set to acquire the entire 50% stake of DHFL in its joint venture subject to regulatory approval. With this, DHFL Pramerica Mutual Fund will now become Pramerica Mutual Fund. The transaction is subject to signing of definitive documentation, customary closing conditions, and regulatory and other approvals. Pramerica ranks among the top 10 largest investment managers in the world with more than $1 trillion in AUM. Pramerica and DHFL formed the joint venture in 2014 and expanded its business through the acquisition of Deutsche Mutual Fund. In another development, Baroda Mutual Fund is reportedly bringing in a new foreign partner. Last year, Bank of Baroda had purchased the 51% stake held by foreign partner Pioneer Investments in their joint venture asset management company.

    To make a mark in the mutual fund ranking space, Samco Securities has introduced RankMF, a platform to help investors select a mutual fund scheme based on several data points. RankMF will not only rate and rank the scheme based on the past performance but also on a slew of other factors such as expense ratios, standard deviation, beta, market valuations, multiples, portfolio holdings and diversification/concentration of portfolio, the cash ratio, size of the fund, and the predicted yields. Mumbai-headquartered, Samco Securities is a fintech start-up in the discount broking industry with over 1 lakh customers. The website, will also analyse the quality of actual portfolio holdings since that is going to deliver real returns to investors and not historical returns which are used by other ranking platforms. Among the existing mutual fund ranking platforms are CRISIL, Value Research, and Morningstar. The difference in the performance of the mutual fund can be as high as 50% and therefore, the selection of a mutual fund scheme is critical. Rank MF will also give filters such as whether the time is right for investments or not and also on the strength of mutual fund schemes. The company has also introduced RankMF SmartSIP, which will generate a signal based on the margin of safety as to whether an investor should continue with the SIP in the same scheme or switch to another fund.

    After the success of ‘Mutual Funds Sahi Hai’ campaign, AMFI is set to launch its new campaign reportedly called ‘FD Jaisa Lagta Hai’ (debt funds are like bank fixed deposits) that will promote the benefits of investing in debt funds. ‘Mutual Funds Sahi Hai’ debt campaign being an innovative campaign required a lot of time for ideation and conceptualisation. The first ‘Mutual Funds Sahi Hai’ campaign ran across different media channels such as TV, online platforms, print, radio, hoardings in multiple languages. They plan to adopt a similar route to spread awareness about debt. Will the debt campaign capture the imagination of investors (to increase retail participation in debt markets) as the first campaign did? Only time will tell.

    to be continued…


  • December 2018

    NFOs of various hues adorn the December 2018 NFONEST.

    Motilal Oswal Liquid Fund

    Opens: December 11, 2018

    Closes: December 18, 2018

    Motilal Oswal Liquid Fund is an open-ended liquid scheme launched by Mostilal Oswal Mutual Fund. The investment objective of the scheme is to generate optimal returns with high liquidity to the investors through a portfolio of money market securities. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Mr. Abhiroop Mukherjee.

    Tata Nifty Exchange Traded Fund

    Opens: December 17, 2018

    Closes: December 19, 2018

    Tata Mutual Fund has launched a new fund named Tata Nifty Exchange Traded Fund, an open ended exchange traded fund tracking Nifty 50 Index. The investment objective of the scheme is to provide returns that closely correspond to the total returns of the securities as represented by the Nifty 50 index, subject to tracking error. The scheme would invest 95% – 100% of assets in equity and equity related instruments covered by Nifty 50 index with high risk profile and up to 5% of asset in Money Market Instruments including CBLO or any other instrument as may be permitted by SEBI and units of liquid scheme of Tata Mutual Fund with low risk profile. Benchmark Index for the scheme is Nifty 50 (Total Return Index). The fund manager is Mr. Sailesh Jain.

    SBI Debt Fund Series C 33

    Opens: December 13, 2018

    Closes: December 20, 2018

    SBI Debt Fund Series C33 is a close-ended debt scheme launched by SBI Mutual Fund which matures 1216 days from the date of allotment. The scheme endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU and Corporate Bonds and Money Market Instruments maturing on or before the maturity of the scheme. The fund is benchmarked against CRISIL Medium Term Debt index. The fund Manager is Ms. Ranjana Gupta.

    ICICI Prudential Capital Protection Oriented Fund XIV-B

    Opens: December 17, 2018

    Closes: December 31, 2018

    ICICI Prudential Capital Protection Oriented Fund XIV-B is a close-ended capital protection oriented scheme launched by ICICI Prudential Mutual Fund which matures 1201 days from the date of allotment. The investment objective of the scheme is to seek to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities would mature on or before the maturity of the scheme. The fund is benchmarked against the Crisil Composite Bond Fund Index (85%) and Nifty 50 Index (15%). The fund managers are Mr. Rajat Chandak (Equity portion), Mr. Rahul Goswami and Ms. Chandni Gupta (Debt Portion) and Ms. Priyanka Khandelwal (ADR/GDR and other foreign securities).

    Shriram Long-term Equity Fund

    Opens: December 17, 2018

    Closes: January 18, 2019

    Shriram Long-term Equity Fund is an open ended equity linked savings scheme with a statutory lock in of 3 years and tax benefit. The primary investment objective of the scheme is to generate income and long-term capital appreciation from a diversified portfolio of predominantly equity and equity related securities and enable investors to avail the income tax rebate, as permitted from time to time. The fund is benchmarked against NIFTY 500. The fund is managed by Mr. Kartik Soral.

    Canara Robeco Capital Protection Oriented Fund – Series 10, IDFC Overnight Fund, DSP Overnight Fund, Kotak Overnight Fund, ICICI Prudential Bharat Consumption Fund, ICICI Prudential Capital Protection Fund – Series XV, IDFC Floating Rate Fund, SBI Debt Fund Series C–35 to 40, ICICI Prudential MNC Fund, ICICI Prudential Commodities Fund, Sundaram Overnight Fund, Indiabulls Overnight Fund, Axis Overnight Fund, SBI US Equity Feeder Fund and ICICI Prudential Private Banks ETF are expected to be launched in the coming months.