Description
mutual funds
INDEX SR No Particulars Page No
04 05 06 07 08 10 10 11 11 13 13 15 16 16 19 23 25 25 27 27 29 36 SECTION I INTRODUCTION TO MUTUAL FUND 1. Introduction ? Concept of a Mutual Fund ? Definition ? Earning of Investors From A Mutual Fund 2. Industry Profile. 3. History Of Mutual Funds ? First Phase – 1964-87. ? Second Phase – 1987-1993 ? Third Phase – 1993-2003 ? Fourth Phase – since February 2003 ? 2003-2004: A retrospect 4. Growth Of Mutual Fund Business In India 5. Pros & Cons Of Investing In Mutual Funds ? Advantages Of Investing In A Mutual Fund ? Drawbacks Of Mutual Funds 6. Net Annual Value 7. Concept Of SIP, STP, SWP 1) Systematic Investment Plan (SIP) 2) Systematic Transfer Plan (STP) ? 3) Systematic Withdrawal Plan (SWP) ? 8. A 10-Step Guide To Evaluating Mutual Funds ? Evaluation Of Canara Robeco Infrastructure-G Fund SECTION II COMPARATIVE STUDY 1. Types Of Mutual Fund Schemes ? By Structure a) Open-ended schemes b) Close-ended schemes ? By Investment Objective a) Growth / Equity Oriented Schemes b) Income / Debt Oriented Scheme c) Balanced Fund
43 43 43 45 47 47 50 53
1
d) Money Market or Liquid Fund ? Other types of funds a) Pooled Funds b) Insurance Segregated Funds c) Specific Sectoral & Thematic funds /schemes ? UTI Thematic Fund 2. Mutual Funds: The Risk And Returns 3. Fund Management Style & Structuring Of Portfolio a) Factors affecting Management style of a scheme b) Equity Portfolio Management Fund Management Style ? Equity Classes ? Use of Derivatives in Equity Portfolio Risk Management ? Successful Equity Portfolio Management ? Portfolio of ICICI Prudential Balanced – Growth c) Debt Portfolio Management ? Instruments in Indian Debt Market ? Debt Investment Strategies ? Use of Derivatives for Debt Portfolio Management 4. What Are Exchange Traded Funds? ? How does an ETF work? ? Benefits and Limitations of ETF ? Categories of ETF?s ? Comparison of ETF with Mutual Fund 5. Top Performers 6. Performance Of Funds Under Different Schemes 7. The Investor?s Rights & Obligations CONCLUSION REFERENCE
53 54 54 55 56 57 58 60 60 63: 65 70 72 73 75 75 77 80 81 83 83 85 86 87 88 97 99 100
2
INTRODUCTION TO MUTUAL FUND
3
INTRODUCTION
The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 6,00,000 crores (As of June , 2008) of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments. Specialization is the order of the day, be it with regard to a scheme?s investment objective or its targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, it?s not just about going with the fund that gives you the highest returns. It?s also about managing risk–finding funds that suit your risk appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tacks – what exactly is a mutual fund? Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors, and collectively invests this amount in either the equity market or the debt market, or both, depending upon the fund?s objective. This means you can access either the equity or the debt market, or both, without investing directly in equity or debt
4
Concept of a Mutual Fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:-
Savings form an important part of the economy of any nation. With savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents multiple avenues to the investors. Though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. I
5
nvestment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child?s education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well. DEFINITION: “Mutual funds are collective savings and investment vehicles where savings of small (or sometimes big) inve.stors are pooled together to invest for their mutual benefit and returns distributed proportionately”. Pooling of money ensures that small investors get the benefit of advice and expertise that is normally available only to very large investors. “A mutual fund is an investment that pools your money with the money of an unlimited number of other investors. In return, you and the other investors each own shares of the fund. The fund's assets are invested according to an investment objective into the fund's portfolio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds”. “Mutual Funds are investment companies that make investments on behalf of individuals and institutions that share common financial goals. The suitability of a particular mutual fund for an individual investor depends on the type and nature of the fund's investments and amount of diversification. Funds are rated widely as to risk and return, and such ratings can be used to establish a match with investor goals and suitability”.
6
"Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's. Investors earn from a Mutual Fund in three ways: 1. Dividends and Interest. A fund may receive income in the form of dividends and interests on the securities it owns. Bonds pay interest, and some stocks pay dividends. The mutual fund company will pass this income on to its shareholders. You generally will be taxed yearly on this amount unless the fund holds tax free securities. 2. Capital Gains/Losses on Securities in a Fund. Prices of the securities in a fund may increase. When the fund then sells the security, the fund has a capital gain. At the end of the year, most mutual funds will distribute these capital gains minus any capital losses (reduced price) to the investors. These capital gains will be taxed each year they are received. 3. Net Asset Value (NAV) of the Mutual Fund. If the company does not sell but holds securities that have increased in value, the value of the shares of the mutual fund (NAV) increase and there is a profit. This also is a capital gain. However, you will not be taxed on this capital gain until the year you sell the fund. Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors? interest, ensures that the investors are not cheated out of their hard-earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal.
7
INDUSTRY PROFILE
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous – in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. Mutual funds assets under management grew by 96% between the end of 1997 and June 2003 and as a result it rose from 8% of GDP to 15%. The industry has grown in size and manages total assets of more than $30351 million. Of the various sectors, the private sector accounts for nearly 91% of the resources mobilised showing their overwhelming dominance in the market. Individuals constitute 98.04% of the total number of investors and contribute US $12062 million, which is 55.16% of the net assets under management.
8
Steady growth of mutual fund business in India in the four decades from 1964, when UTI was set up is given in the table below: Period (Year) Aggregate Investment In Crores of Rupees 65 172 402 1261 4563.68 6738.81 13455.65 19110.92 23060.45 37480.20 Period (Year) Aggregate Investment In Crores of Rupees 46988.02 61301.21 75050.21 81026.52 80539.00 68984.00 63472.00 107966.10 90587.00 94571.00
1964-69 1969-74 1974-79 1979-84 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitive functioning with the dedicated goal of service to the investors can be said to have settled in India only in 1993. However the industry took its roots much earlier with the setting up of the Unit Trust in India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs.72,333.43 Crores as on March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.
9
HISTORY OF MUTUAL FUNDS
The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase – 1964-87:
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of
10
India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
11
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
12
The Graph Indicates The Growth Of Assets Over The Years.
2003-2004: A retrospect:
This year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly
13
among the private sector players, on the back of the continuing debt bull run. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors. The other aspect of this issue is that institutional investors do not usually favor equity. It is largely a retail segment product and without retail depth, most mutual funds have been unable to tap this market. The tables given below are a snapshot of the AUM story, for the industry as a whole and for debt and equity separately.
14
GROWTH OF MUTUAL FUND BUSINESS IN INDIA The Indian Mutual fund business has passed through three phases. The first phase was between 1964 and 1987, when the only player was the Unit Trust of India, which had a total asset of Rs. 6,700/- crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to Rs. 61,028/- crores at the end of 1994 and the number of schemes were 167. The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund. The share of the private players has risen rapidly since then. Within a short period of seven years after 1993 the growth statistics of the business of Mutual Funds in India is given in the table below: Amount (Rs Crores) UTI Public Sector Private Sector Total 72,333.43 10,444.78 25,167.89 1,07,946.10 Percentage (%) 67.00 9.68 23.32 100.00
15
PROS & CONS OF INVESTING IN MUTUAL FUNDS For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. The Advantages of Investing in a Mutual Fund: ? Professional Management : The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. ? Diversification: Mutual Funds invest in a number of companies across a broad crosssection of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. ? Convenient Administration : Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. ? Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. ? Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in
16
brokerage, custodial and other fees translate into lower costs for investors. ? Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically. ? Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. ? Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. ? Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. ? Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
17
? Affordability A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. ? Tax Benefits Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. What?s more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year
18
Drawbacks Of Mutual Funds ? Fluctuating Returns: Mutual funds are like many other investments without a guaranteed return: there is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar.
Another important thing to know is that mutual funds are not guaranteed by the U.S. government, so in the case of dissolution, you won't get anything back. This is especially important for investors in money market funds. Unlike a bank deposit, a mutual fund will be insured by the Federal Deposit Insurance Corporation (FDIC). ? Diversification: Although diversification is one of the keys to successful investing, many mutual fund investors tend to over diversify. The idea of diversification is to reduce the risks associated with holding a single security; over diversification (also known as diworsification) occurs when investors acquire many funds that are highly related and, as a result, don't get the risk reducing benefits of diversification. At the other extreme, just
because you own mutual funds doesn't mean you are automatically diversified. For example, a fund that invests only in a particular industry or region is still relatively risky.
19
? Cash, Cash and More Cash:
As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous. ? Costs: Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees.
The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses. ? Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small cap or income funds. The Securities and Exchange Commission (SEC) requires that funds have at
20
least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. ? Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another? Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers. ? Dilution: It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. ? Taxes : When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a
21
security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability. ? Restrictive gains : Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. ? Management risk : When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
22
NET ANNUAL VALUE
Entry Load is applied as a percent of the Net Asset Value (NAV). Net Assets of a scheme is that figure which is arrived at after deducting all scheme liabilities from its asset. NAV is calculated by dividing the value of Net Assets by the outstanding number of Units.
Net Annual Value Assets Shares Debentures Money Market Instruments Accrued Income Other Current Assets Deferred Revenue Expenditure Rs. Crs. Liabilities 345 Unit Capital 23 Reserves & Surplus 12 2.3 Accrued Expenditure 1.2 Other Current Liabilities 4.2 387.7 Units Issued (Cr.) Face Value (Rs.) Net Assets (Rs.) NAV (Rs.) 30 10 385.7 12.86 All Figures in Rs. Cr The above table shows a typical scheme balance sheet. Investments are entered under the assets column. Adding all assets gives the total of Rs. 387.7 cr. From this if we deduct the liabilities of Rs. 2 cr. i.e. Accrued
23
Rs. Crs. 300 85.7
1.5 0.5
387.7
Expenditure and Other Current Liabilities, we get Rs. 385.7 cr as Net Assets of the scheme. The scheme has issued 30 crs. units @ Rs. 10 each during the NFO. This translates in Rs. 300 crs. being garnered by the scheme then. This is represented by Unit Capital in the Balance Sheet. Thus, as of now, the net assets worth Rs. 385.7 cr are to be divided amongst 30 crs. units. This means the scheme has a Net Asset Value or NAV of Rs. 12.86. The important point that the investor must focus here is that the Rs. 300 crs. garnered by the scheme has increased to Rs. 387 crs., which translates into a 29.23% gain, whereas, the return for the investor is 28.57% (12.86-10/ 10 = 28.57%).
24
CONCEPT OF SIP , STP, SWP.
CONCEPT OF SYSTEMATIC INVESTMENT PLAN An SIP is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly. How does an SIP works? An SIP allows you to take part in the stock market without trying to second guess its movements. AN SIP means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000. When the NAV is high, you will get fewer units. When it drops, you will get more units. Date NAV Approx number of units you will get at Rs 1,000 Jan 1 Feb 1 10 10.5 100 95.23 90.90 105.26 111.11 86.95
Mar 1 11 Apr 1 9.5
May 1 9 Jun 1 11.5
Within six months, you would have 5,894 units by investing just Rs 1,000 every month. Over the long run, you make money. Let's say you invested in Prudential ICICI Technology Fund during the dotcom and tech boom. Say
25
you began with Rs 1,000 and kept investing Rs 1,000 every month. This would be the result: Investment period Monthly investment Total amount invested Value of investment of Mar 7, 2005 Return on investment 23.87% Mar 2003-Mar 2008 Rs 1,000 Rs 61,000 Rs 1,09,315
Had you bought the units on March 13, 2003 at Rs 10.88 per unit (that was the NAV then), you would have lost because the NAV was just 7.04 on March 7, 2008. But because you spaced out your investment, you won. How does an SIP scores? It makes you disciplined in your savings. Every month you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques. As you see above, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses. Also, a number of mutual funds do not charge an entry load if you opt for an SIP. This fee is a percentage of the amount you are investing. And if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units).
26
If, however, you do sell your units within a year, you would be charged an exit load. So it pays to stay invested for the long-run. The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money. Remember, it's your money so don't blindly play around with it. CONCEPT OF SYSTEMATIC TRANSFER PLAN (STP) ? In SIP investor?s money moves out of his savings account into the scheme of his choice. Let?s say an investor has decided to invest Rs 5,000 every month, such that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the month. This means that the Rs. 5000, which will get invested in stages till 25th will remain in the savings account of the investor for 25 days and earn interest @ 3.5%. If the investor moves this amount of Rs. 5000 at the beginning of the month to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice, then not only will he get the benefit of SIP, but he will earn slightly higher interest as well in the Liquid Funds as compared to a bank FD As the. money is being invested in a Liquid Fund, the risk level associated is also minimal. Add to this the fact that liquid funds do not have any entry/ exit loads. This is known as STP. CONCEPT OF SYSTEMATIC WITHDRAWAL PLAN (SWP) ? SWP stands for Systematic Withdrawal Plan. Here the investor invests a lumpsum amount and withdraws some money regularly over a period of time. This results in a steady income for the investor while at the same time his principal also gets drawn down gradually. Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20 = Rs.
27
1,00,000 per annum. This translates into Rs. 8,333 per month. (The investor will also get return on his investment of Rs. 20 lakh, depending on where the money has been invested by the mutual fund). In this example we have not considered the effect of compounding. If that is considered, then he will be able to either draw some more money every month, or he can get the same amount of Rs. 8,333 per month for alonger period of time. The conceptual difference between SWP and MIP is that SWP is an investment style whereas MIP is a type of scheme. In SWP the investor?s capital goes down whereas in MIP, the capital is not touched and only the interest is paid to the investor as dividend.
28
A 10-STEP GUIDE TO EVALUATING MUTUAL FUNDS
Mutual funds are a convenient way to invest in the stock markets (as also debt and money markets). Indian investors are already beginning to realise this. That's the good news; the bad news is that a lot of investors seem to think that any mutual fund will do the 'trick'. The trick over here is to clock higher returns any which way. While generating an above-average return is every fund manager's mantra, it is not achieved that easily and when it is achieved it is not necessarily done in the right manner.
Which brings us to the question - what must investors do to ensure that they are invested in the right fund? With so many funds in the industry and many more being launched every month, this is not an easy task. Multiplicity (as also duplicity) of mutual funds apart, there are many elements within a fund that an investor needs to consider carefully before short-listing his investment options. To facilitate the decision-making process, we present a 10-step guide to investing in mutual funds.
1. Fund sponsor's integrity In this age of financial irregularities and misconduct, it is a tough call to come across fund houses that haven't been embroiled in some controversy or the other. While major financial scams involving mutual funds are yet to make their presence felt in a India, it is quite common in developed markets like the US. That is why it is important to go for a mutual fund sponsor with an impeccable track record in terms of compliance and investor welfare. Equally important is requisite experience with a well-established track record in fund/asset management.
29
2. A competent fund management team The team managing the fund should have considerable experience in dealing with market ups and downs. It should be competent enough to take the right investment decisions based on experience under varying market conditions. More importantly, these investment decisions must be in adherence to the investment mandate (so mid cap funds must be invested in mid caps and large cap funds must be invested in large caps and funds that must be fully invested in equities at all times must not go into cash).
At the end of the day, it is the fund management team's responsibility to deliver performance over the long-term across market cycles vis-a-vis peers and the benchmark index.
3. Well-defined investment philosophy For many fund houses, the investment philosophy revolves around whatever goes with the Chief Investment Officer (CIO). In other words, the CIO defines the investment philosophy of the fund house. Actually it should be the other way round, the fund house must have a well-defined investment process that the CIO must abide by at all times. Sure he can introduce an element of individualism based on his experience, but this cannot override the fund house's philosophy. This will ensure that the investor's interests are aligned to the fund house and not a maverick fund manager/CIO.
Another important aspect of the fund house philosophy is related to asset mobilisation. How is the fund house accumulating new assets (either from existing investors or fresh investors)? Is it doing this by launching senseless NFOs (new fund offers) or is it concentrating on improving performance of
30
its existing funds and drawing investors over there? If it's the former (i.e. the NFO route), then the AMC has got it wrong in our view; getting investors to invest in existing funds by establishing performance over the long-term (at 3 years for equity funds) is the right way to accumulate assets. As and when existing funds have established their performance over 3-5 years, the next NFO can be launched.
4. Get the fund nature right A mutual fund can be classified in two categories i.e. open-ended funds or close-ended depending on whether new investors will or will not be allowed to invest.
a) Open-ended Fund An open-ended fund never closes its doors to investors (unless the fund house decides to do so under exceptional circumstances like for instance, when the fund's net asset base grows too large to be managed effectively). On the same lines, existing investors can exit from an open-ended fund whenever they please (the only exception to this is the tax-saving fund or the equity-linked saving scheme - ELSS as it is known). It is evident that liquidity is the key advantage of investing in open-ended funds.
b) Close-ended Fund A close-ended fund on the other hand opens the door to investors only during the NFO period. After that, it is closed for further investment over a pre-determined tenure (usually 3 or 5 years). Upon maturity of the tenure, the fund may or may not convert into an open-ended fund.
31
5. Get the fund category right Funds can be classified into different categories based on where they invest your money.
a) Equity funds These funds invest in the stock markets and are suitable for investors with a high risk appetite. Over the short-term, investors could lose considerable money depending on the performance of stock markets. Over the long-term (at least 10 years) equities are known to generate above-average returns (particularly in the Indian context) vis-a-vis other assets like bonds, gold and real estate.
b) Debt funds These funds invest in debt markets (corporate bonds, government securities, money market instruments). More than capital appreciation, debt/debt funds are a good way to safeguard your assets over the long-term and to diversify across asset classes.
c) Balanced funds Balanced funds (or hybrid funds) invest in equity and debt markets. However, to retain their equity-oriented nature (from a tax perspective) balanced funds are required to invest a minimum of 65% of net assets in equities. In our view, with nearly 2/3rd of assets in equities, balanced funds are virtually equity funds in disguise. There was a time when balanced funds needed to maintain just 51% of assets in equities, then was the time they were really 'balanced'.
32
Another mutual fund offering in this category is the monthly income plan (MIP). MIPs invest mainly in debt markets (usually 75%-80% of assets); the balance is invested in equity markets. For investors primarily concerned about capital preservation (although over the short-term MIPs can erode capital) with the secondary objective to clock capital appreciation, MIPs are worth a look.
6. Fees and charges (recurring) Asset management companies (AMCs) charge investors a fee for providing fund management expertise. fund management costs money; there are salaries to be paid to fund managers and their team of investment analysts, then there are fees to be paid to the custodian and the registrar among other service providers. These expenses (as indicated by the Expense Ratio) are incurred by the fund on a recurring basis (annually). Such expenses are not to be considered lightly, higher expenses erode returns and over the longterm can make a lot of difference to the fund's performance.
7. The load (one-time) In addition to the recurring expenses, most funds also levy a one-time upfront charge at the time of investment. This is known as the entry load. To understand how this works take an investor who invests in a mutual fund with an NAV (net asset value) of Rs.10.00. If the entry load is 2% the investor will have to pay Rs.10.20 to buy a single unit. The additional payment of Rs 0.20 (per unit) goes towards meeting the mutual fund agent's commission. Some funds also have a practice of imposing an exit load. For instance, if the investor sells his unit at an NAV of Rs 20.00 and incurs a 2% exit load, he will receive Rs 19.60.
33
8. The tax implications The mutual fund tax structure is certainly not meant for lay investors. Even accomplished tax experts antagonise over it and wish that the finance minister simplifies it, rather than complicating it in every budget. Put simply, there are several dichotomies in the mutual fund tax structure.
i) Investing in equity and debt funds have different tax implications. ii) Within debt funds, liquid funds and other debt funds have different tax implications. iii) Within debt funds, investments by individuals/Hindu Undivided Families (HUFs) and corporates have varying tax implications. iv) Within debt funds, investments made from a long-term and a short-term perspective have varying tax implications. As you would have figured by now, investing in mutual funds can be a 'taxing' proposition.
9. Evaluate the fund's portfolio Service levels of fund houses vary. Some fund houses regularly update investors on details like stock allocation, sectoral allocation, asset allocation, Portfolio Turnover Ratio and Expense Ratio among other details. Most fund houses provide a lot of these details at monthly/quarterly frequency through mutual fund factsheets. However, this information is not quite as standardised as it should be, so the investor has to be careful while making a comparison. Making a comparison would typically include evaluating a fund's portfolio in terms of diversification across top 10 stocks and leading sectors (in case of equity funds) to ensure that the fund is not taking on more risk than necessary. It is evident that this is no mean task and requires considerable effort and patience on the investor's part.
34
10. Evaluate the fund's performance Every fund is benchmarked against an index like the BSE Sensex, Nifty, BSE 200 or the CNX 500 to cite a few names. Investors should compare fund performance over varying time frames vis-a-vis both the benchmark index and peers. Carefully evaluate the fund's performance across market cycles particularly the downturns. A well-managed fund should not fall too hard (relative to the benchmark and peers) during a market downturn even if it does not feature at the top during a stock market rally.
35
Evaluation Of Canara Robeco Infrastructure-G Fund
? Current Stats & Profile
Latest NAV 52-Week High 52-Week Low Fund Category Type Launch Date Risk Grade Return Grade Net Assets (Cr) Benchmark ? Fund Performance
19.72 (15/09/09) 19.72 (15/09/09) 9.09 (27/10/08) Equity: Diversified Open End November 2005 Above Average High 168.79 (31/08/09) BSE 100
Annual Returns 2008 Fund Return Rank In Category Category Average S&P CNX Nifty Sensex -58.76 140/193 -55.15 -51.79 -52.45 2007 90.94 2006 34.16 2005 --46.58 36.34 42.33 2004 --26.38 10.68 13.08
36
9/162 78/145 59.45 54.77 47.15 34.73 39.83 46.70
Quarterly Returns Q1 2009 2008 2007 2006 2005 ? Fund Portfolio Portfolio Characteristics As on 31/08/09 Average Mkt Cap (Rs Cr) Market Capitalization Giant Large Mid Small Tiny Investment Valuation Portfolio P/B Ratio ? Fund Details Fund Details VR Category Type Entry Load Exit Load Portfolio P/E Ratio 24,716.31 % of Portfolio 38.83 26.05 28.42 5.06 1.09 Stock Portfolio 3.37 32.20 -0.45 -29.59 -8.20 25.26 -Q2 57.60 -20.48 25.64 -16.65 -Q3 --8.01 24.74 13.47 -Q4 --19.94 32.72 13.25 --
Equity: Diversified Open End Nil 1% for redemption within 365 days
37
Top Holding As on 31/08/09 Name of Holding Reliance Industries Bharti Airtel NTPC BHEL Idea Cellular GAIL Aditya Birla Nuvo Tata Power State Bank of India Mahindra Holidays & Resorts In BPCL Mundra Port & SEZ HPCL Gujarat State Petronet Tulip Telecom Indian Oil Corp. ONGC Gujarat Gas Co. IRB Infrastructure Dev Punjab National Bank Instrument Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity % Net Assets 8.26 6.71 4.94 4.5 4.33 4.23 4.09 3.74 3.69 3.6 3.48 3.25 2.99 2.85 2.66 2.35 1.93 1.91 1.77 1.7
? Canara Robeco Infrastructure fund analysis Canara Robeco Infrastructure fund may be small, but it packs quite a punch... Don't overlook this fund simply because of its tiny size - Rs 115.47 crore (May 31, 2009). With a 3-year annualised return of 15.36 per cent (as on May 31, 2009), the fund is the third-best performer in its category of 13 and has outshone the category average by 4.33 per cent.
38
Granted, the fund's start was lousy with a return of 34.16 per cent in 2006 (category average: 54.20%). Blame it on the huge exposure to debt and cash. But in 2007, the fund compensated its investors well with a return of 90.94 per cent (category average: 82.83%). It successfully rode on the rally in Construction, Engineering, Energy and Diversified sector stocks. It allocated around 70.50 per cent of its portfolio to these sectors while the category allocated an average of around 54 per cent. But as markets tanked in 2008, the fund lowered its exposure to the Construction sector from 18.18 per cent (December 2007) to around 7.26 per cent (May 2008) and to the Engineering sector from 15.53 per cent (December 2007) to 9.32 per cent (July 2008). This did not cushion the fall dramatically and the fund fell by almost 59 per cent (category average 60%) that year. Despite the agility that a small fund offers, this one opts for a large-cap bent, refrains from frequent churning and tilts towards a buy-and-hold approach. Some of stocks that have been held almost since inception are Larsen & Toubro, Tata Power, BHEL, McNally Bharat Engineering and Reliance Industries. Fund manager Anand Shah who took over the fund in April 2008, has one philosophy - to buy stocks which have a secular growth story. “We focus on good companies, not on the market. We focus on long-term growth opportunities in India, not on the market direction,” is how he puts it. While this is touted by a lot of fund managers, in all fairness, Shah does put his money where his mouth is. In December 2008, when the average equity exposure of funds to this asset class was 72.72 per cent, this fund had it at 83 per cent and it rose to 88 per cent over the next two months. By March 2009,
39
the average was 70 per cent but it was at 90 per cent for Canara Robeco Infrastructure. By May 2009, the fund was fully invested at 96 per cent. Naturally, this put him in an enviable position to benefit from the latest market rally (March 9 - May 31, 2009). The fund returned 91.56 per cent, an outperformance of the infrastructure fund's category average by a margin of around 10 per cent. Stocks like L&T, BHEL, Jindal Steel & Power, Tata Power, Reliance Infrastructure and Gujarat State Petronet saw a decrease in holdings between April and May. The reason being profit-booking amidst sharp appreciation in prices. “Even if we are bullish on a sector or stock, if there is a significant appreciation in price which we do not feel is justified, we will book profits,” he says. Though the fund's mandate is very broad. the sectors excluded are FMCG, Pharma and Infotech. Even banking financial services are included, but “not those whose focus area is the retail business. Those that are strong players in the infrastructure sector and lend to infrastructure players are the ones we look at,” says Shah. Right now the fund is betting heavily on Energy with a 30 per cent allocation (category average: 17.77%) and Telecom at 16 per cent (category average: 3.68%). Exposure to Metals has stayed constant over the past five months as the fund manager is negative on the sector and does not see a revival there in the near future. This fund maintains a compact portfolio. Though the number of stocks has ranged from 29 to 49, by and large Shah stick to a number of around 35 stocks.
40
Asset Management Company Canara Robeco Asset Management Company Ltd Mr.R.Swaminathan Construction House, 4th Floor, 5, Walchand Hirachand Marg, Ballard Estate Mumbai 400001 Phone (022) 66585000 /18, 66585085-86 Fax (022) 56585011 - 5014 Email [email protected] ( www.valueresearchonline.com) Person Address
41
CAMPARATIVE STUDY
42
TYPES OF MUTUAL FUND SCHEMES A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
By Structure c) Open-ended schemes Open-ended or open mutual funds are much more common than closedended funds and meet the true definition of a mutual fund – a financial intermediary that allows a group of investors to pool their money together to meet an investment objective– to make money! An individual or team of professional money managers manage the pooled assets and choose investments, which create the fund?s portfolio. They are established by a fund sponsor, usually a mutual fund company, and valued by the fund
43
company or an outside agent. This means that the fund?s portfolio is valued at "fair market" value, which is the closing market value for listed public securities. An open-ended fund can be freely sold and repurchased by investors.
?
Buying and Selling:
Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the fund?s net asset value as determined by the mutual fund company. Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested.
?
Advantages:
Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption (sell) request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. Open funds range in risk depending on their investment strategies and objectives, but still
44
provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, you?re likely to feel a more considerable loss.
?
Risks:
Risk depends on the quality and the kind of portfolio you invest in. One unique risk to open funds is that they may be subject to inflows at one time or sudden redemptions, which leads to a spurt or a fall in the portfolio value, thus affecting your returns. Also, some funds invest in certain sectors or industries in which the value of the in the portfolio can fluctuate due to various market forces, thus affecting the returns of the fund.
d) Close-ended schemes Close-ended or closed mutual funds are really financial securities that are traded on the stock market. Similar to a company, a closed-ended fund issues a fixed number of shares in an initial public offering, which trade on an exchange. Share prices are determined not by the total net asset value (NAV), but by investor demand. A sponsor, either a mutual fund company or investment dealer, will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified.
?
Buying and Selling:
Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are
45
purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges, however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as Rs.5000 may apply, and unlike the more common open funds discussed below, there is typically a five-year commitment.
?
Advantages:
The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount.
?
Risks:
Investing in closed-end funds is more appropriate for seasoned investors. Depending on their investment objective and underlying portfolio, closed-ended funds can be fairly volatile, and their value can fluctuate drastically. Shares can trade at a hefty discount and deprive you from realizing the true value of your shares. Since there is no liquidity, investors must buy a fund with a strong portfolio, when units are trading at a good discount, and the stock market is in position to rise.
46
By Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
e) Growth / Equity Oriented Schemes The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Equity funds As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:
Index funds These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of
47
composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Investing through index funds is a passive investment strategy, as a fund?s performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, there?s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unitholders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, the lower the tracking error, the better the index fund.
Diversified funds Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund manager?s picks languish, the returns will be far lower.
48
The crux of the matter is that your returns from a diversified fund depend a lot on the fund manager?s capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practised by your fund manager. Understand that a portfolio concentrated in a few sectors or companies is a high risk, high return proposition. If you don?t want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance.
Tax-saving funds Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you won?t get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.
Sector funds The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector fund?s NAV will zoom if the sector performs well; however, if the sector languishes, the scheme?s NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of
49
slowdowns. The way to make money from sector funds is to catch these cycles–get in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds.
f) Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Such funds attempt to generate a steady income while preserving investors? capital. Therefore, they invest exclusively in fixed-income instruments securities like bonds, debentures, Government of India securities, and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. There are basically three types of debt funds.
Income funds By definition, such funds can invest in the entire gamut of debt instruments. Most income funds park a major part of their corpus in corporate bonds and debentures, as the returns there are the higher than those available on government-backed paper. But there is also the risk of default–a company could fail to service its debt obligations.
50
Gilt funds They invest only in government securities and T-bills–instruments on which repayment of principal and periodic payment of interest is assured by the government. So, unlike income funds, they don?t face the spectre of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds.
Liquid funds They invest in money market instruments (duration of up to one year) such as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile. They are ideal for investors seeking low-risk investment avenues to park their short-term surpluses. The „risk? in debt funds Although debt funds invest in fixed-income instruments, it doesn?t follow that they are risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so don?t show the same degree of volatility in their performance as equity funds. Still, they face some inherent risk, namely credit risk, interest rate risk and liquidity risk.
?
Interest rate risk: This is common to all three types of debt funds, and is the prime reason why the NAVs of debt funds don?t show a steady, consistent rise. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevelant demand and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign themselves with the new market yield. This, in turn, brings
51
down the NAV of a debt fund. On the other hand, if interest rates fall, existing debt securities become more precious, and rise in value, in line with the new market yield. This pushes up the NAVs of debt funds.
?
Credit risk: This throws light on the quality of debt instruments a fund holds. In the case of debt instruments, safety of principal and timely payment of interest is paramount. There is no credit risk attached with government paper, but that is not the case with debt securities issued by companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more liquid than lower-rated paper. Credit risk is not an issue with gilt funds and liquid funds. Gilt funds invest only in government paper, which are safe. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. For income funds, however, credit risk is real, as they invest primarily in corporate paper.
?
Liquidity risk: This refers to the ease with which a security can be sold in the market. While there is brisk trading in government securities and money market instruments, corporate securities aren?t actively traded. More so, when you go down the rating scale–there is little demand for low-rated debt paper. As with credit risk, gilt funds and liquid risk don?t face any liquidity risk. That?s not the case with income funds, though. An income fund that has a big exposure to low-
52
rated debt instruments could find it difficult to raise money when faced with large redemptions.
g) Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. As the name suggests, balanced funds have an exposure to both equity and debt instruments. They invest in a pre-determined proportion in equity and debt–normally 60:40 in favour of equity. On the risk ladder, they fall somewhere between equity and debt funds, depending on the fund?s debt-equity spilt–the higher the equity holding, the higher the risk. Therefore, they are a good option for investors who would like greater returns than from pure debt, and are willing to take on a little more risk in the process.
h) Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
53
Other types of funds
d) Pooled Funds A "pooled fund" is a unit trust in which investors contribute funds that are then invested, or managed, by a third party. A pooled fund operates like a mutual fund, but is not required to have a prospectus under securities law. Pooled funds are offered by trust companies, investment management firms, insurance companies, and other organizations. Pooled funds and mutual funds are substantially the same, but differ in their legal form. Like a mutual fund, a pooled fund is a trust that is set up under a "trust indenture". This specifies how the pooled fund will operate and what the duties of the various parties to the trust indenture will be. The trust indenture specifies an investment policy for the pooled fund and how management fees will be charged. Pooled funds, like mutual funds, are "unit trusts". This means that investors deposit funds into the trust in exchange for "units" of the fund, which reflect a pro-rata share of the fund's investments. The fund trust indenture will specify how units are issued and redeemed, as well as, the frequency and procedures for valuations. Pooled funds can be either "closed" or "open". An "open" pooled fund is the most common type of pooled fund, and allows units to be redeemed at scheduled valuations. A "closed" pooled fund does not allow redemptions, except in specific circumstances or at termination of the trust. Closed pooled funds are usually established to hold illiquid investments such as real estate or very specialized investment programs, such as hedge funds. The major difference between pooled funds and mutual funds is their legal status under securities law. Pooled funds are not "public" investments, which means investment and trading in pooled funds is restricted. Securities legislation define the rules for a "public" security. Publicly issued securities must meet certain requirements
54
before issue, particularly in information disclosure through their prospectus, or reporting by issuers. Pooled funds are exempt from prospectus requirements under securities law, usually under the "private placement", or "sophisticated investor", clauses in the Securities Act. This means that investments in pooled funds must be over $150,000. Financial institutions such as banks, trust companies or investment counselling firms are allowed to invest their clients in their own pooled funds, by specific exemptions granted under the Securities Act. Each pooled fund investment must be reported to the relevant Securities Commission. Once a client is invested in a pool fund, the result is identical to being in a mutual fund with the same investment mandate. Fees for pooled funds can either be charged inside or outside the fund. Valuation of pooled funds can be less frequent, as there tends to be less activity with fewer and more sophisticated pooled fund investors. Pooled fund fees are usually lower than mutual funds, as these funds are created to deal with larger investors. Pooled funds are allowed to charge their expenses from operations against the fund assets, and the trust indenture provides for the sponsor, or trustee, to hire outside agents to perform certain tasks, such as custody and unit record-keeping.
e) Insurance Segregated Funds An insurance segregated fund is an insurance contract issued under insurance legislation by an insurance company. Its value is based on the performance of a portfolio of marketable securities, such as stocks and bonds. As an insurance contract, a segregated fund is an obligation of an insurance company and forms part of its assets. Insurance companies "segregate" the portfolios which these contracts are based on, dividing these assets from their general assets. The contracts have a minimum value, the price at which they were issued.
55
It is important to realize that a insurance segregated fund might look and act like a mutual fund, but that it is actually something quite different. A mutual fund is a trust, or sometimes a company, which owns title to the actual securities in the funds. The unitholders own the trust which in turn owns the assets. An insurance segregated fund is an insurance contract or a "variable rate annuity". Legally, the insurance company issues the contract the same way it would an annuity or life insurance policy under the relevant insurance legislation. The buyer or "policy holder" has contracted for a payment that is based on the underlying prices of the portfolio that supports the contract but does not have a direct claim or ownership on the securities that form the portfolio. Although insurance companies "segregate" the assets to support these contracts, the holder of the contract does not own these assets. Another wrinkle of segregated funds is their tax status. Since they are insurance contracts, they are taxed as such. Sometimes segregated funds are used as investment options for "universal" or "whole life" life insurance which provides a savings option as well as insurance. Life companies market the tax shelter aspects of these contracts, which allow compounding of investment income untaxed while inside the insurance contract. Another sales aspect of segregated funds is their characteristics under bankruptcy legislation in some jurisdictions. In Canada, for example, an insurance contract is not available to creditors in a bankruptcy. This means an RRSP that uses segregated funds would be protected from creditors in a bankruptcy while an RRSP which invested in mutual funds would be exposed. In summary, although insurance segregated funds look and function like mutual funds, they are actually insurance contracts based on the valuation of a portfolio of marketable securities. As always, investors are wise to consider all the aspects of insurance contracts in their legal jurisdiction prior to investment.
56
f) Specific Sectoral & Thematic funds /schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. Thematic funds are those fund which invest in a stocks which will benefit from a particular theme like Outsourcing, Infrastructure etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Restrain the urge to invest in sector/thematic funds no matter how compelling an argument your agent or the fund house makes. Over the long-term, there is little value that a restrictive and narrow theme can bring to the table. It is best to opt for a broad investment mandate that is best championed by welldiversified equity funds.
UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and Exchange Board of India for an omnibus fund that will have six options. The UTI Thematic Fund is the umbrella fund. It will have sub-funds that will focus on large-cap stocks, mid-cap stocks, auto, banking, PSU stocks and basic industries. UTI now has a UTI Growth Sectors Umbrella with five options that focus on investing in stocks in the services, petro, healthcare pharmaceuticals, information technology, and consumer products. The new fund also proposes to provide investors four automatic triggers that could be used for exit: value, appreciation, date and stop loss.
57
MUTUAL FUNDS: THE RISK AND RETURNS
All investments carry an element of risk and mutual funds are not immune to it. It is a general perception that greater the risk, greater will be the returns. And lower the risk, lower are the returns. The risks associated with mutual funds are in tune with investments they in turn hold.
Risk refers to the possibility of investors losing their money. A simple rule for beating short-term volatility is to invest over a longer horizon. How do you measure the risk associated with a fund? The fund's beta value compares a mutual fund's volatility with that of a benchmark and gives an estimate of how much the fund could fall in a bad market and how high it can soar in a bull run.
Two popular parameters that give a clearer insight are the standard deviation and Sharpe ratio. Standard deviation This is a measure of how much the actual performance of a fund over a period of time deviates from the average performance.
While beta compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent numbers stray from its longterm average. A low standard deviation translates into lower risk. Sharpe ratio This measures whether the returns that a fund delivered were in sync with the kind of volatility it exhibited. It quantifies the performance of the fund relative to the risks it takes. The larger the ratio, the better is the fund's risk-adjusted returns.
58
For those willing to take high risks, equity and sector funds are the picks. Sector funds limit their stock selection to the specific sectors and are not amply diversified. Since all the stocks are restricted to a particular sector like FMCG, pharma or civil, if the sector takes a beating, your returns will be directly impacted. Equity funds invest wholly in the stock markets. They have the same volatility as the investments in the stock market.
Debt funds and bond funds follow a low risk, low return pattern. However, bond fund faces interest rate risk and income risk. Income risk is the possibility that a fixed income fund's dividends will decline as a result of falling overall interest rates. There have been numerous instances of investors locking their money in debt or income funds. On seeing nil or very low returns, they pay up huge exit loads and get out of such schemes. Hence, it is very important that investors first gauge their risk appetite. Once they understand their risk tolerance level they can choose the appropriate investment vehicle.
Balanced funds are a good alternative for those who seek something between high risk sector funds and low risk bond funds. Balanced funds invest 80 to 90 percent of their money in equity instruments and generate decent returns. The remaining money is locked in safe debt instruments. Investors should build a well-diversified portfolio.
Inefficient diversification can mean too many investments from a particular sector or segment. This can mean greater exposure to risk. Proper asset allocation with investor risk profile in mind must be the first step to building a portfolio. Create a well-defined strategy with investment goals and objectives clearly chalked out.
59
FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO
Factors affecting Management style of a scheme It?s one thing to understand mutual funds and their working; it?s another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. Here are seven factors that go a long way in helping an AMC meet its investor?s investment objectives. The factors listed below evaluate factors affecting the management style of a mutual fund scheme.
?
Knowing the profile
Investor?s investments reflect his risk-taking capacity. Equity funds might lure when the market is rising and peers are making money, but if you are not cut out for the risk that accompanies it, don?t bite the bait. So, check if the investor?s objective matches yours. Investors will invest only after they have found their match. If they are racked by uncertainty, they seek expert advice from a qualified financial advisor.
?
Identifying the investment horizon
How long on an average does the investor want to stay invested in a fund is as important as deciding upon your risk profile. Investors would invest in an equity fund only if they are willing to stay on for at least two years. For income and gilt funds, have a one-year perspective at least. Anything less than one year, the only option among mutual funds is liquid funds.
60
?
Declare and Inform
Watch what you commit. Investors look out for the Offer Document and Key Information Memorandum (KIM) before they commit their money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, name of the asset management company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors.
?
The fund fact sheet
Fund fact sheets give investors valuable information of how the fund has performed in the past. It gives investors access to the fund?s portfolio, its diversification levels and its performance in the past. The more fact sheets they examine, the better is their comfort level.
?
Diversification across fund houses
If Investors are routing a substantial sum through mutual funds, they would diversify across fund houses. That way, they spread their risk.
?
Chasing incentives
Some financial intermediaries give upfront incentives, in the form of a percentage of the investor?s initial investment, to invest in a particular fund. Many amateur investors get lured into such incentives and invest in such attractive schemes, which may not meet their future expectations. The ideal investor?s focus would be to find a fund that matches his investment needs and risk profile, and is a performer.
61
?
Tracking investments
The investor?s job doesn?t end at the point of making the investment. They do track your investment on a regular basis, be it in an equity, debt or balanced fund.
Portfolio management is an important foundation of mutual fund business. The performance of the fund measured by the risk adjusted returns produced by the investor arises largely by successful portfolio management function. After collecting the investors? funds, effective portfolio management will have to give returns acceptable to the investor; else, the investor may move to better performing funds. From the investors? perspective, the need for successful portfolio management function is obviously paramount. However, in the complex world of financial markets, portfolio management is a „specialist? function.
Now how a fund manager manages the portfolio would depend on the type of the fund he is managing. The funds can be broadly classified as equity funds and debt funds.
62
Equity Portfolio Management: When the fund contains more than 65% equity, it is called as an equity fund. Thus such type of a fund would need equity portfolio management. An equity portfolio manager?s task consists of two major steps:
a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with the investment objective of the fund and b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns.
How To Identify Which Kind Of Stocks To Include? The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares, warrants or convertible debentures issued by many companies. Even within each category of equity instruments, shares of one company may be very different in terms of their potential than shares of other companies. So how does the fund manager go about choosing the different types of stocks, in order to construct his portfolio? The general answer is that his choice of shares to be included in fund?s portfolio must reflect the investment objective of the fund. more specifically, the equity portfolio manager will choose from a universe of invisible shares in accordance with: a) The nature of the equity instrument, or a stock?s unique characteristics, and b) A certain „investment style? or philosophy in the process of choosing. Thus, you may see a mutual fund?s equity portfolio include shares of diverse companies. However, in reality, the group of stocks selected will have
63
certain unique characteristics, chosen in accordance with the preferred investment style, such that the portfolio as a whole is consistent with the scheme?s objectives.
Indian economy is going through a period of both rapid growth and rapid transformation. Thus, the industries with the growth prospects or blue chip shares of yesterday are no longer certain to continue to be in that category tomorrow. “New” sectors like software or technology stocks have matured and newer sectors such as biotechnology are now making an entry in the investment markets. In this process of rapid change, the stock selection task of an active fund manager in India is by no means simple or limited. We will therefore, review how different stocks are classified according to their characteristics.
Ordinary shares: Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. Losses as well as the profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes.
Preference Shares: Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings.
64
Equity Warrants: These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. Warrants are in the nature of options on stocks.
Convertible Debentures: As the term suggests, these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. Clearly, convertible debentures are debt instruments until converted; when converted, they become equity shares.
EQUITY CLASSES:
Equity shares are generally classified on the basis of either the market capitalization or the anticipated movement of company earnings. it is imperative for the fund manager to understand these elements of the stocks before he selects them for inclusion in the portfolio.
a) Classification in terms of Market Capitalization Market Capitalization is equivalent to the current value of a company, i.e., current market price per share times the number of outstanding shares. There are Large Capitalization Companies, Mid – Cap Companies and Small – Cap Companies. Different schemes of a fund may define their fund objective as a preference for the Large or Mid or the Small Cap Companies? shares. For example, the tax plan of ICICI Prudential AMC is essentially a mid-cap fund where as the tax plan of Reliance is largecap fund. Large Cap shares are more liquid and hence easily tradable.
65
Mid or Small Cap shares may be thought of as having greater growth potential. The stock markets generally have different indices available to track these different classes of shares.
b) Classification in terms of Anticipated Earnings In terms of anticipated earnings of the companies, shares are generally classified on the basis of their market price relation to one of the following measures: ? Price/Earning Ratio is the price of the share divided by the earnings per share and indicated what the investors are willing to pay for the company?s earning potential. Young and fast growing companies usually have high P/E ratios and the established companies in the mature industries may have lower P/E ratios. ? Dividend Yield for a stock is the ratio of dividend paid per share to the current market price. In India, at least in the past, investors have indicated the preference for the high dividend paying shares. What matters to the fund managers is the potential dividend yields based on earning prospects. ? Cyclical Stocks are the shares of companies whose earnings are correlated with the state of the economy. ? Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels.
66
? Value Stocks are share of companies in mature industries and are expected to yield low growth in earnings. these companies may, however, have assets whose values have not been recognized by investors in general. funds manager may try to identify such currently undervalued stocks that in their opinion can yield superior returns later.
Approaches to Portfolio Management (Fund Management Style):
Mutual funds can be broadly classified into two categories in terms of the fund management style i.e. actively managed funds and passively managed funds (popularly referred to as index funds). Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index. in active fund management two basic fund management styles that are prevalent are: i) Growth Investment Style: wherein the primary objective of equity investment is to obtain capital appreciation. this investment style would make the funds manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio. ii) Value Investment Style: wherein the funds manager looks to buy shares of those companies which he believes are currently under
67
valued in the market, but whose worth he estimates will be recognized in the market valuation eventually. On the contrary, passively managed funds/index funds are aligned to a particular benchmark index like the S&P CNX Nifty or the BSE Sensex. The endeavor of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation or weightage.
Investing in index funds is less cumbersome as compared to investing in actively managed funds. Broadly speaking, investors need to consider two important aspects i.e. the expense ratio and the tracking error (i.e. the difference between the returns clocked by the designated index and index fund).
Conversely, investing in actively managed funds demands a deeper review and understanding of the fund house's investment philosophy; also the investor needs to decide on the kind of funds he wishes to invest in - a large cap/mid cap/small cap fund among others.
In the Indian context, the mutual fund industry is dominated by actively managed funds; index funds occupy a smaller share of the market. Wellmanaged actively managed funds have been successful in outperforming index funds by a huge margin.
This could be attributed to the fact that the Indian markets are still in an evolutionary phase and there exist a number of inefficiencies. These inefficiencies are in turn utilized by competent fund managers to outperform the index. This explains why many actively managed funds manage to outperform the index over the long-term (3-5 years).
68
A study was conducted wherein category averages of index funds (passive funds) were compared with those of diversified equity funds (active funds), over varied time frames. The active-passive tradeoff Categories A Average category returns 1-Yr (%) Index funds Actively managed funds S&P CNX Nifty BSE Sensex 40.75 29.05 39.50 44.91 3-Yr (%) 32.91 38.37 30.96 35.22 5-Yr (%) 32.38 41.05 30.32 33.20
(Source: Credence Analytics. Growth over 1-Yr is compounded annualised)
The results are quite interesting. Over the 1-Yr time frame, index funds (40.75 per cent) aligned to the BSE Sensex have comfortably outscored diversified equity funds (29.05 per cent). However over longer time frames (3-Yr and 5-Yr), diversified equity funds have stolen the march over index funds powered by a strong showing. Over 3-Yr, diversified equity funds (38.37 per cent CAGR) have outperformed index funds (32.91 per cent CAGR). The degree of outperformance further widens over 5-Yr; diversified equity funds (41.05 per cent CAGR) fare better than index funds (32.38 per cent). In a nutshell, in the Indian context, index funds have proven their mettle over shorter time frames. It's the opposite over longer time frames (3-5 years), where actively managed funds rule the roost. However the same should not be seen as a blanket recommendation for actively managed funds. Not all actively managed funds are invest-worthy and capable of generating superior returns vis-à-vis benchmark indices (passively managed funds).
69
Use of Equity Derivatives for Portfolio Risk Management:
An equity portfolio manager is always exposed to the risk that market prices of equities will decline, causing his fund NAV to drop. Until recently, a fund manager in India had no option but to sell his stocks, if he expected a fall in market prices. Since the year 2000, however, equity portfolio managers have instruments available to them, which permit them to reduce the loss in portfolio value, without selling the stocks in the cash markets.
Equity Derivatives instruments are specially designed contracts that are traded separately on an exchange, but derive their value from the underlying equity asset. such derivative contract may be based on individual share/scripts, or on a given market index. the two basic types of exchange traded derivative instruments are Futures and Options. a futures contract allows one to buy or sell the underlying asset at a specified future date, but being a traded instrument, the contract can be liquidated without reaching its maturity date and so without taking or giving delivery of the underlying asset.
Options contracts are available on both the market index and the individual shares. a futures contracts is an outright purchase for a future date, whereas an options contract gives its holder the right to buy or sell the Nifty or Sensex index or the individual scrip for a future delivery at a certain strike price, but are not obliged to exercise that option, if the price does not move in the direction you expected. you would pay a premium for the acquisition of this right.
70
How does a fund manager use these futures and options contracts as a risk management instruments?
Broadly, if a funds manager holds an equity portfolio and expects the market to decline, he can sell the index futures at the current price for future delivery. if the market did decline, his equity portfolio value will come down, but his futures contract will show corresponding profit, since he had sold it at the higher past price. this is called “hedging” portfolio risk. in this case, the fund manager would not have any loss due to market decline. however, contrary to the expectations, if the market prices actually rose, our fund manager will not gain. the rise in his equity portfolio value will be neutralized by the loss on his futures position, since he had sold futures at lower price relative to the current market levels. Options, too, can be used to hedge an investment portfolio – by buying put options (or options to sell underlying asset) at a price (the premium). The funds manager can exercise the option only if the prices fall, since he has the right to sell at a higher price. he can forgo the premium and not exercise the option, if the prices actually rise. This way he can still let his portfolio NAV, while protecting the downside risk.
71
Successful Equity Portfolio Management: Portfolio Management skills are innate in nature and strong intuitive traits from the portfolio manager. Nevertheless, there are certain principles of good equity management that any portfolio manager can follow to improve his performance.
? ?
Set realistic target returns based on appropriate benchmarks. Be aware of the level of flexibility available while managing the portfolio.
?
Decide on appropriate investment philosophy, i.e., whether to capitalize on economic cycles, or to focus on the growth sectors or finding the value stocks.
?
Develop an investment strategy based on the investment objective, the time frame for the investment and economic expectations over this period.
?
Avoid over – diversification. although diversification is a major strength of mutual funds, the portfolio manager must avoid the temptation to invest into very large number of securities so as to maintain focus and facilitate sound tracking.
?
Develop a flexible approach to investing. Markets are dynamic and it is impossible to buy „stocks for all seasons?
72
Portfolio of ICICI Prudential Balanced – Growth Table 1 ICICI Prudential Balanced - Growth Portfolio as on Jul 31, 2009 Instrument Rating No. of Market Debentures Value (Rs. in crores) Securities Sovereign 36.55
Company Name
Percentage of Net Assets 13.65
6.9 GOI 2019 Steel Authority of India Ltd Punjab National Bank 8.24 GOI 2027 Industrial Development Bank of India Ltd
Bond
AAA
14.37
5.37
Bond
AAA
14.02 10.11
5.24 3.78
Securities Sovereign
Bond
AA+
5.95
2.22
73
Table 2 Company Name EQUITY* Instrument No. of Shares Market Value (Rs. in crores) 10.50 10.44 9.51 9.00 8.03 7.97 7.86 7.63 7.13 6.72 6.63 6.61 5.65 5.44 5.08 4.90 4.45 4.13 3.83 3.72 % of Net Assets 3.92 3.9 3.55 3.36 3 2.98 2.94 2.85 2.66 2.51 2.48 2.47 2.11 2.03 1.9 1.83 1.66 1.54 1.43 1.39
ITC Ltd Reliance Industries Ltd Larsen & Toubro Limited HDFC Bank Ltd NTPC Limited. Grasim Industries Ltd Bharat Heavy Electricals Ltd Nifty Sterlite Industries (India) Ltd Tata Steel Ltd. Bharti Airtel Ltd ICICI BANK LTD. Hindustan Unilever Ltd Hero Honda Motors Ltd Tata Consultancy Services Ltd. Hindustan Petroleum Corporation Ltd State Bank of India Bharat Petroleum Corporation Ltd Mahindra & Mahindra Ltd Infosys Technologies Ltd
Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity
421315 53367 63122 60049 372645 29056 35255
110545 145282 161747 87169 193708 33901 96632 140438 24546 87169 44552 18015
Table 3 Company Name OTHERS Instrument Market Value (Rs. in crores) 6.8522 5.6462 5.5042 % of Net Assets 2.56 2.11 2.06
74
Cash Current Assets ICICI BANK LTD.
Cash Current Assets CD
Debt Portfolio Management: Debt portfolio management has to contend with the construction and management of portfolio of debt instruments, with the primary objective of generating income. Just as the equity fund manager has to identify suitable stocks from a larger universe of equity shares, a debt fund manager has to select from a whole universe of debt securities he wants to invest in.
Debt schemes of a mutual fund have a short maturity period, generally up to one year. nevertheless, some schemes regarded as debt schemes do have maturity period a little longer than a year, say, eighteen months. thus in the context of “debt” mutual funds, depending upon the maturity period of the scheme, the funds managers invest more in “market-traded instruments” or the “debt securities”. the difference in market-traded instruments and debt securities is that the former matures before one year and the later after a year.
Instruments in Indian Debt Market: The objective of a debt fund is to provide investors with a stable income stream. Hence, a debt fund invests mainly in instruments that yield a fixed rate of return and where the principal is secure. The debt market in India offers the following instruments for investment by mutual funds. Certificate of Deposit: Certificate of Deposits (CD) are issued by scheduled commercial banks excluding regional rural banks. these are unsecured negotiable promissory notes. bank CDs have a maturity period of 91 days to one year, while those issued by financial institutions have maturities between one and three years. Commercial Paper: Commercial Paper (CP) is a short term, unsecured instrument issued by corporate bodies (public and private) to meet short term working capital
75
needs. maturity varies between 3 months and 1 year. this instrument can be issued to the individuals, banks, companies and other corporate bodies registered or incorporated in India. CPs can be issued to NRIs on non – repatriable and non – transferable basis. Corporate Debentures: Debentures are issued by manufacturing companies with physical assets, as secured instruments, in the form of certificates. They are assigned credit rating by the rating agencies. All publicly issued debentures are listed on the exchanges. Floating Rate Bond (FRB): These are short to medium term interest bearing instruments issued by financial intermediaries and corporations. The typical maturity is of these bonds is 3 to 5 years. FRBs issued by the financial institutions are generally unsecured while those form private corporations are secured. Government Securities: These are medium to long term interest – bearing obligations issued through the RBI by the Government of India and state governments. Treasury Bills. T-bills are short term obligations issued through the RBI by the Government of India at a discount. The RBI issues T-bills for tenures: now 91 days and 364 days. These treasury bills are issued through an auction procedure. The yield is determined on the basis of bids tendered and accepted. Public Sector Undertakings (PSU) Bonds: PSU are medium and long term obligations issued by public sector companies in which the government share holding is generally greater than 51%. Some PSU Bonds carry tax exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds. PSU bonds are generally not guaranteed by the government and are in the form of promissory notes transferable by endorsement and delivery.
76
Debt Investment Strategies – An Aid for Debt Portfolio Management: Let us have a look at some debt investment strategies adopted by the debt portfolio managers.
Buy and Hold: Historically, in India, UTI and many of the other mutual funds tended to invest in high yielding debt securities that gave adequate returns on the overall portfolio. The returns are considered sufficient to reward the investors. Therefore, the funds would just encash the coupons and hold the bonds until maturity. These fund managers will tend to avoid bond with call provisions, to counter the prepayment risk. It has to be understood the strategy holds good as long as the general interest rate level are stable. if yields rise, the price of bonds will fall. Hence, while the fund may generate sufficient current income according to original target, it will incur a capital loss on its portfolio as and when revalued to current market price. Another risk on the portfolio, particularly if its maturities are long, is the risk of default by the issuer.
Duration Management: If Buy and Hold is like Passive Fund Management, Duration Management is like Active Fund Management. This strategy involves altering the average duration of bonds in a portfolio depending upon the fund manager?s expectations regarding the direction of interest rates. If bond yields are expected to fall, the fund manager would buy the bonds with longer duration and sell bonds with shorter duration, until the fund?s average duration becomes longer than the market?s average duration. based as the strategy is on interest rate anticipations, it is akin to the Market Timing Strategy for equity investments.
77
Credit Selection: Some debt managers look to investing in a bond in anticipation of changes on ots credit rating. an upgrade of a bond?s credit rating would lend to increase in its price, thereby leading to a superior return. the fund would need to analyze the bond?s credit quality so as to implement this strategy. Usually, debt funds will specify the proportion of assets they will hold in instruments of different credit quality/ratings, and hold these proportions. Active credit selection strategy would imply frequent trading of bonds in anticipation of changes in ratings. While being an active risk management strategy, it does not take away the interest rate, prepayment or credit risks that are faced by any debt fund.
Prepayment Prediction: As noted earlier some bonds allow the issuers the option to call for redemption before maturity. a fund which holds bonds with this provision is exposed to the risk of high yielding bonds being called back before maturity when interest rates decline. The fund manager would therefore strive to hold bonds with low prepayment risk relative to yield spread or try to predict the course of the interest rates and decide what the prepayment is likely to be, and then increase or decrease his exposure. In any case, the risks faced by such fund managers are the same as any other. What matters at the end is the yield performance obtained by the fund manager.
78
Interest Rates and Debt Portfolio Management: No matter which investment strategy is followed by a debt fund manager, debt securities are always exposed to interest rate risk, as their price is directly dependent on them. While they may yield fixed rates of returns, their market values are dependent on interest rate movements, which in turn affect the performance of fund portfolio of which they are a part. Hence, it is essential to understand the factors that affect the interest rates. While this is an intricate subject in itself, we have summarized below some key elements that have a bearing on interest rate movements:
Inflation: simply put, inflation is the percentage by which prices of goods and services in the economy increase over a period of time. This increase may be on account of factors arising within the country – change in production levels, mechanisms for distribution of goods, etc, and/or on account of changes in the country?s external balance of payments position. In India, inflation is generally measured by the Wholesale Price Index although the Consumer Price Index is also tracked. When the inflation rate rises, money becomes dearer, leading to an increase in the general level of interest rates. Exchange Rate: A key factor in determining exchange rates between any two currencies is their relative purchasing power. Over a period, the relative purchasing power between two currencies may change based on the performance of the respective economies. The consequent change in exchange rates can affect interest rate levels in the country.
Policies of the Central Bank: The central bank is the apex authority for regulation of the monetary system in a country. In India, this role is played by the Reserve Bank. The RBI?s policies have a strong bearing on interest rate levels in the economy. If the RBI wishes to curb excess liquidity in a
79
monetary system, it could impose a higher liquidity ratio on banks and institutions. This would restrict credit leading to an increase in interest rates. Similarly, and increase in RBI?s bank rate has the effect of increasing interest rate levels. RBI may also undertake open operations in Treasury Bills and Government securities with the intention of restricting / relaxing liquidity, thereby impacting the interest rates.
Use of Derivatives for Debt Portfolio Management: As explained above, a debt portfolio is always exposed to the interest rate risk. Hence, derivatives contracts can be used to reduce or alter the risk profile of the portfolios containing debt instruments. Interest rate derivatives contracts can be exchange traded or privately traded (on the OTC market). Thus, a portfolio manager can sell interest rate futures or buy interest rate „put? options, usually on an exchange, to protect the value of his debt portfolio. He can also buy or sell forward contracts or swaps bilaterally with other market players on OTC market. In India, interest rate swaps and forward rate agreements were introduced in 1999, though the market for these contracts has not yet fully developed. In 2004, the National Stock Exchange has introduced futures on Interest Rates. Interest rate options are not yet available for trading on exchange.
80
What are Exchange Traded Funds?
ETFs represent shares of ownership in either fund, unit investment trusts, or depository receipts that hold portfolios of common stocks which closely track the performance and dividend yield of specific indexes, either broad market, sector or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities. While similar to an index mutual fund, ETFs differ from mutual funds in significant ways. Unlike Index mutual funds, ETFs are priced and can be bought and sold throughout the trading day. Furthermore, ETFs can be sold short and bought on margin.
Have you ever wished you could buy every stock represented in a high profile index such as the NSE Nifty, or the BSE Sensex but the cost of buying each stock represented in such an index was prohibitive?
Now, single securities, known as Exchange Traded Funds (ETF), can track the performance of a growing number of different index funds (currently the NSE Nifty). Most ETFs represent a portfolio of stocks designed to track one specific index. ETFs can be bought and sold exactly like a stock of an individual company during the entire trading day. Furthermore, they can be bought on margin, sold short or bought at limit prices. Exchange traded funds can help investors build a diversified portfolio that?s easy to track.
Exchange Traded Funds (ETFs) have been in existence in India for quite some time now. Apart from Benchmark AMC, which specializes in ETFs, there have been a couple of ETFs from Prudential ICICI AMC and UTI
81
AMC. But so far ETFs have not enjoyed the kind of popularity that the conventional Mutual Funds enjoy. One reason could be the lack of understanding of the concept of ETF amongst the general investor. Second, and probably the more important reason, is that ETFs by nature track a certain index (e.g. Nifty or the Bankex). Hence, the returns one can expect from ETFs will be equal to the rise in the index. Whereas, India is a growing market and hence offers huge opportunities in the non-index shares too. Therefore, it is not difficult for an active fund manager to beat the index and offer better returns. As such ETFs (and index-funds too, by that logic) have comparatively negligible AUMs. Two things could, however, make ETFs popular in India
?
One, of course, is that as market valuations become fairly or overvalued, it will become more & more difficult to beat the index. Then index-based funds (both conventional MFs & ETFs) may become a better option than actively-managed funds
?
Gold ETFs or Real-Estate ETFs have no comparable product in the conventional MF sector, and hence become the only MF route to invest in such markets.
Here?s an interesting live example about 1-2 years ago the banking sector was not very popular. But with the rise in interest rates and the general economic growth, bank stocks were becoming quite popular. As a result the only banking index fund viz. Benchmark AMC?s the Banking BeES (there are few banking sector funds but not bank-index funds) saw a jump of AUM from about Rs.370 crores in June 2005 to almost Rs.7,400 crores by December 2006. This makes it the largest MF scheme, much higher than about Rs.5000 crores Reliance Equity Fund.
82
How does an ETF work?
In a normal fund we buy/sell units directly from/to the AMC. First the money is collected from the investors to form the corpus. The fund manager then uses this corpus to build and manage the appropriate portfolio. When you want to redeem your units, a part of the portfolio is sold and you get paid for your units. The units in a conventional MF are, therefore, called incash units. But in ETF, we have something called the authorized participants (appointed by the AMC). They will first deposit all the shares that comprise the index (or the gold in case of Gold ETF) with the AMC and receive what is called the creation units from the AMC. Since these units are created by depositing underlying shares/gold, they are called in-kind units.
Benefits and Limitations of ETF
Benefits of investing in ETFs
?
Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)
?
One can short sell an ETF or buy on margin or even purchase one unit, which is not possible with index-funds/conventional MF?s
?
ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MF?s
? ?
Not dependent on the fund manager Like an index fund, they are very transparent
83
Disadvantages of investing in ETFs
?
SIP in ETF is not convenient as you have to place a fresh order every month
?
Also SIP may prove expensive as compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell
?
Because ETFs are conveniently tradable, people tend to trade more in ETFs as compared to conventional funds. This unnecessarily pushes up the costs.
?
You cannot automatically re-invest your dividends. Secondly, you may have to pay brokerage to reinvest dividends in ETF, whereas dividend reinvestment in MF?s is automatic and with no entry-load
?
Comparatively lower liquidity as the market has still not caught up on the concept.
It may, therefore, be concluded that if an investor is looking for a long-term and defensive investment strategy in equities by backing the index rather than looking at active management, ETF offers an alternative to index-based funds. It offers trading convenience & probably lower costs than index funds. A case-to-case comparison is, however, important as some indexfunds may be cheaper. Also for SIP?s, index-funds may prove better than ETFs. However, in the absence of conventional MF?s like in Gold, ETFs is but a natural and better choice than buying/selling physical gold.
84
Categories of ETF?s 1. Stock ETFs
By Investment Strategy By Investment • Bearish ETFs • Ethical ETFs • Growth Stock ETFs • High-Dividend ETFs • Leveraged ETFs • Sector Rotation • Value Line ETFs • Value Stock ETFs Style • Large Cap Stocks • Mid Cap Stocks • Small Cap Stocks • Micro Cap Stocks
By Industry • Aerospace & Defense
By Region -Indian
• Biotechnology Stocks • Construction -Global • Consumer Goods & Services Markets • Financial Services • Health Care • Industrials • Internet • Media • Metals & Mining • Oil & Gas • Pharmaceuticals • Real Estate • Retail • Semiconductors • Software • Telecommunications • Transportation • Utilities
2. Bond ETFs 3. Commodity ETFs • Agriculture/Crop Price ETFs • Currency ETFs • Energy ETFs • Precious Metals ETFs • Real Estate ETFs-REITs
85
Comparison of ETF with Mutual Fund ETF Comparison - While similar to an index mutual fund, ETFs differ from mutual funds in significant ways.
Index Attribute ETF Mutual Fund Diversification Traded throughout the day Can be bought on margin Can be sold short Tracks an index or sector Tax efficient as turnover is low Low Expense Ratio Trade at any brokerage firm Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Possibly Sometimes No
Individual Stock No Yes Yes Yes No No Not a factor Yes
86
Top Performers
Top Performers as on ( 10/08/2009 ) Rank Scheme Name Top 3 Liquid Schemes (1 Mth) 1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - G 3 LIC MF Liquid Fund - Growth Top 3 Floating Rate Schemes (1 Mth) 1 Templeton FRIF - Long Term - Super IP - Groth 2 ICICI Prudential LT FRF - Plan C - Growth 3 Birla Sun Life Floating Rate Fund - LTP - Growth Top 3 Short Term Income Schemes (1 Mth) 1 PRINCIPAL Income Fund - STP - Growth 2 Templeton India STIP - Growth 3 LIC MF Savings Plus Fund - Growth Top 3 Income Schemes (1 Yr) 1 Canara Robeco Income Scheme - Growth 2 ICICI Prudential Income Fund -Growth 3 Fortis Flexi Debt Fund - Growth Top 3 Tax Schemes (1 Yr) 1 Sahara Taxgain - Growth 2 Sundaram BNP Paribas Taxsaver - (Open En 3 HDFC Taxsaver - Growth Top 3 Equity Schemes (1 Yr) 1 Tata Life Sciences and Technology Fund - Ap 2 JM Mid Cap Fund - Growth 3 Sundaram BNP Paribas Financial Services Op Top 3 Balanced Schemes (1 Yr) 1 Reliance RSF - Balanced - Growth 2 Birla Sun Life 95 - Growth 3 HDFC Prudence Fund - Growth Top 3 MIP Schemes (1 Yr) 1 Reliance MIP - Growth 2 Birla Sun Life MIP - Savings 5 - Growth 3 HDFC MIP - LTP - Growth Source: www.mutualfundindia.com
% Returns 0.5274 0.5254 0.4375 % Returns 0.5831 0.5746 0.5711 % Returns 0.6553 0.5763 0.4599 % Returns 26.4648 24.4898 19.8424 % Returns 15.3153 11.7922 9.9382 % Returns 29.4581 0.4599 26.4648 % Returns 23.6347 19.1215 17.4833 % Returns 26.1132 20.8864 15.3153
87
Performance of Funds under different Schemes
1. Equity- Diversified --- TOP 20 SCHEMES S Scheme Name No 1 Birla Sun Life Asset Allocation Aggressive 2 UTI Dividend Yield 3 FT India Life Stage FoF 20s 4 Templeton India Growth 5 HSBC Equity 6 ICICI Prudential Advisor-Very Aggressive 7 Sundaram BNP Paribas Select Focus Reg 8 ICICI Prudential Dynamic 9 Tata Pure Equity 10 DSPML Top 100 Equity Regular 11 Sundaram BNP Paribas India Leadership Regular 12 DSPML Equity 13 Baroda Pioneer Growth 14 HDFC Top 200 15 ICICI Prudential Growth 16 UTI Equity 17 HDFC Capital Builder 18 Sundaram BNP Paribas Growth Regular 19 HSBC India Opportunities 20 Sahara Growth Source: www.valueresearchonline.com 2. Equity - Sector wise ? Auto S No Scheme Name NAV as on 10-9-2009 15.01 Return (%) -16.79 NAV as on 10-9-2009 23.73 21.24 27.74 92.24 95.9 29.49 83.18 79.06 79.14 77.51 37.6 46.72 43.29 143.02 111.17 40.94 79.41 88.52 33.99 67.16 Return (%) -11.34 -14.36 -14.38 -15.08 -15.13 -15.32 -15.58 -15.62 -15.83 -15.83 -16.28 -16.33 -16.56 -16.61 -16.67 -16.82 -16.89 -16.99 -17.02 -17.04
1 UTI Thematic Transportation and Logistics Fund - Growth Source: www.valueresearchonline.com
88
? Sector Funds - Banking And Financial Services S No NAV as on 10-92009 13.0571 Return (%) -21.87
Scheme Name
1 Sundaram BNP Paribas Financial Services Opportunities Fund - Ret Growth 2 Reliance Banking Fund - Growth 3 UTI Thematic Banking Sector Fund Growth 4 Religare Banking Fund - Reg - Growth 5 JM Financial Services Sector Fund Growth 6 Sahara Banking and Financial Services Fund - Growth 7 ICICI Prudential Banking and Financial Services Fund - Retail - Growth 8 Sundaram BNP Paribas Financial Services Opportunities Fund - Ret Growth 9 Reliance Banking Fund - Growth 10 UTI Thematic Banking Sector Fund Growth Source: www.valueresearchonline.com ? Pharma S No Scheme Name
61.6074 26.98 12.47 8.1379 18.9971 12.19 13.0571
-26.37 -26.66 -16.33 -16.56 -16.61 -16.67 -21.87
61.6074 26.98
-26.37 -26.66
1 UTI Pharma & Healthcare 2 Franklin Pharma 3 JM Healthcare Sector 4 Magnum Pharma 5 Reliance Pharma Source: www.valueresearchonline.com
NAV as Return on 10-9(%) 2009 23.74 -3.38 29.26 -4.38 19.55 -5.31 32.34 -5.72 24.38 -6.64
89
? Technology S Scheme Name No 1 Tata Life Sciences and Technology Fund Appr 2 Franklin Infotech Fund - Growth 3 DSP BlackRock Technology.com Fund Reg - Growth 4 Birla Sun Life New Millennium - Growth 5 ICICI Prudential Technology Fund Growth 6 Birla Sun Life New Millennium 7 Kotak Tech Source: www.valueresearchonline.com ? FMCG S No Scheme Name NAV as on Return 10-9-2009 (%) 43.213 -13.87 29.09 -14.74 44.12 -21.1 NAV as on Return 10-9-2009 (%) 51.8386 -3.5 41.2342 23.839 15.24 10.64 19.54 8.31 -9.47 -11.64 -11.97 -12.75 -13.25 -15.57
1 Franklin FMCG Fund - Growth 2 Birla Sun Life Buy India Fund - Growth 3 ICICI Prudential FMCG - Growth Source: www.valueresearchonline.com
90
? INDEX S No Scheme Name NAV as on 10-92009 172.4173 27.0414 41.5183 42.6929 23.79 46.9068 44.8178 38.3151 22.32 37.1323 35.2775 28.0988 39.4545 26.7885 30.7221 127.1025 28.2869 25.0619 15.9854 14.9134 172.4173 27.0414 Return (%) -17.97 -18.48 -19.01 -19.02 -19.07 -19.11 -19.13 -19.17 -19.18 -19.22 -19.3 -19.3 -19.39 -19.41 -19.67 -20.25 -20.34 -24.72 -26.58 -28.79 -28.94 -29.05
1 HDFC Index Fund - Sensex Plus Plan 2 LIC MF Index Fund - Sensex Advantage Plan - Growth 3 ICICI Prudential Index Fund 4 Franklin India Index Fund - BSE Sensex Plan - Growth 5 Canara Robeco Nifty Index - Growth 6 UTI Master Index Fund - Growth 7 Birla Sun Life Index Fund - Growth 8 SBI Magnum Index Fund - Growth 9 ING Nifty Plus Fund - Growth 10 Tata Index Fund - Sensex Plan - Option A 11 Franklin India Index Fund - NSE Nifty Plan - Growth 12 UTI Nifty Fund - Growth 13 HDFC Index Fund - Nifty Plan 14 Tata Index Fund - Nifty Plan - Option A 15 PRINCIPAL Index Fund - Growth 16 HDFC Index Fund - Sensex Plan 17 LIC MF Index Fund - Sensex Plan Growth 18 LIC MF Index Fund - Nifty Plan - Growth 19 Benchmark S&P CNX 500 Fund Growth 20 JM Nifty Plus Fund - Growth 21 HDFC Index Fund - Sensex Plus Plan 22 LIC MF Index Fund - Sensex Advantage Plan - Growth Source: www.valueresearchonline.com
91
3. Equity- Tax Savings (ELSS) NAV as Scheme Name on 10-92009 1 Sahara Taxgain - Growth 27.459 2 Sundaram BNP Paribas Taxsaver - (Open 36.065 Ended Fund) - Growth 3 HDFC Taxsaver - Growth 157.506 4 HSBC Tax Saver Equity Fund - Growth 11.1412 5 Taurus Taxshield - Growth 27.16 6 Franklin India Taxshield - Growth 147.6045 7 Birla Sun Life Tax Relief 96 - Growth 8.82 8 ICICI Prudential Taxplan - Growth 94.16 9 HDFC Long Term Advantage Fund 96.653 Growth 10 Tata Tax Saving Fund 42.2639 11 SBI Magnum Tax Gain Scheme 93 47.79 Growth 12 DSP BlackRock Tax Saver Fund 12.374 Growth 13 LIC Tax Plan - Growth 24.8285 14 Franklin India Index Tax Fund 34.589 15 Birla Sun Life Tax Plan - Growth 10.8 16 Baroda Pioneer ELSS 96 20.99 17 UTI Equity Tax Savings Plan - Growth 30.98 18 Principal Personal Taxsaver 75.17 19 DWS Tax Saving Fund - Growth 10.9169 20 ING Tax Saving Fund - Growth 21.03 21 PRINCIPAL Tax Savings Fund 61.03 22 Escorts Tax Plan - Growth 39.146 23 Sahara Taxgain - Growth 27.459 24 Sundaram BNP Paribas Taxsaver - (Open 36.065 Ended Fund) - Growth 25 HDFC Taxsaver - Growth 157.506 26 HSBC Tax Saver Equity Fund - Growth 11.1412 27 Taurus Taxshield - Growth 27.16 28 Franklin India Taxshield - Growth 147.6045 29 Birla Sun Life Tax Relief 96 - Growth 8.82 30 ICICI Prudential Taxplan - Growth 94.16 Source: www.valueresearchonline.com S No Return (%) -7.19 -7.57 -13.73 -14.37 -15.35 -15.41 -15.54 -16.13 -17.19 -17.21 -17.28 -17.62 -17.74 -17.85 -17.95 -18.11 -18.2 -18.6 -18.61 -19.06 -19.09 -19.13 -19.21 -19.25 -19.39 -19.57 -19.75 -19.89 -20.28 -20.51
92
4. Gilt Funds: ? Medium & Long Term S No Scheme Name NAV as on 10-92009 18.1734 31.4846 28.911 31.2134 24.7297 20.2478 22.55 24.9591 32.3641 14.2151 Return (%) 6.99 1.42 1.01 0.96 0.9 0.88 0.87 0.82 0.8 0
1 ICICI Prudential GFIP - PF Option Growth 2 ICICI Prudential GFIP - Growth 3 JM G Sec Regular Plan - Growth 4 DSP BlackRock Government Securities Fund - Growth 5 Birla Sun Life G Sec Fund - LT - Growth 6 Escorts Gilt Plan - Growth 7 Templeton India GSF - LTP - Growth 8 Canara Robeco Gilt PGS - Growth 9 Templeton India GSF - Composite Plan Growth 10 Templeton India GSF - PF Plan - Growth Source: www.valueresearchonline.com ? Gilt Funds: Short Term S No Scheme Name
1 ICICI Prudential GFTP - Growth 2 ICICI Prudential GFTP - PF Option Growth 3 Tata G S S M F - Growth 4 SBI Magnum Gilt STP - Growth 5 UTI G-Sec Fund - STP - Growth 6 HDFC Gilt Fund - S T P - Growth 7 Templeton India GSF - Treasury Plan Growth 8 Kotak Gilt - Savings Plan - Growth 9 Birla Sun Life G Sec Fund - STD Growth 10 DSP BlackRock Treasury Bill Fund Growth Source: www.valueresearchonline.com
NAV as on 10-92009 23.8234 15.0534 14.6467 18.1405 13.4903 15.4847 16.0203 20.8531 17.7824 19.1569
Return (%) 1.25 1.25 1.19 1.14 1.14 1.13 1.04 1.01 1.01 1
93
5. Debt - Liquid/Money Market Funds
Sr Scheme Name No 1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - Growth 3 LIC MF Liquid Fund - Growth 4 IDFC Liquid Fund - Plan D - Growth 5 Reliance Liquid Fund - TP - Retail Growth 6 Reliance Liquidity Fund - Growth 7 UTI Money Market - Ret - Growth 8 HDFC Cash Mgmt Fund - Savings Plan - Growth 9 PRINCIPAL Floating Rate Fund SMP - Growth 10 HDFC Liquid Fund - Growth 11 DWS Insta Cash Plus Fund - Growth 12 IDFC Liquidity Manager Fund Growth 13 JM High Liquidity - Growth 14 UTI Liquid Fund - Cash Plan Growth 15 Templeton India TMA - Growth Source: www.valueresearchonline.com
NAV as on 10-9- Return 2009 (%) 1630.9557 1.85 1618.8213 1.78 16.3907 10.1063 21.5132 13.4975 25.0948 18.7277 13.9821 17.7791 15.0434 12.3183 24.4847 1456.8031 2215.8161 1.77 1.75 1.74 1.73 1.72 1.7 1.69 1.68 1.68 1.68 1.67 1.66 1.6
94
6. Debt – Medium Term S No 1 2 3 4 5 6 Scheme Name NAV as Return on 10-9(%) 2009 17.08 1.98 13.19 1.79 15.03 1.74 14.34 1.73 12.79 1.72 11.02 1.69 12.73 12.99 14.35 11.14 24.71 16.88 14.82 20.35 13.32 13.27 13.31 12.74 12.88 27.73 1.67 1.61 1.47 1.34 1.24 1.08 1.08 1.07 1.03 0.99 0.96 0.88 0.69 0.58
ICICI Prudential Long-term Tata Dynamic Bond A ICICI Prudential Flexible Income Sahara Income Birla Sun Life Dynamic Bond Retail ING OptiMix Active Debt Multi Manager FoF 7 Kotak Flexi Debt Regular 8 ICICI Prudential Advisor-Very Cautious 9 Canara Robeco Income 10 Reliance Regular Savings Debt 11 Escorts Income 12 Reliance Medium Term 13 Taurus Libra Bond 14 ING Income 15 Baroda Pioneer Income 16 Tata Income Plus 17 Tata Income Plus HI 18 ABN AMRO Flexi Debt Reg 19 IDFC SSI Medium-term 20 Templeton India Income Source: www.valueresearchonline.com
95
7. Liquid Funds S No NAV as Return on 10-9(%) 2009 1630.9557 1.98 1618.8213 1.79 16.3907 10.1063 21.5132 13.4975 25.0948 18.7277 13.9821 17.7791 15.0434 12.3183 24.4847 1456.8031 2215.8161 21.902 1261.5357 13.3942 16.3215 1149.1781 1.74 1.73 1.72 1.69 1.67 1.61 1.47 1.34 1.24 1.08 1.08 1.07 1.03 0.99 0.96 0.88 0.69 0.58
Scheme Name
1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - Growth 3 LIC MF Liquid Fund - Growth 4 IDFC Liquid Fund - Plan D - Growth 5 Reliance Liquid Fund - TP - Retail Growth 6 Reliance Liquidity Fund - Growth 7 UTI Money Market - Ret - Growth 8 HDFC Cash Mgmt Fund - Savings Plan - Growth 9 PRINCIPAL Floating Rate Fund SMP - Growth 10 HDFC Liquid Fund - Growth 11 DWS Insta Cash Plus Fund - Growth 12 IDFC Liquidity Manager Fund Growth 13 JM High Liquidity - Growth 14 UTI Liquid Fund - Cash Plan Growth 15 Templeton India TMA - Growth 16 Birla Sun Life Cash Manager Growth 17 IDFC Liquid Fund - Growth 18 Escorts Liquid Plan - Growth 19 Canara Robeco Liquid - Growth 20 AIG India Liquid Fund - Ret Growth Source: www.valueresearchonline.com
96
THE INVESTOR?S RIGHTS & OBLIGATIONS
Some of the Rights and Obligations of investors are :? Investors are mutual, beneficial and proportional owners of the scheme?s assets. The investments are held by the trust in fiduciary capacity (The fiduciary duty is a legal relationship of confidence or trust between two or more parties). ? In case of dividend declaration, investors have a right to receive the dividend within 30 days of declaration. ? On redemption request by investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations. ? In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds. ? Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end.
97
? Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of scheme?s assets pass a resolution to that respect. ? Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue. ? Lastly, investors can approach the investor relations officer for grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. Theinvestor can also sue the trustees. The offer document is a legal document and it is the investor?s obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund manager?s experience, historical performance of other schemes of the fund and a lot of other vital information.
It is not mandatory for the fund house to distribute the OD with each application form but if the investor asks for it, the fund house has to give it to the investor. However, an abridged version of the OD, known as the Key Information Memorandum (KIM) has to be provided with the application form.
98
CONCLUSION
With the reference of my this work I can say that mutual fund is the one of the best investment option for investing in money market there are different types of mutual fund like open ended and close ended with different scheme like Growth fund, Income fund, Diversified fund, etc there are about thousand of mutual fund scheme available in the market . but it is very essential to evaluate a mutual fund scheme with other possible investment option before investing in a mutual fund . In the project I try to put light on different fund management style & structure of the scheme . As a fund manager a person has to decide and forecast the demand of fund in the market and design a best investment scheme for which different strategies and approaches regarding fund to be adopted . normally fund managers are panel of experts it can be beneficial investing in mutual fund I put my all possible efforts to complete the project still my knowledge is like drop in ocean .
I will conclude project with following note :
“MUTUAL FUNDS ARE SUBJECT TO MARKET RISKS PLEASE READ THE OFFER DOCUMENT CAREFULLY BEFORE INVESTING.”
99
References
Websites:
? www.valueresearchonline.com ? www.mutualfundsindia.com ? www.moneycontrol.com ? www.nseindia.com ? www.economics.indiatimes.com ? www.wikepdia.org ? www.google.co.in
Books:
? Management & Working Of Mutual Fund- L.K.Bansal ? Investment Analysis and Portfolio Management – Prasanna Chandra
Company Journals & Business Journals,
? Fund Factsheet- ICICI Prudential ? Fund Factsheet- Canara Robeco Infrastructure-G Fund ? Fund Factsheet- Birla Mutual Fund ? Fund Factsheet- Reliance Mutual fund
100
doc_932400981.docx
mutual funds
INDEX SR No Particulars Page No
04 05 06 07 08 10 10 11 11 13 13 15 16 16 19 23 25 25 27 27 29 36 SECTION I INTRODUCTION TO MUTUAL FUND 1. Introduction ? Concept of a Mutual Fund ? Definition ? Earning of Investors From A Mutual Fund 2. Industry Profile. 3. History Of Mutual Funds ? First Phase – 1964-87. ? Second Phase – 1987-1993 ? Third Phase – 1993-2003 ? Fourth Phase – since February 2003 ? 2003-2004: A retrospect 4. Growth Of Mutual Fund Business In India 5. Pros & Cons Of Investing In Mutual Funds ? Advantages Of Investing In A Mutual Fund ? Drawbacks Of Mutual Funds 6. Net Annual Value 7. Concept Of SIP, STP, SWP 1) Systematic Investment Plan (SIP) 2) Systematic Transfer Plan (STP) ? 3) Systematic Withdrawal Plan (SWP) ? 8. A 10-Step Guide To Evaluating Mutual Funds ? Evaluation Of Canara Robeco Infrastructure-G Fund SECTION II COMPARATIVE STUDY 1. Types Of Mutual Fund Schemes ? By Structure a) Open-ended schemes b) Close-ended schemes ? By Investment Objective a) Growth / Equity Oriented Schemes b) Income / Debt Oriented Scheme c) Balanced Fund
43 43 43 45 47 47 50 53
1
d) Money Market or Liquid Fund ? Other types of funds a) Pooled Funds b) Insurance Segregated Funds c) Specific Sectoral & Thematic funds /schemes ? UTI Thematic Fund 2. Mutual Funds: The Risk And Returns 3. Fund Management Style & Structuring Of Portfolio a) Factors affecting Management style of a scheme b) Equity Portfolio Management Fund Management Style ? Equity Classes ? Use of Derivatives in Equity Portfolio Risk Management ? Successful Equity Portfolio Management ? Portfolio of ICICI Prudential Balanced – Growth c) Debt Portfolio Management ? Instruments in Indian Debt Market ? Debt Investment Strategies ? Use of Derivatives for Debt Portfolio Management 4. What Are Exchange Traded Funds? ? How does an ETF work? ? Benefits and Limitations of ETF ? Categories of ETF?s ? Comparison of ETF with Mutual Fund 5. Top Performers 6. Performance Of Funds Under Different Schemes 7. The Investor?s Rights & Obligations CONCLUSION REFERENCE
53 54 54 55 56 57 58 60 60 63: 65 70 72 73 75 75 77 80 81 83 83 85 86 87 88 97 99 100
2
INTRODUCTION TO MUTUAL FUND
3
INTRODUCTION
The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 6,00,000 crores (As of June , 2008) of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments. Specialization is the order of the day, be it with regard to a scheme?s investment objective or its targeted investment universe. Given the plethora of options on hand and the hard-sell adopted by mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, it?s not just about going with the fund that gives you the highest returns. It?s also about managing risk–finding funds that suit your risk appetite and investment needs.
So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tacks – what exactly is a mutual fund? Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors, and collectively invests this amount in either the equity market or the debt market, or both, depending upon the fund?s objective. This means you can access either the equity or the debt market, or both, without investing directly in equity or debt
4
Concept of a Mutual Fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:-
Savings form an important part of the economy of any nation. With savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents multiple avenues to the investors. Though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. I
5
nvestment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child?s education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well. DEFINITION: “Mutual funds are collective savings and investment vehicles where savings of small (or sometimes big) inve.stors are pooled together to invest for their mutual benefit and returns distributed proportionately”. Pooling of money ensures that small investors get the benefit of advice and expertise that is normally available only to very large investors. “A mutual fund is an investment that pools your money with the money of an unlimited number of other investors. In return, you and the other investors each own shares of the fund. The fund's assets are invested according to an investment objective into the fund's portfolio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds”. “Mutual Funds are investment companies that make investments on behalf of individuals and institutions that share common financial goals. The suitability of a particular mutual fund for an individual investor depends on the type and nature of the fund's investments and amount of diversification. Funds are rated widely as to risk and return, and such ratings can be used to establish a match with investor goals and suitability”.
6
"Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's. Investors earn from a Mutual Fund in three ways: 1. Dividends and Interest. A fund may receive income in the form of dividends and interests on the securities it owns. Bonds pay interest, and some stocks pay dividends. The mutual fund company will pass this income on to its shareholders. You generally will be taxed yearly on this amount unless the fund holds tax free securities. 2. Capital Gains/Losses on Securities in a Fund. Prices of the securities in a fund may increase. When the fund then sells the security, the fund has a capital gain. At the end of the year, most mutual funds will distribute these capital gains minus any capital losses (reduced price) to the investors. These capital gains will be taxed each year they are received. 3. Net Asset Value (NAV) of the Mutual Fund. If the company does not sell but holds securities that have increased in value, the value of the shares of the mutual fund (NAV) increase and there is a profit. This also is a capital gain. However, you will not be taxed on this capital gain until the year you sell the fund. Though still at a nascent stage, Indian MF industry offers a plethora of schemes and serves broadly all type of investors. The range of products includes equity funds, debt, liquid, gilt and balanced funds. There are also funds meant exclusively for young and old, small and large investors. Moreover, the setup of a legal structure, which has enough teeth to safeguard investors? interest, ensures that the investors are not cheated out of their hard-earned money. All in all, benefits provided by them cut across the boundaries of investor category and thus create for them, a universal appeal.
7
INDUSTRY PROFILE
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous – in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. The Indian mutual fund industry is one of the fastest growing sectors in the Indian capital and financial markets. The mutual fund industry in India has seen dramatic improvements in quantity as well as quality of product and service offerings in recent years. Mutual funds assets under management grew by 96% between the end of 1997 and June 2003 and as a result it rose from 8% of GDP to 15%. The industry has grown in size and manages total assets of more than $30351 million. Of the various sectors, the private sector accounts for nearly 91% of the resources mobilised showing their overwhelming dominance in the market. Individuals constitute 98.04% of the total number of investors and contribute US $12062 million, which is 55.16% of the net assets under management.
8
Steady growth of mutual fund business in India in the four decades from 1964, when UTI was set up is given in the table below: Period (Year) Aggregate Investment In Crores of Rupees 65 172 402 1261 4563.68 6738.81 13455.65 19110.92 23060.45 37480.20 Period (Year) Aggregate Investment In Crores of Rupees 46988.02 61301.21 75050.21 81026.52 80539.00 68984.00 63472.00 107966.10 90587.00 94571.00
1964-69 1969-74 1974-79 1979-84 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Mutual Fund Industry in its true spirit rooted in a free market and oriented towards competitive functioning with the dedicated goal of service to the investors can be said to have settled in India only in 1993. However the industry took its roots much earlier with the setting up of the Unit Trust in India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs.72,333.43 Crores as on March 31, 2000. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.
9
HISTORY OF MUTUAL FUNDS
The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase – 1964-87:
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of
10
India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase – 1987-1993 (Entry of Public Sector Funds): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores. Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
11
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase – since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
12
The Graph Indicates The Growth Of Assets Over The Years.
2003-2004: A retrospect:
This year was extremely eventful for mutual funds. The aggressive competition in the business took its toll and two more mutual funds bit the dust. Alliance decided to remain in the ring after a highly public bidding war did not yield an acceptable price, while Zurich has been sold to HDFC Mutual. The growth of the industry continued to be corporate focused barring a few initiatives by mutual funds to expand the retail base. Large money brought with it the problems of low retention and consequently low profitability, which is one of the problems plaguing the business. But at the same time, the industry did see spectacular growth in assets, particularly
13
among the private sector players, on the back of the continuing debt bull run. Equity did not find favor with investors since the market was lack-luster and performances of funds, barring a few, were quite disappointing for investors. The other aspect of this issue is that institutional investors do not usually favor equity. It is largely a retail segment product and without retail depth, most mutual funds have been unable to tap this market. The tables given below are a snapshot of the AUM story, for the industry as a whole and for debt and equity separately.
14
GROWTH OF MUTUAL FUND BUSINESS IN INDIA The Indian Mutual fund business has passed through three phases. The first phase was between 1964 and 1987, when the only player was the Unit Trust of India, which had a total asset of Rs. 6,700/- crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to Rs. 61,028/- crores at the end of 1994 and the number of schemes were 167. The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund. The share of the private players has risen rapidly since then. Within a short period of seven years after 1993 the growth statistics of the business of Mutual Funds in India is given in the table below: Amount (Rs Crores) UTI Public Sector Private Sector Total 72,333.43 10,444.78 25,167.89 1,07,946.10 Percentage (%) 67.00 9.68 23.32 100.00
15
PROS & CONS OF INVESTING IN MUTUAL FUNDS For investments in mutual fund, one must keep in mind about the Pros and cons of investments in mutual fund. The Advantages of Investing in a Mutual Fund: ? Professional Management : The investor avails of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. ? Diversification: Mutual Funds invest in a number of companies across a broad crosssection of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. ? Convenient Administration : Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. ? Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. ? Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in
16
brokerage, custodial and other fees translate into lower costs for investors. ? Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically. ? Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. ? Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. ? Choice of Schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. ? Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
17
? Affordability A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. ? Tax Benefits Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give you the advantages of capital gains taxation. If you hold units beyond one year, you get the benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability. What?s more, tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. You can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year
18
Drawbacks Of Mutual Funds ? Fluctuating Returns: Mutual funds are like many other investments without a guaranteed return: there is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund. When deciding on a particular fund to buy, you need to research the risks involved - just because a professional manager is looking after the fund, that doesn't mean the performance will be stellar.
Another important thing to know is that mutual funds are not guaranteed by the U.S. government, so in the case of dissolution, you won't get anything back. This is especially important for investors in money market funds. Unlike a bank deposit, a mutual fund will be insured by the Federal Deposit Insurance Corporation (FDIC). ? Diversification: Although diversification is one of the keys to successful investing, many mutual fund investors tend to over diversify. The idea of diversification is to reduce the risks associated with holding a single security; over diversification (also known as diworsification) occurs when investors acquire many funds that are highly related and, as a result, don't get the risk reducing benefits of diversification. At the other extreme, just
because you own mutual funds doesn't mean you are automatically diversified. For example, a fund that invests only in a particular industry or region is still relatively risky.
19
? Cash, Cash and More Cash:
As you know already, mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolios as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous. ? Costs: Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees.
The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. As you can imagine, in years when the fund doesn't make money, these fees only magnify losses. ? Misleading Advertisements: The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small cap or income funds. The Securities and Exchange Commission (SEC) requires that funds have at
20
least 80% of assets in the particular type of investment implied in their names. How the remaining assets are invested is up to the fund manager. ? Evaluating Funds: Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do you know if one fund is better than another? Furthermore, advertisements, rankings and ratings issued by fund companies only describe past performance. Always note that mutual fund descriptions/advertisements always include the tagline "past results are not indicative of future returns". Be sure not to pick funds only because they have performed well in the past - yesterday's big winners may be today's big losers. ? Dilution: It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money. ? Taxes : When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a
21
security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability. ? Restrictive gains : Diversification helps, if risk minimization is your objective. However, the lack of investment focus also means you gain less than if you had invested directly in a single security. Assume, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But your investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. ? Management risk : When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.
22
NET ANNUAL VALUE
Entry Load is applied as a percent of the Net Asset Value (NAV). Net Assets of a scheme is that figure which is arrived at after deducting all scheme liabilities from its asset. NAV is calculated by dividing the value of Net Assets by the outstanding number of Units.
Net Annual Value Assets Shares Debentures Money Market Instruments Accrued Income Other Current Assets Deferred Revenue Expenditure Rs. Crs. Liabilities 345 Unit Capital 23 Reserves & Surplus 12 2.3 Accrued Expenditure 1.2 Other Current Liabilities 4.2 387.7 Units Issued (Cr.) Face Value (Rs.) Net Assets (Rs.) NAV (Rs.) 30 10 385.7 12.86 All Figures in Rs. Cr The above table shows a typical scheme balance sheet. Investments are entered under the assets column. Adding all assets gives the total of Rs. 387.7 cr. From this if we deduct the liabilities of Rs. 2 cr. i.e. Accrued
23
Rs. Crs. 300 85.7
1.5 0.5
387.7
Expenditure and Other Current Liabilities, we get Rs. 385.7 cr as Net Assets of the scheme. The scheme has issued 30 crs. units @ Rs. 10 each during the NFO. This translates in Rs. 300 crs. being garnered by the scheme then. This is represented by Unit Capital in the Balance Sheet. Thus, as of now, the net assets worth Rs. 385.7 cr are to be divided amongst 30 crs. units. This means the scheme has a Net Asset Value or NAV of Rs. 12.86. The important point that the investor must focus here is that the Rs. 300 crs. garnered by the scheme has increased to Rs. 387 crs., which translates into a 29.23% gain, whereas, the return for the investor is 28.57% (12.86-10/ 10 = 28.57%).
24
CONCEPT OF SIP , STP, SWP.
CONCEPT OF SYSTEMATIC INVESTMENT PLAN An SIP is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. The minimum amount to be invested can be as small as Rs 500 and the frequency of investment is usually monthly or quarterly. How does an SIP works? An SIP allows you to take part in the stock market without trying to second guess its movements. AN SIP means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000. When the NAV is high, you will get fewer units. When it drops, you will get more units. Date NAV Approx number of units you will get at Rs 1,000 Jan 1 Feb 1 10 10.5 100 95.23 90.90 105.26 111.11 86.95
Mar 1 11 Apr 1 9.5
May 1 9 Jun 1 11.5
Within six months, you would have 5,894 units by investing just Rs 1,000 every month. Over the long run, you make money. Let's say you invested in Prudential ICICI Technology Fund during the dotcom and tech boom. Say
25
you began with Rs 1,000 and kept investing Rs 1,000 every month. This would be the result: Investment period Monthly investment Total amount invested Value of investment of Mar 7, 2005 Return on investment 23.87% Mar 2003-Mar 2008 Rs 1,000 Rs 61,000 Rs 1,09,315
Had you bought the units on March 13, 2003 at Rs 10.88 per unit (that was the NAV then), you would have lost because the NAV was just 7.04 on March 7, 2008. But because you spaced out your investment, you won. How does an SIP scores? It makes you disciplined in your savings. Every month you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques. As you see above, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses. Also, a number of mutual funds do not charge an entry load if you opt for an SIP. This fee is a percentage of the amount you are investing. And if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units).
26
If, however, you do sell your units within a year, you would be charged an exit load. So it pays to stay invested for the long-run. The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money. Remember, it's your money so don't blindly play around with it. CONCEPT OF SYSTEMATIC TRANSFER PLAN (STP) ? In SIP investor?s money moves out of his savings account into the scheme of his choice. Let?s say an investor has decided to invest Rs 5,000 every month, such that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the month. This means that the Rs. 5000, which will get invested in stages till 25th will remain in the savings account of the investor for 25 days and earn interest @ 3.5%. If the investor moves this amount of Rs. 5000 at the beginning of the month to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of his choice, then not only will he get the benefit of SIP, but he will earn slightly higher interest as well in the Liquid Funds as compared to a bank FD As the. money is being invested in a Liquid Fund, the risk level associated is also minimal. Add to this the fact that liquid funds do not have any entry/ exit loads. This is known as STP. CONCEPT OF SYSTEMATIC WITHDRAWAL PLAN (SWP) ? SWP stands for Systematic Withdrawal Plan. Here the investor invests a lumpsum amount and withdraws some money regularly over a period of time. This results in a steady income for the investor while at the same time his principal also gets drawn down gradually. Say for example an investor aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this money over a 20 year period, he can withdraw Rs. 20,00,000/ 20 = Rs.
27
1,00,000 per annum. This translates into Rs. 8,333 per month. (The investor will also get return on his investment of Rs. 20 lakh, depending on where the money has been invested by the mutual fund). In this example we have not considered the effect of compounding. If that is considered, then he will be able to either draw some more money every month, or he can get the same amount of Rs. 8,333 per month for alonger period of time. The conceptual difference between SWP and MIP is that SWP is an investment style whereas MIP is a type of scheme. In SWP the investor?s capital goes down whereas in MIP, the capital is not touched and only the interest is paid to the investor as dividend.
28
A 10-STEP GUIDE TO EVALUATING MUTUAL FUNDS
Mutual funds are a convenient way to invest in the stock markets (as also debt and money markets). Indian investors are already beginning to realise this. That's the good news; the bad news is that a lot of investors seem to think that any mutual fund will do the 'trick'. The trick over here is to clock higher returns any which way. While generating an above-average return is every fund manager's mantra, it is not achieved that easily and when it is achieved it is not necessarily done in the right manner.
Which brings us to the question - what must investors do to ensure that they are invested in the right fund? With so many funds in the industry and many more being launched every month, this is not an easy task. Multiplicity (as also duplicity) of mutual funds apart, there are many elements within a fund that an investor needs to consider carefully before short-listing his investment options. To facilitate the decision-making process, we present a 10-step guide to investing in mutual funds.
1. Fund sponsor's integrity In this age of financial irregularities and misconduct, it is a tough call to come across fund houses that haven't been embroiled in some controversy or the other. While major financial scams involving mutual funds are yet to make their presence felt in a India, it is quite common in developed markets like the US. That is why it is important to go for a mutual fund sponsor with an impeccable track record in terms of compliance and investor welfare. Equally important is requisite experience with a well-established track record in fund/asset management.
29
2. A competent fund management team The team managing the fund should have considerable experience in dealing with market ups and downs. It should be competent enough to take the right investment decisions based on experience under varying market conditions. More importantly, these investment decisions must be in adherence to the investment mandate (so mid cap funds must be invested in mid caps and large cap funds must be invested in large caps and funds that must be fully invested in equities at all times must not go into cash).
At the end of the day, it is the fund management team's responsibility to deliver performance over the long-term across market cycles vis-a-vis peers and the benchmark index.
3. Well-defined investment philosophy For many fund houses, the investment philosophy revolves around whatever goes with the Chief Investment Officer (CIO). In other words, the CIO defines the investment philosophy of the fund house. Actually it should be the other way round, the fund house must have a well-defined investment process that the CIO must abide by at all times. Sure he can introduce an element of individualism based on his experience, but this cannot override the fund house's philosophy. This will ensure that the investor's interests are aligned to the fund house and not a maverick fund manager/CIO.
Another important aspect of the fund house philosophy is related to asset mobilisation. How is the fund house accumulating new assets (either from existing investors or fresh investors)? Is it doing this by launching senseless NFOs (new fund offers) or is it concentrating on improving performance of
30
its existing funds and drawing investors over there? If it's the former (i.e. the NFO route), then the AMC has got it wrong in our view; getting investors to invest in existing funds by establishing performance over the long-term (at 3 years for equity funds) is the right way to accumulate assets. As and when existing funds have established their performance over 3-5 years, the next NFO can be launched.
4. Get the fund nature right A mutual fund can be classified in two categories i.e. open-ended funds or close-ended depending on whether new investors will or will not be allowed to invest.
a) Open-ended Fund An open-ended fund never closes its doors to investors (unless the fund house decides to do so under exceptional circumstances like for instance, when the fund's net asset base grows too large to be managed effectively). On the same lines, existing investors can exit from an open-ended fund whenever they please (the only exception to this is the tax-saving fund or the equity-linked saving scheme - ELSS as it is known). It is evident that liquidity is the key advantage of investing in open-ended funds.
b) Close-ended Fund A close-ended fund on the other hand opens the door to investors only during the NFO period. After that, it is closed for further investment over a pre-determined tenure (usually 3 or 5 years). Upon maturity of the tenure, the fund may or may not convert into an open-ended fund.
31
5. Get the fund category right Funds can be classified into different categories based on where they invest your money.
a) Equity funds These funds invest in the stock markets and are suitable for investors with a high risk appetite. Over the short-term, investors could lose considerable money depending on the performance of stock markets. Over the long-term (at least 10 years) equities are known to generate above-average returns (particularly in the Indian context) vis-a-vis other assets like bonds, gold and real estate.
b) Debt funds These funds invest in debt markets (corporate bonds, government securities, money market instruments). More than capital appreciation, debt/debt funds are a good way to safeguard your assets over the long-term and to diversify across asset classes.
c) Balanced funds Balanced funds (or hybrid funds) invest in equity and debt markets. However, to retain their equity-oriented nature (from a tax perspective) balanced funds are required to invest a minimum of 65% of net assets in equities. In our view, with nearly 2/3rd of assets in equities, balanced funds are virtually equity funds in disguise. There was a time when balanced funds needed to maintain just 51% of assets in equities, then was the time they were really 'balanced'.
32
Another mutual fund offering in this category is the monthly income plan (MIP). MIPs invest mainly in debt markets (usually 75%-80% of assets); the balance is invested in equity markets. For investors primarily concerned about capital preservation (although over the short-term MIPs can erode capital) with the secondary objective to clock capital appreciation, MIPs are worth a look.
6. Fees and charges (recurring) Asset management companies (AMCs) charge investors a fee for providing fund management expertise. fund management costs money; there are salaries to be paid to fund managers and their team of investment analysts, then there are fees to be paid to the custodian and the registrar among other service providers. These expenses (as indicated by the Expense Ratio) are incurred by the fund on a recurring basis (annually). Such expenses are not to be considered lightly, higher expenses erode returns and over the longterm can make a lot of difference to the fund's performance.
7. The load (one-time) In addition to the recurring expenses, most funds also levy a one-time upfront charge at the time of investment. This is known as the entry load. To understand how this works take an investor who invests in a mutual fund with an NAV (net asset value) of Rs.10.00. If the entry load is 2% the investor will have to pay Rs.10.20 to buy a single unit. The additional payment of Rs 0.20 (per unit) goes towards meeting the mutual fund agent's commission. Some funds also have a practice of imposing an exit load. For instance, if the investor sells his unit at an NAV of Rs 20.00 and incurs a 2% exit load, he will receive Rs 19.60.
33
8. The tax implications The mutual fund tax structure is certainly not meant for lay investors. Even accomplished tax experts antagonise over it and wish that the finance minister simplifies it, rather than complicating it in every budget. Put simply, there are several dichotomies in the mutual fund tax structure.
i) Investing in equity and debt funds have different tax implications. ii) Within debt funds, liquid funds and other debt funds have different tax implications. iii) Within debt funds, investments by individuals/Hindu Undivided Families (HUFs) and corporates have varying tax implications. iv) Within debt funds, investments made from a long-term and a short-term perspective have varying tax implications. As you would have figured by now, investing in mutual funds can be a 'taxing' proposition.
9. Evaluate the fund's portfolio Service levels of fund houses vary. Some fund houses regularly update investors on details like stock allocation, sectoral allocation, asset allocation, Portfolio Turnover Ratio and Expense Ratio among other details. Most fund houses provide a lot of these details at monthly/quarterly frequency through mutual fund factsheets. However, this information is not quite as standardised as it should be, so the investor has to be careful while making a comparison. Making a comparison would typically include evaluating a fund's portfolio in terms of diversification across top 10 stocks and leading sectors (in case of equity funds) to ensure that the fund is not taking on more risk than necessary. It is evident that this is no mean task and requires considerable effort and patience on the investor's part.
34
10. Evaluate the fund's performance Every fund is benchmarked against an index like the BSE Sensex, Nifty, BSE 200 or the CNX 500 to cite a few names. Investors should compare fund performance over varying time frames vis-a-vis both the benchmark index and peers. Carefully evaluate the fund's performance across market cycles particularly the downturns. A well-managed fund should not fall too hard (relative to the benchmark and peers) during a market downturn even if it does not feature at the top during a stock market rally.
35
Evaluation Of Canara Robeco Infrastructure-G Fund
? Current Stats & Profile
Latest NAV 52-Week High 52-Week Low Fund Category Type Launch Date Risk Grade Return Grade Net Assets (Cr) Benchmark ? Fund Performance
19.72 (15/09/09) 19.72 (15/09/09) 9.09 (27/10/08) Equity: Diversified Open End November 2005 Above Average High 168.79 (31/08/09) BSE 100
Annual Returns 2008 Fund Return Rank In Category Category Average S&P CNX Nifty Sensex -58.76 140/193 -55.15 -51.79 -52.45 2007 90.94 2006 34.16 2005 --46.58 36.34 42.33 2004 --26.38 10.68 13.08
36
9/162 78/145 59.45 54.77 47.15 34.73 39.83 46.70
Quarterly Returns Q1 2009 2008 2007 2006 2005 ? Fund Portfolio Portfolio Characteristics As on 31/08/09 Average Mkt Cap (Rs Cr) Market Capitalization Giant Large Mid Small Tiny Investment Valuation Portfolio P/B Ratio ? Fund Details Fund Details VR Category Type Entry Load Exit Load Portfolio P/E Ratio 24,716.31 % of Portfolio 38.83 26.05 28.42 5.06 1.09 Stock Portfolio 3.37 32.20 -0.45 -29.59 -8.20 25.26 -Q2 57.60 -20.48 25.64 -16.65 -Q3 --8.01 24.74 13.47 -Q4 --19.94 32.72 13.25 --
Equity: Diversified Open End Nil 1% for redemption within 365 days
37
Top Holding As on 31/08/09 Name of Holding Reliance Industries Bharti Airtel NTPC BHEL Idea Cellular GAIL Aditya Birla Nuvo Tata Power State Bank of India Mahindra Holidays & Resorts In BPCL Mundra Port & SEZ HPCL Gujarat State Petronet Tulip Telecom Indian Oil Corp. ONGC Gujarat Gas Co. IRB Infrastructure Dev Punjab National Bank Instrument Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity % Net Assets 8.26 6.71 4.94 4.5 4.33 4.23 4.09 3.74 3.69 3.6 3.48 3.25 2.99 2.85 2.66 2.35 1.93 1.91 1.77 1.7
? Canara Robeco Infrastructure fund analysis Canara Robeco Infrastructure fund may be small, but it packs quite a punch... Don't overlook this fund simply because of its tiny size - Rs 115.47 crore (May 31, 2009). With a 3-year annualised return of 15.36 per cent (as on May 31, 2009), the fund is the third-best performer in its category of 13 and has outshone the category average by 4.33 per cent.
38
Granted, the fund's start was lousy with a return of 34.16 per cent in 2006 (category average: 54.20%). Blame it on the huge exposure to debt and cash. But in 2007, the fund compensated its investors well with a return of 90.94 per cent (category average: 82.83%). It successfully rode on the rally in Construction, Engineering, Energy and Diversified sector stocks. It allocated around 70.50 per cent of its portfolio to these sectors while the category allocated an average of around 54 per cent. But as markets tanked in 2008, the fund lowered its exposure to the Construction sector from 18.18 per cent (December 2007) to around 7.26 per cent (May 2008) and to the Engineering sector from 15.53 per cent (December 2007) to 9.32 per cent (July 2008). This did not cushion the fall dramatically and the fund fell by almost 59 per cent (category average 60%) that year. Despite the agility that a small fund offers, this one opts for a large-cap bent, refrains from frequent churning and tilts towards a buy-and-hold approach. Some of stocks that have been held almost since inception are Larsen & Toubro, Tata Power, BHEL, McNally Bharat Engineering and Reliance Industries. Fund manager Anand Shah who took over the fund in April 2008, has one philosophy - to buy stocks which have a secular growth story. “We focus on good companies, not on the market. We focus on long-term growth opportunities in India, not on the market direction,” is how he puts it. While this is touted by a lot of fund managers, in all fairness, Shah does put his money where his mouth is. In December 2008, when the average equity exposure of funds to this asset class was 72.72 per cent, this fund had it at 83 per cent and it rose to 88 per cent over the next two months. By March 2009,
39
the average was 70 per cent but it was at 90 per cent for Canara Robeco Infrastructure. By May 2009, the fund was fully invested at 96 per cent. Naturally, this put him in an enviable position to benefit from the latest market rally (March 9 - May 31, 2009). The fund returned 91.56 per cent, an outperformance of the infrastructure fund's category average by a margin of around 10 per cent. Stocks like L&T, BHEL, Jindal Steel & Power, Tata Power, Reliance Infrastructure and Gujarat State Petronet saw a decrease in holdings between April and May. The reason being profit-booking amidst sharp appreciation in prices. “Even if we are bullish on a sector or stock, if there is a significant appreciation in price which we do not feel is justified, we will book profits,” he says. Though the fund's mandate is very broad. the sectors excluded are FMCG, Pharma and Infotech. Even banking financial services are included, but “not those whose focus area is the retail business. Those that are strong players in the infrastructure sector and lend to infrastructure players are the ones we look at,” says Shah. Right now the fund is betting heavily on Energy with a 30 per cent allocation (category average: 17.77%) and Telecom at 16 per cent (category average: 3.68%). Exposure to Metals has stayed constant over the past five months as the fund manager is negative on the sector and does not see a revival there in the near future. This fund maintains a compact portfolio. Though the number of stocks has ranged from 29 to 49, by and large Shah stick to a number of around 35 stocks.
40
Asset Management Company Canara Robeco Asset Management Company Ltd Mr.R.Swaminathan Construction House, 4th Floor, 5, Walchand Hirachand Marg, Ballard Estate Mumbai 400001 Phone (022) 66585000 /18, 66585085-86 Fax (022) 56585011 - 5014 Email [email protected] ( www.valueresearchonline.com) Person Address
41
CAMPARATIVE STUDY
42
TYPES OF MUTUAL FUND SCHEMES A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
By Structure c) Open-ended schemes Open-ended or open mutual funds are much more common than closedended funds and meet the true definition of a mutual fund – a financial intermediary that allows a group of investors to pool their money together to meet an investment objective– to make money! An individual or team of professional money managers manage the pooled assets and choose investments, which create the fund?s portfolio. They are established by a fund sponsor, usually a mutual fund company, and valued by the fund
43
company or an outside agent. This means that the fund?s portfolio is valued at "fair market" value, which is the closing market value for listed public securities. An open-ended fund can be freely sold and repurchased by investors.
?
Buying and Selling:
Open funds sell and redeem shares at any time directly to shareholders. To make an investment, you purchase a number of shares through a representative, or if you have an account with the investment firm, you can buy online, or send a check. The price you pay per share will be based on the fund?s net asset value as determined by the mutual fund company. Open funds have no time duration, and can be purchased or redeemed at any time, but not on the stock market. An open fund issues and redeems shares on demand, whenever investors put money into the fund or take it out. Since this happens routinely every day, total assets of the fund grow and shrink as money flows in and out daily. The more investors buy a fund, the more shares there will be. There's no limit to the number of shares the fund can issue. Nor is the value of each individual share affected by the number outstanding, because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself. Some open-ended funds charge an entry load (i.e., a sales charge), usually a percentage of the net asset value, which is deducted from the amount invested.
?
Advantages:
Open funds are much more flexible and provide instant liquidity as funds sell shares daily. You will generally get a redemption (sell) request processed promptly, and receive your proceeds by check in 3-4 days. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. Open funds range in risk depending on their investment strategies and objectives, but still
44
provide flexibility and the benefit of diversified investments, allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the fluctuation price of only one stock. If a stock in the fund drops in value, it may not impact your total investment as another holding in the fund may be up. But, if you have all of your assets in that one stock, and it takes a dive, you?re likely to feel a more considerable loss.
?
Risks:
Risk depends on the quality and the kind of portfolio you invest in. One unique risk to open funds is that they may be subject to inflows at one time or sudden redemptions, which leads to a spurt or a fall in the portfolio value, thus affecting your returns. Also, some funds invest in certain sectors or industries in which the value of the in the portfolio can fluctuate due to various market forces, thus affecting the returns of the fund.
d) Close-ended schemes Close-ended or closed mutual funds are really financial securities that are traded on the stock market. Similar to a company, a closed-ended fund issues a fixed number of shares in an initial public offering, which trade on an exchange. Share prices are determined not by the total net asset value (NAV), but by investor demand. A sponsor, either a mutual fund company or investment dealer, will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. The fund retains an investment manager to manage the fund assets in the manner specified.
?
Buying and Selling:
Unlike standard mutual funds, you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. Shares are
45
purchased in the open market similar to stocks. Information regarding prices and net asset values are listed on stock exchanges, however, liquidity is very poor. The time to buy closed funds is immediately after they are issued. Often the share price drops below the net asset value, thus selling at a discount. A minimum investment of as much as Rs.5000 may apply, and unlike the more common open funds discussed below, there is typically a five-year commitment.
?
Advantages:
The prospect of buying closed funds at a discount makes them appealing to experienced investors. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value, the discount usually decreases and becomes a premium instead. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks, with the ability to buy at a discount.
?
Risks:
Investing in closed-end funds is more appropriate for seasoned investors. Depending on their investment objective and underlying portfolio, closed-ended funds can be fairly volatile, and their value can fluctuate drastically. Shares can trade at a hefty discount and deprive you from realizing the true value of your shares. Since there is no liquidity, investors must buy a fund with a strong portfolio, when units are trading at a good discount, and the stock market is in position to rise.
46
By Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
e) Growth / Equity Oriented Schemes The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Equity funds As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:
Index funds These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of
47
composition and the individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Investing through index funds is a passive investment strategy, as a fund?s performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, there?s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unitholders. So, if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualised return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualised return to 16.2 per cent. Obviously, the lower the tracking error, the better the index fund.
Diversified funds Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund manager?s picks languish, the returns will be far lower.
48
The crux of the matter is that your returns from a diversified fund depend a lot on the fund manager?s capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practised by your fund manager. Understand that a portfolio concentrated in a few sectors or companies is a high risk, high return proposition. If you don?t want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance.
Tax-saving funds Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you won?t get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, tax-saving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions.
Sector funds The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector fund?s NAV will zoom if the sector performs well; however, if the sector languishes, the scheme?s NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of
49
slowdowns. The way to make money from sector funds is to catch these cycles–get in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds.
f) Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Such funds attempt to generate a steady income while preserving investors? capital. Therefore, they invest exclusively in fixed-income instruments securities like bonds, debentures, Government of India securities, and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. There are basically three types of debt funds.
Income funds By definition, such funds can invest in the entire gamut of debt instruments. Most income funds park a major part of their corpus in corporate bonds and debentures, as the returns there are the higher than those available on government-backed paper. But there is also the risk of default–a company could fail to service its debt obligations.
50
Gilt funds They invest only in government securities and T-bills–instruments on which repayment of principal and periodic payment of interest is assured by the government. So, unlike income funds, they don?t face the spectre of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds.
Liquid funds They invest in money market instruments (duration of up to one year) such as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile. They are ideal for investors seeking low-risk investment avenues to park their short-term surpluses. The „risk? in debt funds Although debt funds invest in fixed-income instruments, it doesn?t follow that they are risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so don?t show the same degree of volatility in their performance as equity funds. Still, they face some inherent risk, namely credit risk, interest rate risk and liquidity risk.
?
Interest rate risk: This is common to all three types of debt funds, and is the prime reason why the NAVs of debt funds don?t show a steady, consistent rise. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevelant demand and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign themselves with the new market yield. This, in turn, brings
51
down the NAV of a debt fund. On the other hand, if interest rates fall, existing debt securities become more precious, and rise in value, in line with the new market yield. This pushes up the NAVs of debt funds.
?
Credit risk: This throws light on the quality of debt instruments a fund holds. In the case of debt instruments, safety of principal and timely payment of interest is paramount. There is no credit risk attached with government paper, but that is not the case with debt securities issued by companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more liquid than lower-rated paper. Credit risk is not an issue with gilt funds and liquid funds. Gilt funds invest only in government paper, which are safe. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. For income funds, however, credit risk is real, as they invest primarily in corporate paper.
?
Liquidity risk: This refers to the ease with which a security can be sold in the market. While there is brisk trading in government securities and money market instruments, corporate securities aren?t actively traded. More so, when you go down the rating scale–there is little demand for low-rated debt paper. As with credit risk, gilt funds and liquid risk don?t face any liquidity risk. That?s not the case with income funds, though. An income fund that has a big exposure to low-
52
rated debt instruments could find it difficult to raise money when faced with large redemptions.
g) Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. As the name suggests, balanced funds have an exposure to both equity and debt instruments. They invest in a pre-determined proportion in equity and debt–normally 60:40 in favour of equity. On the risk ladder, they fall somewhere between equity and debt funds, depending on the fund?s debt-equity spilt–the higher the equity holding, the higher the risk. Therefore, they are a good option for investors who would like greater returns than from pure debt, and are willing to take on a little more risk in the process.
h) Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
53
Other types of funds
d) Pooled Funds A "pooled fund" is a unit trust in which investors contribute funds that are then invested, or managed, by a third party. A pooled fund operates like a mutual fund, but is not required to have a prospectus under securities law. Pooled funds are offered by trust companies, investment management firms, insurance companies, and other organizations. Pooled funds and mutual funds are substantially the same, but differ in their legal form. Like a mutual fund, a pooled fund is a trust that is set up under a "trust indenture". This specifies how the pooled fund will operate and what the duties of the various parties to the trust indenture will be. The trust indenture specifies an investment policy for the pooled fund and how management fees will be charged. Pooled funds, like mutual funds, are "unit trusts". This means that investors deposit funds into the trust in exchange for "units" of the fund, which reflect a pro-rata share of the fund's investments. The fund trust indenture will specify how units are issued and redeemed, as well as, the frequency and procedures for valuations. Pooled funds can be either "closed" or "open". An "open" pooled fund is the most common type of pooled fund, and allows units to be redeemed at scheduled valuations. A "closed" pooled fund does not allow redemptions, except in specific circumstances or at termination of the trust. Closed pooled funds are usually established to hold illiquid investments such as real estate or very specialized investment programs, such as hedge funds. The major difference between pooled funds and mutual funds is their legal status under securities law. Pooled funds are not "public" investments, which means investment and trading in pooled funds is restricted. Securities legislation define the rules for a "public" security. Publicly issued securities must meet certain requirements
54
before issue, particularly in information disclosure through their prospectus, or reporting by issuers. Pooled funds are exempt from prospectus requirements under securities law, usually under the "private placement", or "sophisticated investor", clauses in the Securities Act. This means that investments in pooled funds must be over $150,000. Financial institutions such as banks, trust companies or investment counselling firms are allowed to invest their clients in their own pooled funds, by specific exemptions granted under the Securities Act. Each pooled fund investment must be reported to the relevant Securities Commission. Once a client is invested in a pool fund, the result is identical to being in a mutual fund with the same investment mandate. Fees for pooled funds can either be charged inside or outside the fund. Valuation of pooled funds can be less frequent, as there tends to be less activity with fewer and more sophisticated pooled fund investors. Pooled fund fees are usually lower than mutual funds, as these funds are created to deal with larger investors. Pooled funds are allowed to charge their expenses from operations against the fund assets, and the trust indenture provides for the sponsor, or trustee, to hire outside agents to perform certain tasks, such as custody and unit record-keeping.
e) Insurance Segregated Funds An insurance segregated fund is an insurance contract issued under insurance legislation by an insurance company. Its value is based on the performance of a portfolio of marketable securities, such as stocks and bonds. As an insurance contract, a segregated fund is an obligation of an insurance company and forms part of its assets. Insurance companies "segregate" the portfolios which these contracts are based on, dividing these assets from their general assets. The contracts have a minimum value, the price at which they were issued.
55
It is important to realize that a insurance segregated fund might look and act like a mutual fund, but that it is actually something quite different. A mutual fund is a trust, or sometimes a company, which owns title to the actual securities in the funds. The unitholders own the trust which in turn owns the assets. An insurance segregated fund is an insurance contract or a "variable rate annuity". Legally, the insurance company issues the contract the same way it would an annuity or life insurance policy under the relevant insurance legislation. The buyer or "policy holder" has contracted for a payment that is based on the underlying prices of the portfolio that supports the contract but does not have a direct claim or ownership on the securities that form the portfolio. Although insurance companies "segregate" the assets to support these contracts, the holder of the contract does not own these assets. Another wrinkle of segregated funds is their tax status. Since they are insurance contracts, they are taxed as such. Sometimes segregated funds are used as investment options for "universal" or "whole life" life insurance which provides a savings option as well as insurance. Life companies market the tax shelter aspects of these contracts, which allow compounding of investment income untaxed while inside the insurance contract. Another sales aspect of segregated funds is their characteristics under bankruptcy legislation in some jurisdictions. In Canada, for example, an insurance contract is not available to creditors in a bankruptcy. This means an RRSP that uses segregated funds would be protected from creditors in a bankruptcy while an RRSP which invested in mutual funds would be exposed. In summary, although insurance segregated funds look and function like mutual funds, they are actually insurance contracts based on the valuation of a portfolio of marketable securities. As always, investors are wise to consider all the aspects of insurance contracts in their legal jurisdiction prior to investment.
56
f) Specific Sectoral & Thematic funds /schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. Thematic funds are those fund which invest in a stocks which will benefit from a particular theme like Outsourcing, Infrastructure etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Restrain the urge to invest in sector/thematic funds no matter how compelling an argument your agent or the fund house makes. Over the long-term, there is little value that a restrictive and narrow theme can bring to the table. It is best to opt for a broad investment mandate that is best championed by welldiversified equity funds.
UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and Exchange Board of India for an omnibus fund that will have six options. The UTI Thematic Fund is the umbrella fund. It will have sub-funds that will focus on large-cap stocks, mid-cap stocks, auto, banking, PSU stocks and basic industries. UTI now has a UTI Growth Sectors Umbrella with five options that focus on investing in stocks in the services, petro, healthcare pharmaceuticals, information technology, and consumer products. The new fund also proposes to provide investors four automatic triggers that could be used for exit: value, appreciation, date and stop loss.
57
MUTUAL FUNDS: THE RISK AND RETURNS
All investments carry an element of risk and mutual funds are not immune to it. It is a general perception that greater the risk, greater will be the returns. And lower the risk, lower are the returns. The risks associated with mutual funds are in tune with investments they in turn hold.
Risk refers to the possibility of investors losing their money. A simple rule for beating short-term volatility is to invest over a longer horizon. How do you measure the risk associated with a fund? The fund's beta value compares a mutual fund's volatility with that of a benchmark and gives an estimate of how much the fund could fall in a bad market and how high it can soar in a bull run.
Two popular parameters that give a clearer insight are the standard deviation and Sharpe ratio. Standard deviation This is a measure of how much the actual performance of a fund over a period of time deviates from the average performance.
While beta compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent numbers stray from its longterm average. A low standard deviation translates into lower risk. Sharpe ratio This measures whether the returns that a fund delivered were in sync with the kind of volatility it exhibited. It quantifies the performance of the fund relative to the risks it takes. The larger the ratio, the better is the fund's risk-adjusted returns.
58
For those willing to take high risks, equity and sector funds are the picks. Sector funds limit their stock selection to the specific sectors and are not amply diversified. Since all the stocks are restricted to a particular sector like FMCG, pharma or civil, if the sector takes a beating, your returns will be directly impacted. Equity funds invest wholly in the stock markets. They have the same volatility as the investments in the stock market.
Debt funds and bond funds follow a low risk, low return pattern. However, bond fund faces interest rate risk and income risk. Income risk is the possibility that a fixed income fund's dividends will decline as a result of falling overall interest rates. There have been numerous instances of investors locking their money in debt or income funds. On seeing nil or very low returns, they pay up huge exit loads and get out of such schemes. Hence, it is very important that investors first gauge their risk appetite. Once they understand their risk tolerance level they can choose the appropriate investment vehicle.
Balanced funds are a good alternative for those who seek something between high risk sector funds and low risk bond funds. Balanced funds invest 80 to 90 percent of their money in equity instruments and generate decent returns. The remaining money is locked in safe debt instruments. Investors should build a well-diversified portfolio.
Inefficient diversification can mean too many investments from a particular sector or segment. This can mean greater exposure to risk. Proper asset allocation with investor risk profile in mind must be the first step to building a portfolio. Create a well-defined strategy with investment goals and objectives clearly chalked out.
59
FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO
Factors affecting Management style of a scheme It?s one thing to understand mutual funds and their working; it?s another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. Here are seven factors that go a long way in helping an AMC meet its investor?s investment objectives. The factors listed below evaluate factors affecting the management style of a mutual fund scheme.
?
Knowing the profile
Investor?s investments reflect his risk-taking capacity. Equity funds might lure when the market is rising and peers are making money, but if you are not cut out for the risk that accompanies it, don?t bite the bait. So, check if the investor?s objective matches yours. Investors will invest only after they have found their match. If they are racked by uncertainty, they seek expert advice from a qualified financial advisor.
?
Identifying the investment horizon
How long on an average does the investor want to stay invested in a fund is as important as deciding upon your risk profile. Investors would invest in an equity fund only if they are willing to stay on for at least two years. For income and gilt funds, have a one-year perspective at least. Anything less than one year, the only option among mutual funds is liquid funds.
60
?
Declare and Inform
Watch what you commit. Investors look out for the Offer Document and Key Information Memorandum (KIM) before they commit their money to a fund. The offer document contains essential details pertaining to the fund, including the summary information (type of scheme, name of the asset management company and price of units, among other things), investment objectives and investment procedure, financial information and risk factors.
?
The fund fact sheet
Fund fact sheets give investors valuable information of how the fund has performed in the past. It gives investors access to the fund?s portfolio, its diversification levels and its performance in the past. The more fact sheets they examine, the better is their comfort level.
?
Diversification across fund houses
If Investors are routing a substantial sum through mutual funds, they would diversify across fund houses. That way, they spread their risk.
?
Chasing incentives
Some financial intermediaries give upfront incentives, in the form of a percentage of the investor?s initial investment, to invest in a particular fund. Many amateur investors get lured into such incentives and invest in such attractive schemes, which may not meet their future expectations. The ideal investor?s focus would be to find a fund that matches his investment needs and risk profile, and is a performer.
61
?
Tracking investments
The investor?s job doesn?t end at the point of making the investment. They do track your investment on a regular basis, be it in an equity, debt or balanced fund.
Portfolio management is an important foundation of mutual fund business. The performance of the fund measured by the risk adjusted returns produced by the investor arises largely by successful portfolio management function. After collecting the investors? funds, effective portfolio management will have to give returns acceptable to the investor; else, the investor may move to better performing funds. From the investors? perspective, the need for successful portfolio management function is obviously paramount. However, in the complex world of financial markets, portfolio management is a „specialist? function.
Now how a fund manager manages the portfolio would depend on the type of the fund he is managing. The funds can be broadly classified as equity funds and debt funds.
62
Equity Portfolio Management: When the fund contains more than 65% equity, it is called as an equity fund. Thus such type of a fund would need equity portfolio management. An equity portfolio manager?s task consists of two major steps:
a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with the investment objective of the fund and b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns.
How To Identify Which Kind Of Stocks To Include? The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares, warrants or convertible debentures issued by many companies. Even within each category of equity instruments, shares of one company may be very different in terms of their potential than shares of other companies. So how does the fund manager go about choosing the different types of stocks, in order to construct his portfolio? The general answer is that his choice of shares to be included in fund?s portfolio must reflect the investment objective of the fund. more specifically, the equity portfolio manager will choose from a universe of invisible shares in accordance with: a) The nature of the equity instrument, or a stock?s unique characteristics, and b) A certain „investment style? or philosophy in the process of choosing. Thus, you may see a mutual fund?s equity portfolio include shares of diverse companies. However, in reality, the group of stocks selected will have
63
certain unique characteristics, chosen in accordance with the preferred investment style, such that the portfolio as a whole is consistent with the scheme?s objectives.
Indian economy is going through a period of both rapid growth and rapid transformation. Thus, the industries with the growth prospects or blue chip shares of yesterday are no longer certain to continue to be in that category tomorrow. “New” sectors like software or technology stocks have matured and newer sectors such as biotechnology are now making an entry in the investment markets. In this process of rapid change, the stock selection task of an active fund manager in India is by no means simple or limited. We will therefore, review how different stocks are classified according to their characteristics.
Ordinary shares: Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. Losses as well as the profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are a risk investment, bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes.
Preference Shares: Unlike equity shares, preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. If preference shares are cumulative, unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings.
64
Equity Warrants: These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. Warrants are in the nature of options on stocks.
Convertible Debentures: As the term suggests, these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. Clearly, convertible debentures are debt instruments until converted; when converted, they become equity shares.
EQUITY CLASSES:
Equity shares are generally classified on the basis of either the market capitalization or the anticipated movement of company earnings. it is imperative for the fund manager to understand these elements of the stocks before he selects them for inclusion in the portfolio.
a) Classification in terms of Market Capitalization Market Capitalization is equivalent to the current value of a company, i.e., current market price per share times the number of outstanding shares. There are Large Capitalization Companies, Mid – Cap Companies and Small – Cap Companies. Different schemes of a fund may define their fund objective as a preference for the Large or Mid or the Small Cap Companies? shares. For example, the tax plan of ICICI Prudential AMC is essentially a mid-cap fund where as the tax plan of Reliance is largecap fund. Large Cap shares are more liquid and hence easily tradable.
65
Mid or Small Cap shares may be thought of as having greater growth potential. The stock markets generally have different indices available to track these different classes of shares.
b) Classification in terms of Anticipated Earnings In terms of anticipated earnings of the companies, shares are generally classified on the basis of their market price relation to one of the following measures: ? Price/Earning Ratio is the price of the share divided by the earnings per share and indicated what the investors are willing to pay for the company?s earning potential. Young and fast growing companies usually have high P/E ratios and the established companies in the mature industries may have lower P/E ratios. ? Dividend Yield for a stock is the ratio of dividend paid per share to the current market price. In India, at least in the past, investors have indicated the preference for the high dividend paying shares. What matters to the fund managers is the potential dividend yields based on earning prospects. ? Cyclical Stocks are the shares of companies whose earnings are correlated with the state of the economy. ? Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels.
66
? Value Stocks are share of companies in mature industries and are expected to yield low growth in earnings. these companies may, however, have assets whose values have not been recognized by investors in general. funds manager may try to identify such currently undervalued stocks that in their opinion can yield superior returns later.
Approaches to Portfolio Management (Fund Management Style):
Mutual funds can be broadly classified into two categories in terms of the fund management style i.e. actively managed funds and passively managed funds (popularly referred to as index funds). Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index. in active fund management two basic fund management styles that are prevalent are: i) Growth Investment Style: wherein the primary objective of equity investment is to obtain capital appreciation. this investment style would make the funds manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio. ii) Value Investment Style: wherein the funds manager looks to buy shares of those companies which he believes are currently under
67
valued in the market, but whose worth he estimates will be recognized in the market valuation eventually. On the contrary, passively managed funds/index funds are aligned to a particular benchmark index like the S&P CNX Nifty or the BSE Sensex. The endeavor of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation or weightage.
Investing in index funds is less cumbersome as compared to investing in actively managed funds. Broadly speaking, investors need to consider two important aspects i.e. the expense ratio and the tracking error (i.e. the difference between the returns clocked by the designated index and index fund).
Conversely, investing in actively managed funds demands a deeper review and understanding of the fund house's investment philosophy; also the investor needs to decide on the kind of funds he wishes to invest in - a large cap/mid cap/small cap fund among others.
In the Indian context, the mutual fund industry is dominated by actively managed funds; index funds occupy a smaller share of the market. Wellmanaged actively managed funds have been successful in outperforming index funds by a huge margin.
This could be attributed to the fact that the Indian markets are still in an evolutionary phase and there exist a number of inefficiencies. These inefficiencies are in turn utilized by competent fund managers to outperform the index. This explains why many actively managed funds manage to outperform the index over the long-term (3-5 years).
68
A study was conducted wherein category averages of index funds (passive funds) were compared with those of diversified equity funds (active funds), over varied time frames. The active-passive tradeoff Categories A Average category returns 1-Yr (%) Index funds Actively managed funds S&P CNX Nifty BSE Sensex 40.75 29.05 39.50 44.91 3-Yr (%) 32.91 38.37 30.96 35.22 5-Yr (%) 32.38 41.05 30.32 33.20
(Source: Credence Analytics. Growth over 1-Yr is compounded annualised)
The results are quite interesting. Over the 1-Yr time frame, index funds (40.75 per cent) aligned to the BSE Sensex have comfortably outscored diversified equity funds (29.05 per cent). However over longer time frames (3-Yr and 5-Yr), diversified equity funds have stolen the march over index funds powered by a strong showing. Over 3-Yr, diversified equity funds (38.37 per cent CAGR) have outperformed index funds (32.91 per cent CAGR). The degree of outperformance further widens over 5-Yr; diversified equity funds (41.05 per cent CAGR) fare better than index funds (32.38 per cent). In a nutshell, in the Indian context, index funds have proven their mettle over shorter time frames. It's the opposite over longer time frames (3-5 years), where actively managed funds rule the roost. However the same should not be seen as a blanket recommendation for actively managed funds. Not all actively managed funds are invest-worthy and capable of generating superior returns vis-à-vis benchmark indices (passively managed funds).
69
Use of Equity Derivatives for Portfolio Risk Management:
An equity portfolio manager is always exposed to the risk that market prices of equities will decline, causing his fund NAV to drop. Until recently, a fund manager in India had no option but to sell his stocks, if he expected a fall in market prices. Since the year 2000, however, equity portfolio managers have instruments available to them, which permit them to reduce the loss in portfolio value, without selling the stocks in the cash markets.
Equity Derivatives instruments are specially designed contracts that are traded separately on an exchange, but derive their value from the underlying equity asset. such derivative contract may be based on individual share/scripts, or on a given market index. the two basic types of exchange traded derivative instruments are Futures and Options. a futures contract allows one to buy or sell the underlying asset at a specified future date, but being a traded instrument, the contract can be liquidated without reaching its maturity date and so without taking or giving delivery of the underlying asset.
Options contracts are available on both the market index and the individual shares. a futures contracts is an outright purchase for a future date, whereas an options contract gives its holder the right to buy or sell the Nifty or Sensex index or the individual scrip for a future delivery at a certain strike price, but are not obliged to exercise that option, if the price does not move in the direction you expected. you would pay a premium for the acquisition of this right.
70
How does a fund manager use these futures and options contracts as a risk management instruments?
Broadly, if a funds manager holds an equity portfolio and expects the market to decline, he can sell the index futures at the current price for future delivery. if the market did decline, his equity portfolio value will come down, but his futures contract will show corresponding profit, since he had sold it at the higher past price. this is called “hedging” portfolio risk. in this case, the fund manager would not have any loss due to market decline. however, contrary to the expectations, if the market prices actually rose, our fund manager will not gain. the rise in his equity portfolio value will be neutralized by the loss on his futures position, since he had sold futures at lower price relative to the current market levels. Options, too, can be used to hedge an investment portfolio – by buying put options (or options to sell underlying asset) at a price (the premium). The funds manager can exercise the option only if the prices fall, since he has the right to sell at a higher price. he can forgo the premium and not exercise the option, if the prices actually rise. This way he can still let his portfolio NAV, while protecting the downside risk.
71
Successful Equity Portfolio Management: Portfolio Management skills are innate in nature and strong intuitive traits from the portfolio manager. Nevertheless, there are certain principles of good equity management that any portfolio manager can follow to improve his performance.
? ?
Set realistic target returns based on appropriate benchmarks. Be aware of the level of flexibility available while managing the portfolio.
?
Decide on appropriate investment philosophy, i.e., whether to capitalize on economic cycles, or to focus on the growth sectors or finding the value stocks.
?
Develop an investment strategy based on the investment objective, the time frame for the investment and economic expectations over this period.
?
Avoid over – diversification. although diversification is a major strength of mutual funds, the portfolio manager must avoid the temptation to invest into very large number of securities so as to maintain focus and facilitate sound tracking.
?
Develop a flexible approach to investing. Markets are dynamic and it is impossible to buy „stocks for all seasons?
72
Portfolio of ICICI Prudential Balanced – Growth Table 1 ICICI Prudential Balanced - Growth Portfolio as on Jul 31, 2009 Instrument Rating No. of Market Debentures Value (Rs. in crores) Securities Sovereign 36.55
Company Name
Percentage of Net Assets 13.65
6.9 GOI 2019 Steel Authority of India Ltd Punjab National Bank 8.24 GOI 2027 Industrial Development Bank of India Ltd
Bond
AAA
14.37
5.37
Bond
AAA
14.02 10.11
5.24 3.78
Securities Sovereign
Bond
AA+
5.95
2.22
73
Table 2 Company Name EQUITY* Instrument No. of Shares Market Value (Rs. in crores) 10.50 10.44 9.51 9.00 8.03 7.97 7.86 7.63 7.13 6.72 6.63 6.61 5.65 5.44 5.08 4.90 4.45 4.13 3.83 3.72 % of Net Assets 3.92 3.9 3.55 3.36 3 2.98 2.94 2.85 2.66 2.51 2.48 2.47 2.11 2.03 1.9 1.83 1.66 1.54 1.43 1.39
ITC Ltd Reliance Industries Ltd Larsen & Toubro Limited HDFC Bank Ltd NTPC Limited. Grasim Industries Ltd Bharat Heavy Electricals Ltd Nifty Sterlite Industries (India) Ltd Tata Steel Ltd. Bharti Airtel Ltd ICICI BANK LTD. Hindustan Unilever Ltd Hero Honda Motors Ltd Tata Consultancy Services Ltd. Hindustan Petroleum Corporation Ltd State Bank of India Bharat Petroleum Corporation Ltd Mahindra & Mahindra Ltd Infosys Technologies Ltd
Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity Equity
421315 53367 63122 60049 372645 29056 35255
110545 145282 161747 87169 193708 33901 96632 140438 24546 87169 44552 18015
Table 3 Company Name OTHERS Instrument Market Value (Rs. in crores) 6.8522 5.6462 5.5042 % of Net Assets 2.56 2.11 2.06
74
Cash Current Assets ICICI BANK LTD.
Cash Current Assets CD
Debt Portfolio Management: Debt portfolio management has to contend with the construction and management of portfolio of debt instruments, with the primary objective of generating income. Just as the equity fund manager has to identify suitable stocks from a larger universe of equity shares, a debt fund manager has to select from a whole universe of debt securities he wants to invest in.
Debt schemes of a mutual fund have a short maturity period, generally up to one year. nevertheless, some schemes regarded as debt schemes do have maturity period a little longer than a year, say, eighteen months. thus in the context of “debt” mutual funds, depending upon the maturity period of the scheme, the funds managers invest more in “market-traded instruments” or the “debt securities”. the difference in market-traded instruments and debt securities is that the former matures before one year and the later after a year.
Instruments in Indian Debt Market: The objective of a debt fund is to provide investors with a stable income stream. Hence, a debt fund invests mainly in instruments that yield a fixed rate of return and where the principal is secure. The debt market in India offers the following instruments for investment by mutual funds. Certificate of Deposit: Certificate of Deposits (CD) are issued by scheduled commercial banks excluding regional rural banks. these are unsecured negotiable promissory notes. bank CDs have a maturity period of 91 days to one year, while those issued by financial institutions have maturities between one and three years. Commercial Paper: Commercial Paper (CP) is a short term, unsecured instrument issued by corporate bodies (public and private) to meet short term working capital
75
needs. maturity varies between 3 months and 1 year. this instrument can be issued to the individuals, banks, companies and other corporate bodies registered or incorporated in India. CPs can be issued to NRIs on non – repatriable and non – transferable basis. Corporate Debentures: Debentures are issued by manufacturing companies with physical assets, as secured instruments, in the form of certificates. They are assigned credit rating by the rating agencies. All publicly issued debentures are listed on the exchanges. Floating Rate Bond (FRB): These are short to medium term interest bearing instruments issued by financial intermediaries and corporations. The typical maturity is of these bonds is 3 to 5 years. FRBs issued by the financial institutions are generally unsecured while those form private corporations are secured. Government Securities: These are medium to long term interest – bearing obligations issued through the RBI by the Government of India and state governments. Treasury Bills. T-bills are short term obligations issued through the RBI by the Government of India at a discount. The RBI issues T-bills for tenures: now 91 days and 364 days. These treasury bills are issued through an auction procedure. The yield is determined on the basis of bids tendered and accepted. Public Sector Undertakings (PSU) Bonds: PSU are medium and long term obligations issued by public sector companies in which the government share holding is generally greater than 51%. Some PSU Bonds carry tax exemptions. The minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds. PSU bonds are generally not guaranteed by the government and are in the form of promissory notes transferable by endorsement and delivery.
76
Debt Investment Strategies – An Aid for Debt Portfolio Management: Let us have a look at some debt investment strategies adopted by the debt portfolio managers.
Buy and Hold: Historically, in India, UTI and many of the other mutual funds tended to invest in high yielding debt securities that gave adequate returns on the overall portfolio. The returns are considered sufficient to reward the investors. Therefore, the funds would just encash the coupons and hold the bonds until maturity. These fund managers will tend to avoid bond with call provisions, to counter the prepayment risk. It has to be understood the strategy holds good as long as the general interest rate level are stable. if yields rise, the price of bonds will fall. Hence, while the fund may generate sufficient current income according to original target, it will incur a capital loss on its portfolio as and when revalued to current market price. Another risk on the portfolio, particularly if its maturities are long, is the risk of default by the issuer.
Duration Management: If Buy and Hold is like Passive Fund Management, Duration Management is like Active Fund Management. This strategy involves altering the average duration of bonds in a portfolio depending upon the fund manager?s expectations regarding the direction of interest rates. If bond yields are expected to fall, the fund manager would buy the bonds with longer duration and sell bonds with shorter duration, until the fund?s average duration becomes longer than the market?s average duration. based as the strategy is on interest rate anticipations, it is akin to the Market Timing Strategy for equity investments.
77
Credit Selection: Some debt managers look to investing in a bond in anticipation of changes on ots credit rating. an upgrade of a bond?s credit rating would lend to increase in its price, thereby leading to a superior return. the fund would need to analyze the bond?s credit quality so as to implement this strategy. Usually, debt funds will specify the proportion of assets they will hold in instruments of different credit quality/ratings, and hold these proportions. Active credit selection strategy would imply frequent trading of bonds in anticipation of changes in ratings. While being an active risk management strategy, it does not take away the interest rate, prepayment or credit risks that are faced by any debt fund.
Prepayment Prediction: As noted earlier some bonds allow the issuers the option to call for redemption before maturity. a fund which holds bonds with this provision is exposed to the risk of high yielding bonds being called back before maturity when interest rates decline. The fund manager would therefore strive to hold bonds with low prepayment risk relative to yield spread or try to predict the course of the interest rates and decide what the prepayment is likely to be, and then increase or decrease his exposure. In any case, the risks faced by such fund managers are the same as any other. What matters at the end is the yield performance obtained by the fund manager.
78
Interest Rates and Debt Portfolio Management: No matter which investment strategy is followed by a debt fund manager, debt securities are always exposed to interest rate risk, as their price is directly dependent on them. While they may yield fixed rates of returns, their market values are dependent on interest rate movements, which in turn affect the performance of fund portfolio of which they are a part. Hence, it is essential to understand the factors that affect the interest rates. While this is an intricate subject in itself, we have summarized below some key elements that have a bearing on interest rate movements:
Inflation: simply put, inflation is the percentage by which prices of goods and services in the economy increase over a period of time. This increase may be on account of factors arising within the country – change in production levels, mechanisms for distribution of goods, etc, and/or on account of changes in the country?s external balance of payments position. In India, inflation is generally measured by the Wholesale Price Index although the Consumer Price Index is also tracked. When the inflation rate rises, money becomes dearer, leading to an increase in the general level of interest rates. Exchange Rate: A key factor in determining exchange rates between any two currencies is their relative purchasing power. Over a period, the relative purchasing power between two currencies may change based on the performance of the respective economies. The consequent change in exchange rates can affect interest rate levels in the country.
Policies of the Central Bank: The central bank is the apex authority for regulation of the monetary system in a country. In India, this role is played by the Reserve Bank. The RBI?s policies have a strong bearing on interest rate levels in the economy. If the RBI wishes to curb excess liquidity in a
79
monetary system, it could impose a higher liquidity ratio on banks and institutions. This would restrict credit leading to an increase in interest rates. Similarly, and increase in RBI?s bank rate has the effect of increasing interest rate levels. RBI may also undertake open operations in Treasury Bills and Government securities with the intention of restricting / relaxing liquidity, thereby impacting the interest rates.
Use of Derivatives for Debt Portfolio Management: As explained above, a debt portfolio is always exposed to the interest rate risk. Hence, derivatives contracts can be used to reduce or alter the risk profile of the portfolios containing debt instruments. Interest rate derivatives contracts can be exchange traded or privately traded (on the OTC market). Thus, a portfolio manager can sell interest rate futures or buy interest rate „put? options, usually on an exchange, to protect the value of his debt portfolio. He can also buy or sell forward contracts or swaps bilaterally with other market players on OTC market. In India, interest rate swaps and forward rate agreements were introduced in 1999, though the market for these contracts has not yet fully developed. In 2004, the National Stock Exchange has introduced futures on Interest Rates. Interest rate options are not yet available for trading on exchange.
80
What are Exchange Traded Funds?
ETFs represent shares of ownership in either fund, unit investment trusts, or depository receipts that hold portfolios of common stocks which closely track the performance and dividend yield of specific indexes, either broad market, sector or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities. While similar to an index mutual fund, ETFs differ from mutual funds in significant ways. Unlike Index mutual funds, ETFs are priced and can be bought and sold throughout the trading day. Furthermore, ETFs can be sold short and bought on margin.
Have you ever wished you could buy every stock represented in a high profile index such as the NSE Nifty, or the BSE Sensex but the cost of buying each stock represented in such an index was prohibitive?
Now, single securities, known as Exchange Traded Funds (ETF), can track the performance of a growing number of different index funds (currently the NSE Nifty). Most ETFs represent a portfolio of stocks designed to track one specific index. ETFs can be bought and sold exactly like a stock of an individual company during the entire trading day. Furthermore, they can be bought on margin, sold short or bought at limit prices. Exchange traded funds can help investors build a diversified portfolio that?s easy to track.
Exchange Traded Funds (ETFs) have been in existence in India for quite some time now. Apart from Benchmark AMC, which specializes in ETFs, there have been a couple of ETFs from Prudential ICICI AMC and UTI
81
AMC. But so far ETFs have not enjoyed the kind of popularity that the conventional Mutual Funds enjoy. One reason could be the lack of understanding of the concept of ETF amongst the general investor. Second, and probably the more important reason, is that ETFs by nature track a certain index (e.g. Nifty or the Bankex). Hence, the returns one can expect from ETFs will be equal to the rise in the index. Whereas, India is a growing market and hence offers huge opportunities in the non-index shares too. Therefore, it is not difficult for an active fund manager to beat the index and offer better returns. As such ETFs (and index-funds too, by that logic) have comparatively negligible AUMs. Two things could, however, make ETFs popular in India
?
One, of course, is that as market valuations become fairly or overvalued, it will become more & more difficult to beat the index. Then index-based funds (both conventional MFs & ETFs) may become a better option than actively-managed funds
?
Gold ETFs or Real-Estate ETFs have no comparable product in the conventional MF sector, and hence become the only MF route to invest in such markets.
Here?s an interesting live example about 1-2 years ago the banking sector was not very popular. But with the rise in interest rates and the general economic growth, bank stocks were becoming quite popular. As a result the only banking index fund viz. Benchmark AMC?s the Banking BeES (there are few banking sector funds but not bank-index funds) saw a jump of AUM from about Rs.370 crores in June 2005 to almost Rs.7,400 crores by December 2006. This makes it the largest MF scheme, much higher than about Rs.5000 crores Reliance Equity Fund.
82
How does an ETF work?
In a normal fund we buy/sell units directly from/to the AMC. First the money is collected from the investors to form the corpus. The fund manager then uses this corpus to build and manage the appropriate portfolio. When you want to redeem your units, a part of the portfolio is sold and you get paid for your units. The units in a conventional MF are, therefore, called incash units. But in ETF, we have something called the authorized participants (appointed by the AMC). They will first deposit all the shares that comprise the index (or the gold in case of Gold ETF) with the AMC and receive what is called the creation units from the AMC. Since these units are created by depositing underlying shares/gold, they are called in-kind units.
Benefits and Limitations of ETF
Benefits of investing in ETFs
?
Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)
?
One can short sell an ETF or buy on margin or even purchase one unit, which is not possible with index-funds/conventional MF?s
?
ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MF?s
? ?
Not dependent on the fund manager Like an index fund, they are very transparent
83
Disadvantages of investing in ETFs
?
SIP in ETF is not convenient as you have to place a fresh order every month
?
Also SIP may prove expensive as compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell
?
Because ETFs are conveniently tradable, people tend to trade more in ETFs as compared to conventional funds. This unnecessarily pushes up the costs.
?
You cannot automatically re-invest your dividends. Secondly, you may have to pay brokerage to reinvest dividends in ETF, whereas dividend reinvestment in MF?s is automatic and with no entry-load
?
Comparatively lower liquidity as the market has still not caught up on the concept.
It may, therefore, be concluded that if an investor is looking for a long-term and defensive investment strategy in equities by backing the index rather than looking at active management, ETF offers an alternative to index-based funds. It offers trading convenience & probably lower costs than index funds. A case-to-case comparison is, however, important as some indexfunds may be cheaper. Also for SIP?s, index-funds may prove better than ETFs. However, in the absence of conventional MF?s like in Gold, ETFs is but a natural and better choice than buying/selling physical gold.
84
Categories of ETF?s 1. Stock ETFs
By Investment Strategy By Investment • Bearish ETFs • Ethical ETFs • Growth Stock ETFs • High-Dividend ETFs • Leveraged ETFs • Sector Rotation • Value Line ETFs • Value Stock ETFs Style • Large Cap Stocks • Mid Cap Stocks • Small Cap Stocks • Micro Cap Stocks
By Industry • Aerospace & Defense
By Region -Indian
• Biotechnology Stocks • Construction -Global • Consumer Goods & Services Markets • Financial Services • Health Care • Industrials • Internet • Media • Metals & Mining • Oil & Gas • Pharmaceuticals • Real Estate • Retail • Semiconductors • Software • Telecommunications • Transportation • Utilities
2. Bond ETFs 3. Commodity ETFs • Agriculture/Crop Price ETFs • Currency ETFs • Energy ETFs • Precious Metals ETFs • Real Estate ETFs-REITs
85
Comparison of ETF with Mutual Fund ETF Comparison - While similar to an index mutual fund, ETFs differ from mutual funds in significant ways.
Index Attribute ETF Mutual Fund Diversification Traded throughout the day Can be bought on margin Can be sold short Tracks an index or sector Tax efficient as turnover is low Low Expense Ratio Trade at any brokerage firm Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Possibly Sometimes No
Individual Stock No Yes Yes Yes No No Not a factor Yes
86
Top Performers
Top Performers as on ( 10/08/2009 ) Rank Scheme Name Top 3 Liquid Schemes (1 Mth) 1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - G 3 LIC MF Liquid Fund - Growth Top 3 Floating Rate Schemes (1 Mth) 1 Templeton FRIF - Long Term - Super IP - Groth 2 ICICI Prudential LT FRF - Plan C - Growth 3 Birla Sun Life Floating Rate Fund - LTP - Growth Top 3 Short Term Income Schemes (1 Mth) 1 PRINCIPAL Income Fund - STP - Growth 2 Templeton India STIP - Growth 3 LIC MF Savings Plus Fund - Growth Top 3 Income Schemes (1 Yr) 1 Canara Robeco Income Scheme - Growth 2 ICICI Prudential Income Fund -Growth 3 Fortis Flexi Debt Fund - Growth Top 3 Tax Schemes (1 Yr) 1 Sahara Taxgain - Growth 2 Sundaram BNP Paribas Taxsaver - (Open En 3 HDFC Taxsaver - Growth Top 3 Equity Schemes (1 Yr) 1 Tata Life Sciences and Technology Fund - Ap 2 JM Mid Cap Fund - Growth 3 Sundaram BNP Paribas Financial Services Op Top 3 Balanced Schemes (1 Yr) 1 Reliance RSF - Balanced - Growth 2 Birla Sun Life 95 - Growth 3 HDFC Prudence Fund - Growth Top 3 MIP Schemes (1 Yr) 1 Reliance MIP - Growth 2 Birla Sun Life MIP - Savings 5 - Growth 3 HDFC MIP - LTP - Growth Source: www.mutualfundindia.com
% Returns 0.5274 0.5254 0.4375 % Returns 0.5831 0.5746 0.5711 % Returns 0.6553 0.5763 0.4599 % Returns 26.4648 24.4898 19.8424 % Returns 15.3153 11.7922 9.9382 % Returns 29.4581 0.4599 26.4648 % Returns 23.6347 19.1215 17.4833 % Returns 26.1132 20.8864 15.3153
87
Performance of Funds under different Schemes
1. Equity- Diversified --- TOP 20 SCHEMES S Scheme Name No 1 Birla Sun Life Asset Allocation Aggressive 2 UTI Dividend Yield 3 FT India Life Stage FoF 20s 4 Templeton India Growth 5 HSBC Equity 6 ICICI Prudential Advisor-Very Aggressive 7 Sundaram BNP Paribas Select Focus Reg 8 ICICI Prudential Dynamic 9 Tata Pure Equity 10 DSPML Top 100 Equity Regular 11 Sundaram BNP Paribas India Leadership Regular 12 DSPML Equity 13 Baroda Pioneer Growth 14 HDFC Top 200 15 ICICI Prudential Growth 16 UTI Equity 17 HDFC Capital Builder 18 Sundaram BNP Paribas Growth Regular 19 HSBC India Opportunities 20 Sahara Growth Source: www.valueresearchonline.com 2. Equity - Sector wise ? Auto S No Scheme Name NAV as on 10-9-2009 15.01 Return (%) -16.79 NAV as on 10-9-2009 23.73 21.24 27.74 92.24 95.9 29.49 83.18 79.06 79.14 77.51 37.6 46.72 43.29 143.02 111.17 40.94 79.41 88.52 33.99 67.16 Return (%) -11.34 -14.36 -14.38 -15.08 -15.13 -15.32 -15.58 -15.62 -15.83 -15.83 -16.28 -16.33 -16.56 -16.61 -16.67 -16.82 -16.89 -16.99 -17.02 -17.04
1 UTI Thematic Transportation and Logistics Fund - Growth Source: www.valueresearchonline.com
88
? Sector Funds - Banking And Financial Services S No NAV as on 10-92009 13.0571 Return (%) -21.87
Scheme Name
1 Sundaram BNP Paribas Financial Services Opportunities Fund - Ret Growth 2 Reliance Banking Fund - Growth 3 UTI Thematic Banking Sector Fund Growth 4 Religare Banking Fund - Reg - Growth 5 JM Financial Services Sector Fund Growth 6 Sahara Banking and Financial Services Fund - Growth 7 ICICI Prudential Banking and Financial Services Fund - Retail - Growth 8 Sundaram BNP Paribas Financial Services Opportunities Fund - Ret Growth 9 Reliance Banking Fund - Growth 10 UTI Thematic Banking Sector Fund Growth Source: www.valueresearchonline.com ? Pharma S No Scheme Name
61.6074 26.98 12.47 8.1379 18.9971 12.19 13.0571
-26.37 -26.66 -16.33 -16.56 -16.61 -16.67 -21.87
61.6074 26.98
-26.37 -26.66
1 UTI Pharma & Healthcare 2 Franklin Pharma 3 JM Healthcare Sector 4 Magnum Pharma 5 Reliance Pharma Source: www.valueresearchonline.com
NAV as Return on 10-9(%) 2009 23.74 -3.38 29.26 -4.38 19.55 -5.31 32.34 -5.72 24.38 -6.64
89
? Technology S Scheme Name No 1 Tata Life Sciences and Technology Fund Appr 2 Franklin Infotech Fund - Growth 3 DSP BlackRock Technology.com Fund Reg - Growth 4 Birla Sun Life New Millennium - Growth 5 ICICI Prudential Technology Fund Growth 6 Birla Sun Life New Millennium 7 Kotak Tech Source: www.valueresearchonline.com ? FMCG S No Scheme Name NAV as on Return 10-9-2009 (%) 43.213 -13.87 29.09 -14.74 44.12 -21.1 NAV as on Return 10-9-2009 (%) 51.8386 -3.5 41.2342 23.839 15.24 10.64 19.54 8.31 -9.47 -11.64 -11.97 -12.75 -13.25 -15.57
1 Franklin FMCG Fund - Growth 2 Birla Sun Life Buy India Fund - Growth 3 ICICI Prudential FMCG - Growth Source: www.valueresearchonline.com
90
? INDEX S No Scheme Name NAV as on 10-92009 172.4173 27.0414 41.5183 42.6929 23.79 46.9068 44.8178 38.3151 22.32 37.1323 35.2775 28.0988 39.4545 26.7885 30.7221 127.1025 28.2869 25.0619 15.9854 14.9134 172.4173 27.0414 Return (%) -17.97 -18.48 -19.01 -19.02 -19.07 -19.11 -19.13 -19.17 -19.18 -19.22 -19.3 -19.3 -19.39 -19.41 -19.67 -20.25 -20.34 -24.72 -26.58 -28.79 -28.94 -29.05
1 HDFC Index Fund - Sensex Plus Plan 2 LIC MF Index Fund - Sensex Advantage Plan - Growth 3 ICICI Prudential Index Fund 4 Franklin India Index Fund - BSE Sensex Plan - Growth 5 Canara Robeco Nifty Index - Growth 6 UTI Master Index Fund - Growth 7 Birla Sun Life Index Fund - Growth 8 SBI Magnum Index Fund - Growth 9 ING Nifty Plus Fund - Growth 10 Tata Index Fund - Sensex Plan - Option A 11 Franklin India Index Fund - NSE Nifty Plan - Growth 12 UTI Nifty Fund - Growth 13 HDFC Index Fund - Nifty Plan 14 Tata Index Fund - Nifty Plan - Option A 15 PRINCIPAL Index Fund - Growth 16 HDFC Index Fund - Sensex Plan 17 LIC MF Index Fund - Sensex Plan Growth 18 LIC MF Index Fund - Nifty Plan - Growth 19 Benchmark S&P CNX 500 Fund Growth 20 JM Nifty Plus Fund - Growth 21 HDFC Index Fund - Sensex Plus Plan 22 LIC MF Index Fund - Sensex Advantage Plan - Growth Source: www.valueresearchonline.com
91
3. Equity- Tax Savings (ELSS) NAV as Scheme Name on 10-92009 1 Sahara Taxgain - Growth 27.459 2 Sundaram BNP Paribas Taxsaver - (Open 36.065 Ended Fund) - Growth 3 HDFC Taxsaver - Growth 157.506 4 HSBC Tax Saver Equity Fund - Growth 11.1412 5 Taurus Taxshield - Growth 27.16 6 Franklin India Taxshield - Growth 147.6045 7 Birla Sun Life Tax Relief 96 - Growth 8.82 8 ICICI Prudential Taxplan - Growth 94.16 9 HDFC Long Term Advantage Fund 96.653 Growth 10 Tata Tax Saving Fund 42.2639 11 SBI Magnum Tax Gain Scheme 93 47.79 Growth 12 DSP BlackRock Tax Saver Fund 12.374 Growth 13 LIC Tax Plan - Growth 24.8285 14 Franklin India Index Tax Fund 34.589 15 Birla Sun Life Tax Plan - Growth 10.8 16 Baroda Pioneer ELSS 96 20.99 17 UTI Equity Tax Savings Plan - Growth 30.98 18 Principal Personal Taxsaver 75.17 19 DWS Tax Saving Fund - Growth 10.9169 20 ING Tax Saving Fund - Growth 21.03 21 PRINCIPAL Tax Savings Fund 61.03 22 Escorts Tax Plan - Growth 39.146 23 Sahara Taxgain - Growth 27.459 24 Sundaram BNP Paribas Taxsaver - (Open 36.065 Ended Fund) - Growth 25 HDFC Taxsaver - Growth 157.506 26 HSBC Tax Saver Equity Fund - Growth 11.1412 27 Taurus Taxshield - Growth 27.16 28 Franklin India Taxshield - Growth 147.6045 29 Birla Sun Life Tax Relief 96 - Growth 8.82 30 ICICI Prudential Taxplan - Growth 94.16 Source: www.valueresearchonline.com S No Return (%) -7.19 -7.57 -13.73 -14.37 -15.35 -15.41 -15.54 -16.13 -17.19 -17.21 -17.28 -17.62 -17.74 -17.85 -17.95 -18.11 -18.2 -18.6 -18.61 -19.06 -19.09 -19.13 -19.21 -19.25 -19.39 -19.57 -19.75 -19.89 -20.28 -20.51
92
4. Gilt Funds: ? Medium & Long Term S No Scheme Name NAV as on 10-92009 18.1734 31.4846 28.911 31.2134 24.7297 20.2478 22.55 24.9591 32.3641 14.2151 Return (%) 6.99 1.42 1.01 0.96 0.9 0.88 0.87 0.82 0.8 0
1 ICICI Prudential GFIP - PF Option Growth 2 ICICI Prudential GFIP - Growth 3 JM G Sec Regular Plan - Growth 4 DSP BlackRock Government Securities Fund - Growth 5 Birla Sun Life G Sec Fund - LT - Growth 6 Escorts Gilt Plan - Growth 7 Templeton India GSF - LTP - Growth 8 Canara Robeco Gilt PGS - Growth 9 Templeton India GSF - Composite Plan Growth 10 Templeton India GSF - PF Plan - Growth Source: www.valueresearchonline.com ? Gilt Funds: Short Term S No Scheme Name
1 ICICI Prudential GFTP - Growth 2 ICICI Prudential GFTP - PF Option Growth 3 Tata G S S M F - Growth 4 SBI Magnum Gilt STP - Growth 5 UTI G-Sec Fund - STP - Growth 6 HDFC Gilt Fund - S T P - Growth 7 Templeton India GSF - Treasury Plan Growth 8 Kotak Gilt - Savings Plan - Growth 9 Birla Sun Life G Sec Fund - STD Growth 10 DSP BlackRock Treasury Bill Fund Growth Source: www.valueresearchonline.com
NAV as on 10-92009 23.8234 15.0534 14.6467 18.1405 13.4903 15.4847 16.0203 20.8531 17.7824 19.1569
Return (%) 1.25 1.25 1.19 1.14 1.14 1.13 1.04 1.01 1.01 1
93
5. Debt - Liquid/Money Market Funds
Sr Scheme Name No 1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - Growth 3 LIC MF Liquid Fund - Growth 4 IDFC Liquid Fund - Plan D - Growth 5 Reliance Liquid Fund - TP - Retail Growth 6 Reliance Liquidity Fund - Growth 7 UTI Money Market - Ret - Growth 8 HDFC Cash Mgmt Fund - Savings Plan - Growth 9 PRINCIPAL Floating Rate Fund SMP - Growth 10 HDFC Liquid Fund - Growth 11 DWS Insta Cash Plus Fund - Growth 12 IDFC Liquidity Manager Fund Growth 13 JM High Liquidity - Growth 14 UTI Liquid Fund - Cash Plan Growth 15 Templeton India TMA - Growth Source: www.valueresearchonline.com
NAV as on 10-9- Return 2009 (%) 1630.9557 1.85 1618.8213 1.78 16.3907 10.1063 21.5132 13.4975 25.0948 18.7277 13.9821 17.7791 15.0434 12.3183 24.4847 1456.8031 2215.8161 1.77 1.75 1.74 1.73 1.72 1.7 1.69 1.68 1.68 1.68 1.67 1.66 1.6
94
6. Debt – Medium Term S No 1 2 3 4 5 6 Scheme Name NAV as Return on 10-9(%) 2009 17.08 1.98 13.19 1.79 15.03 1.74 14.34 1.73 12.79 1.72 11.02 1.69 12.73 12.99 14.35 11.14 24.71 16.88 14.82 20.35 13.32 13.27 13.31 12.74 12.88 27.73 1.67 1.61 1.47 1.34 1.24 1.08 1.08 1.07 1.03 0.99 0.96 0.88 0.69 0.58
ICICI Prudential Long-term Tata Dynamic Bond A ICICI Prudential Flexible Income Sahara Income Birla Sun Life Dynamic Bond Retail ING OptiMix Active Debt Multi Manager FoF 7 Kotak Flexi Debt Regular 8 ICICI Prudential Advisor-Very Cautious 9 Canara Robeco Income 10 Reliance Regular Savings Debt 11 Escorts Income 12 Reliance Medium Term 13 Taurus Libra Bond 14 ING Income 15 Baroda Pioneer Income 16 Tata Income Plus 17 Tata Income Plus HI 18 ABN AMRO Flexi Debt Reg 19 IDFC SSI Medium-term 20 Templeton India Income Source: www.valueresearchonline.com
95
7. Liquid Funds S No NAV as Return on 10-9(%) 2009 1630.9557 1.98 1618.8213 1.79 16.3907 10.1063 21.5132 13.4975 25.0948 18.7277 13.9821 17.7791 15.0434 12.3183 24.4847 1456.8031 2215.8161 21.902 1261.5357 13.3942 16.3215 1149.1781 1.74 1.73 1.72 1.69 1.67 1.61 1.47 1.34 1.24 1.08 1.08 1.07 1.03 0.99 0.96 0.88 0.69 0.58
Scheme Name
1 Sahara Liquid Fund - VP - Growth 2 Sahara Liquid Fund - Fixed Pricing Option - Growth 3 LIC MF Liquid Fund - Growth 4 IDFC Liquid Fund - Plan D - Growth 5 Reliance Liquid Fund - TP - Retail Growth 6 Reliance Liquidity Fund - Growth 7 UTI Money Market - Ret - Growth 8 HDFC Cash Mgmt Fund - Savings Plan - Growth 9 PRINCIPAL Floating Rate Fund SMP - Growth 10 HDFC Liquid Fund - Growth 11 DWS Insta Cash Plus Fund - Growth 12 IDFC Liquidity Manager Fund Growth 13 JM High Liquidity - Growth 14 UTI Liquid Fund - Cash Plan Growth 15 Templeton India TMA - Growth 16 Birla Sun Life Cash Manager Growth 17 IDFC Liquid Fund - Growth 18 Escorts Liquid Plan - Growth 19 Canara Robeco Liquid - Growth 20 AIG India Liquid Fund - Ret Growth Source: www.valueresearchonline.com
96
THE INVESTOR?S RIGHTS & OBLIGATIONS
Some of the Rights and Obligations of investors are :? Investors are mutual, beneficial and proportional owners of the scheme?s assets. The investments are held by the trust in fiduciary capacity (The fiduciary duty is a legal relationship of confidence or trust between two or more parties). ? In case of dividend declaration, investors have a right to receive the dividend within 30 days of declaration. ? On redemption request by investors, the AMC must dispatch the redemption proceeds within 10 working days of the request. In case the AMC fails to do so, it has to pay an interest @ 15%. This rate may change from time to time subject to regulations. ? In case the investor fails to claim the redemption proceeds immediately, then the applicable NAV depends upon when the investor claims the redemption proceeds. ? Investors can obtain relevant information from the trustees and inspect documents like trust deed, investment management agreement, annual reports, offer documents, etc. They must receive audited annual reports within 6 months from the financial year end.
97
? Investors can wind up a scheme or even terminate the AMC if unit holders representing 75% of scheme?s assets pass a resolution to that respect. ? Investors have a right to be informed about changes in the fundamental attributes of a scheme. Fundamental attributes include type of scheme, investment objectives and policies and terms of issue. ? Lastly, investors can approach the investor relations officer for grievance redressal. In case the investor does not get appropriate solution, he can approach the investor grievance cell of SEBI. Theinvestor can also sue the trustees. The offer document is a legal document and it is the investor?s obligation to read the OD carefully before investing. The OD contains all the material information that the investor would require to make an informed decision. It contains the risk factors, dividend policy, investment objective, expenses expected to be incurred by the proposed scheme, fund manager?s experience, historical performance of other schemes of the fund and a lot of other vital information.
It is not mandatory for the fund house to distribute the OD with each application form but if the investor asks for it, the fund house has to give it to the investor. However, an abridged version of the OD, known as the Key Information Memorandum (KIM) has to be provided with the application form.
98
CONCLUSION
With the reference of my this work I can say that mutual fund is the one of the best investment option for investing in money market there are different types of mutual fund like open ended and close ended with different scheme like Growth fund, Income fund, Diversified fund, etc there are about thousand of mutual fund scheme available in the market . but it is very essential to evaluate a mutual fund scheme with other possible investment option before investing in a mutual fund . In the project I try to put light on different fund management style & structure of the scheme . As a fund manager a person has to decide and forecast the demand of fund in the market and design a best investment scheme for which different strategies and approaches regarding fund to be adopted . normally fund managers are panel of experts it can be beneficial investing in mutual fund I put my all possible efforts to complete the project still my knowledge is like drop in ocean .
I will conclude project with following note :
“MUTUAL FUNDS ARE SUBJECT TO MARKET RISKS PLEASE READ THE OFFER DOCUMENT CAREFULLY BEFORE INVESTING.”
99
References
Websites:
? www.valueresearchonline.com ? www.mutualfundsindia.com ? www.moneycontrol.com ? www.nseindia.com ? www.economics.indiatimes.com ? www.wikepdia.org ? www.google.co.in
Books:
? Management & Working Of Mutual Fund- L.K.Bansal ? Investment Analysis and Portfolio Management – Prasanna Chandra
Company Journals & Business Journals,
? Fund Factsheet- ICICI Prudential ? Fund Factsheet- Canara Robeco Infrastructure-G Fund ? Fund Factsheet- Birla Mutual Fund ? Fund Factsheet- Reliance Mutual fund
100
doc_932400981.docx