Table of Contents SR. NO.
CONCEPT OF MUTUAL FUND INVESTOR EARN FROM MUTUAL FUND
ADVANTAGES OF MUTUAL FUND DISADVANTAGES OF MUTUAL FUND FREQUENTIY USED TERM
2 3 4
TYPES OF MUTUAL FUND SCHEMES ORGANIZATION OF A MUTUAL FUND FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO INDIVIDUAL SCHEME ANALYSIS THEMATIC FUNDS INDEX FUNDS EQUITY LINKED SAVING SCHEMES DIVERSIFIED EQUITY FUNDS DEBT FUNDS CONSLUSION BIBLIOGRAPHY
15 30 33 49 49 69 91 106 126
Ch. 1- 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 329,162 crore (As of Dec, 2006) 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 hardsell 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
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 are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most 2
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. Investment 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.
Investors earn from a Mutual Fund in three ways:
1. Income is earned from dividends declared by mutual fund schemes from time to time. 2. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain. 3
3. If fund holdings increase in price but are not sold by the fund manager, the fund's unit price increases. You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain.
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. Investors of all categories could choose to invest on their own in multiple options but opt for mutual funds for the sole reason that all benefits come in a package.
Advantages of Mutual Funds
1. Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies‟ financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. 2. Diversification Mutual Funds invest in a number of companies across a broad cross-section 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. 3. Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. 4. 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. Apart from liquidity, these funds have also provided very good post-tax returns on year to year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 12.5 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis. 5. 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 brokerage, custodial and other fees translate into lower costs for investors. 6. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. 7. Transparency 5
Investors 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. 8. 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. 9. 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. 10. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. 11. 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. 12. 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 6
avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year
Disadvantages of mutual funds Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund. 1. No assured returns and no protection of capital If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. In addition, mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors. A scheme cannot make any guarantee of return, without stating the name of the guarantor, and disclosing the net worth of the guarantor. The past performance of the assured return schemes should also be given. 2. Restrictive gains Diversification helps, if risk minimisation 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. 3. Taxes
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. 4. 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.
History of Mutual Funds in India 1963 1964 1987 1993 Establishment of Unit Trust of India Unit Scheme 1964 launched Entry of non-UTI, Public Sector mutual funds Entry of private sector funds First Mutual Fund regulations came into being 1996 2003 Substitution of prevalent rules by SEBI (Mutual Funds) Regulations 1996 UTI bifurcated into two separate entities 2004 Specified Undertaking of Unit Trust of India UTI Mutual Fund
Existence of 421 schemes, managing assets worth Rs. 153108
Frequently used terms
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.
Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
Is a charge collected by a scheme when it sells the units. Also called, „Front-end‟ load. Schemes that do not charge a load are called „No Load‟ schemes. Repurchase or „Back-end‟Load
Is a charge collected by a scheme when it buys back the units from the unitholders.
Ch. 2- 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.
a) open-ended schemes b) close-ended schemes c) interval schemes
By investment objective:
a) growth schemes b) income schemes c) Balanced schemes d) money market schemes
a) Tax saving schemes b) special schemes c) index schemes d) sector specific schemes
a) Open-ended schemes Open-ended or open mutual funds are much more common than closed-ended 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 10
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 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.
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 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 11
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.
b) 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 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 $5000 may apply, and unlike the more common open funds discussed below, there is typically a five-year commitment.
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.
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:
a) Growth / Equity Oriented Schemes The aim of growth funds is to provide capital appreciation over the medium to longterm. 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. 13
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 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. 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 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.
b) 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. 16
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 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 lowrated debt instruments could find it difficult to raise money when faced with large redemptions.
c) 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.
d) 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 interbank 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.
Other types of funds
a) 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 19
"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 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 recordkeeping.
b) 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. 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. The insurance contract nature of a segregated fund makes for an interesting feature that insurance companies often use in their marketing. The contract can be issued with an initial "book value" that the company can agree to pay no matter what the actual value of the portfolio supporting the contract. If the market value of the portfolio falls below the book value, the company agrees to pay no less than the book value which is known as the "minimum value guarantee" or the "higher of book or market". Initially, this guarantee feature has some value. Since marketable securities increase over longer periods of time it becomes less important over time. 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 21
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.
c) 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 well-diversified 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 22
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.
Ch. 3- Organization of a Mutual Fund
The structure of mutual funds in India is governed by SEBI (Mutual Fund) Regulations, 1996. In India, is mandatory to have a three tier structure of Management Company. Sponsor-Trustee-Asset
Sponsor Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The sponsor establishes the mutual fund and registers the same with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval of SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record of business interest in the financial markets. Sponsor must have been profit making in at least 3 of the above 5 years. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.
Trustee Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner.
Asset Management Company (AMC) The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crore at all times.
Registrar and Transfer Agent The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.
Custodian A custodian is an agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them.
Ch. 4- 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. Declare and Inform
Watch what you commit. Investors look out for the Offer Document and Hey 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 26
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. 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.
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 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 28
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.
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. 29
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 large-cap fund. Large Cap shares are more liquid and hence easily tradable. 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. 30
Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels. 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 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. Well-managed 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). 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 Average category returns 1-Yr (%) 3-Yr (%) 5-Yr (%) Index funds 40.75 32.91 38.37 30.96 32.38 41.05 30.32
Actively managed funds 29.05 S&P CNX Nifty 32 39.50
(Source: Credence Analytics. NAV data as on February 8, 2007. 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).
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/scrips, or on a given market index. the two basic types of exchange traded derivative instruments are Futures and Options. a 33
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.
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.
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‟
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 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.
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. 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. 37
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.
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 38
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.
Interest Rates and Debt Portfolio Management: no matter which investment stragtegy 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 t he 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 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.
Ch. 5- Individual Scheme Analysis
Section I- Thematic Funds- Infrastructure
Mutual funds constantly come out with different schemes. Infrastructure funds are part of a mutual fund category called thematic funds. While sectoral funds invest in particular sectors like, say, information technology, power, metals, oil and gas, etc, thematic funds invests in themes like infrastructure, consumption-led categories like the retail industry and outsourcing companies. India needs to invest large amounts in areas like Roads, Ports, Power, and Telecom etc. to sustain high economic growth. Apart from government spending, it will also require private participation to make significant progress on developing infrastructure. New initiatives such as Public-Private participation, increase in FDI limits and adequate funding support from the government have provided a tremendous boost to the system and therefore companies engaged in this sector have delivered robust performance in the last couple of years. Today, there is a huge buzz about the Great Indian Gold Rush and its three themes -- infrastructure, consumption and outsourcing. Of these three, infrastructure funds have caught the fancy of a lot of mutual funds; many new funds have been launched in this category in the last couple of years. Infrastructure, as a theme, covers several sectors like power utilities, power equipment and construction companies. Unlike technology sector mutual funds (at best, technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in), infrastructure funds are not restricted to a few sectors. We have made an attempt to compare the thematic infrastructure schemes of a few AMCs.
ICICI Prudential Infrastructure Fund Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Sankaran Naren To provide capital to unit appreciation holders and by income investing
predominantly in equity/equity related securities of the companies belonging to infrastructure
development and the balance in debt securities and money market instruments including call money. Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007) 31st Aug, 2005 Rs. 1,711.81 Crores Rs. 10 Growth option : Rs. 19.19 Dividend option : Rs. 14.91 Minimum Investment Expense Ratio Benchmark Rs. 5000 1.93% S&P CNX Nifty
Portfolio as on 30th April, 2007
11% 1% 3% 2% 6% 7% 6% 2% 5% Auto Ancillaries Cement Dredging Hotels Industrial Products Oil Power Transportation Term Deposits Other Current Assets 9% Banks Construction Ferrous Metals Industrial Capital Goods Non-Ferrous Metals Petoleum Products Telecom Services CPs & CDs Cash, Call, CBLO & Reverse Repo 2% 5% 0%4% 12% 0% 9% 2% 14%
Portfolio as on 30th April, 2007 (% to NAV) Auto Ancillaries 3.72 Banks 12.32 Cement 0.3 Construction 8.77 Dredging 2.07 Ferrous Metals 13.6 Hotels 2.1 Industrial Capital Goods 9.41 Industrial Products 5.21 Non-Ferrous Metals 1.52 Oil 5.91 Petoleum Products 7.29 Power 5.59 Telecom Services 2.43 Transportation 2.8 CPs & CDs 1.1 Term Deposits 10.67 Cash, Call, CBLO & Reverse Repo 5.12 Other Current Assets 0.07 Total 100
Understanding the portfolio: The fund is well diversified in both its stock and sectoral exposures. It is a multisector fund and therefore has a much lesser concentration risk than a typical sector fund. The fund normally holds 35-40 stocks in its portfolio spread across 14-20 sectors, a large number when compared to most other thematic funds. Approximately 83% of the funds are invested in equities of infrastructure related companies. Closely analyzing the equity portfolio, we notice that a considerably high investment has been made in the banking sector. This points out that the fund manager is able to recognize the growth potential of the Banking sector in the Indian context. Due to this, the scheme enjoys the benefits of investing in the booming services sector. The
portfolio consists of several well-reputed companies of India viz. Jindal Steel, SAIL, Tata Steel, BHEL, Reliance Industries, Tata Power, etc. It is noticed that exposure to Auto has been reduced to zero, as holdings in Ferrous Metals (Sesa Goa) has been replaced with Tata Steel. The portfolio is skewed towards large cap as the fund seeks to maximize the risk-return payoff. The Scheme also exhibits term-deposits, CPs & CDs to reputed organizations like Allahabad Bank, UTI, IDBI etc. Comparing the Benchmark The graph below indicates the movement of Rs. 10000 invested at inception vis-àvis the benchmark performance.
The fund largely invests in equities from the infrastructure sector. However, what distinguishes it from a typical sector fund is its pervasive definition of the infrastructure sector. The fund house has taken the liberty of including sectors like banking & financial services among a host of others for defining its area of investment. The large number of stocks in the portfolio may reduce the fund's vulnerability to the fluctuations in each of its holdings. However, it may also prevent spectacular performance from one or two of its stocks from showing up in the performance. The scheme‟s portfolio strategy is governed by its investment objective. In our opinion, the fund can add value to informed investors who have a view on the infrastructure sector and a flair for medium to high risk investment avenues.
UTI Infrastructure Fund Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Sanjay Dongre To provide Capital appreciation through investing in the stocks of the companies engaged in the sectors like Metals, Building materials, oil and gas, power, chemicals, engineering etc. The fund will invest in the stocks of the companies which form part of Infrastructure Industries. Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th March, 2007) 9th March, 2004 Rs. 812.19 Crores Rs. 10 Growth option : Rs. 25.99 Dividend option : Rs. 18.99 Minimum Investment Benchmark Style Box: Rs. 5000 BSE 100
Portfolio as on 30th March, 2007 (% to NAV)
Industrial Capital Goods Construction Cement Net Current Assets Ferrous Metals Industrial Products Unclassified Auto And Ancillaries Chemicals
Telecommunications -service Petroleum Products Power Oil Finance Consumer Durables Deposit With Bank Consumer Non Durables Non-ferrous Metals
Portfolio as on 30th March, 2007 (% to NAV) Industrial Capital Goods Telecommunications -service Construction Petroleum Products Cement Power Net Current Assets Oil Ferrous Metals Finance Industrial Products Consumer Durables Unclassified Deposit With Bank Auto And Ancillaries 32.22 11.37 9.54 9.06 7.56 6.32 4.44 3.74 2.85 2.62 2.29 2.28 2.17 1.09 0.95
Consumer Non Durables Chemicals Non-ferrous Metals Total
0.83 0.51 0.16 100
Understanding the Portfolio UTI Infrastructure Fund is positioned to follow a top down approach keeping in mind the economic scenario. The fund‟s endeavour is to pick sectors, which are expected to perform better and select fundamentally strong companies in those sectors. The scheme‟s performance is highly linked with the overall economic growth of the country as the sectors in which the scheme invests are directly linked to the GDP growth of India. The fund has invested almost 93% of its corpus in Equities. Due to this, the risk in such a scheme may be perceived as higher. The Fund portfolio reveals heavy investment in Basic/Engineering sector, closely followed by communication sector. Further, it has a relatively very low investment in the rapidly growing Auto Ancillaries sector. Comparing the Benchmark:
scheme has invested in equities of on 20-25 companies. This indicates higher exposure to company-specific risk. The scheme‟s performance is highly linked with the overall economic growth of the country as the sectors in which the scheme invests are directly linked to the GDP growth of India. During the month of March 2007, the fund has under performed its benchmark index BSE 100. The ongoing monetary tightening in the economy has negative impact on sector, which has resulted in the underperformance. Although, Engineering & Construction companies are likely to show strong quarterly numbers as well as strong order book position, which are more than 2-3 times of yearly revenues in coming quarters.
DSP Merrill Lynch T.I.G.E.R Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Soumendra Nath Lahiri An open ended diversified equity Scheme, seeking to generate capital appreciation, from a portfolio that is substantially constituted of equity securities and equity related securities of corporates, which could benefit from structural changes brought about by continuing liberalization in economic policies by the Government and/or from continuing investments in infrastructure, both by the public and private sector Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007) 27th April, 2004 Rs. 1499.86 Crores Rs. 10 Growth - Rs. 34.1240 Dividend - Rs. 19.311 Minimum Investment Benchmark Style Box: Rs. 5000 BSE 100
Portfolio as on 30th April, 2007
Industrial Capital Goods Petroleum Products Power Telecom Services Finance Industrial Products Cement Retailing
Construction Banks Media & Entertainment Ferrous Metals Transportation Oil Pharmaceuticals Engineering
Portfolio as on 30th April, 2007 Non-Ferrous Metals Textiles & Textile Products Consumer Durables Debt Industrial Capital Goods 20.11Instruments Construction
Cash & Cash Equivalents
8.9 7.83 7.63 7.22 6.97 6.47 5.74 4.67 3.94 3.66 3.38 2.73 2.57 1.65 0.72
Petroleum Products Banks Power Media & Entertainment Telecom Services Ferrous Metals Finance Transportation Industrial Products Oil Cement Pharmaceuticals Retailing Engineering
Textiles & Textile Products Non-Ferrous Metals Consumer Durables Debt Instruments Cash & Cash Equivalents
0.95 0.45 0.42 2.51 1.48 Total 100
Understanding the Portfolio: DSP T.I.G.E.R. Fund was launched at a very opportune time when the Sensex was around 7,500 and the India economy had begun to witness high growth. DSP India T.I.G.E.R. Fund is aimed at benefiting from the exponential growth that India is likely to witness in the coming decade. The Scheme began with a decent corpus of around Rs 200 crores and has been able to accumulate Rs 1,007 crores as of May 2006. DSP India T.I.G.E.R. is the first fund of its kind that covers infrastructral areas, giving the common investor a chance to make the most of the ongoing economic reforms. The Fund House is very bullish on the Indian Economy and believes that the improved GDP growth in the future shall strengthen the markets further, on the back of continuing economic reforms. Better market capitalisation will result from unlocking as well as creation of value, which the Fund aims at capturing. The fund has a well-diversified portfolio, consisting of about 61 stocks. Capital goods stocks, on an average, accounted for 23 per cent of the portfolio the past year and the top three sectors cornered 40 per cent of the assets. The fund reduced exposure to the cement sector earlier this year, pruning holdings from 13 per cent to 4.5 per cent. This strategy helped it contain losses during the postBudget correction. Comparing the Benchmark
The scheme has generated an annualised return of 53 per cent since inception and has outpaced its benchmark, the BSE 100, by 12 percentage points during the same period. Our View: DSPML T.I.G.E.R's. NAV has grown 18 per cent for the past year and outpaced its benchmark BSE-100 by 3 percentage points. However, it has trailed the ICICI Pru Infrastructure Fund. In the same period, it outperformed peers such as Tata Infrastructure and Birla Infrastructure Fund. The fund's performance has, however, been relatively consistent, trailing the benchmark in just seven of the past 24 months on a monthly return basis. Though impacted by the mid-cap meltdown in May, it staged a recovery subsequently. However, the T.I.G.E.R Fund has a relatively diversified portfolio and thus carries a moderate risk profile. Investors also have to keep in mind that infrastructure theme funds usually have an exposure of 30-40 per cent to mid-cap stocks (market capitalisation less than Rs 5,000 crore), leading to a higher risk profile. Concentrated bets on sectors such as capital goods also add to the fund's risk level. Hence, risk-averse investors may find diversified funds a better alternative.
Caninfrastructure Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Umesh Kamath To generate income / capital appreciation by investing in equities and equity related instruments of companies in the infrastructure sector. Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007) 11th September, 2005 Rs. 81.5677 Rs. 10 Growth - Rs. 15.05 Dividend - Rs. 12.86 Minimum Investment Benchmark Portfolio: Rs. 5000 BSE 100
Portfolio as on 31st May, 2007
2% 9% 2% 5% 7% 15% 16% Construction Energy Technology Chemicals Cash & Cash Equivalents Basic/Engineering Diversified Metal & Metal Products Services T-Bills 2% 21%
Portfolio as on 31st May, 2007 Construction 21.29 Basic/Engineering 20.88 Energy 16.01 Diversified 14.71 Technology 7.11 Metal & Metal Products 4.77 Chemicals 2.17 Services 2.12 Cash & Cash Equivalents 8.51 T-Bills 2.44 Total 100
A Comparative Study
ICICI Prudential: Prudential ICICI Asset Management Company Limited is an investment management company and a 55:45 joint venture between Prudential Corporation plc, UK, and ICICI Ltd., India. Both companies are financial giants, and each is a major player in its field. Prudential Corporation plc, UK was incorporated in 1848, as a provider of insurance products. Through its investments, it controls approximately 4% of all the listed shares on the second largest stock exchange in the world, the London Stock Exchange, making it one of the largest institutional investors in the UK. ICICI Ltd. was established in 1955 by the World Bank, the Government of India and representatives of Indian industry, to promote the industrial development of India by providing project and corporate finance to Indian industry.Prudential ICICI Asset Management Company Limited has been incorporated with a capital of Rs 65 crore. This investment - way above the stipulated norm of Rs 10 crore, represents a strategic long-term commitment, on the part of both partners, to the rapidly expanding financial services sector in India. In a short span of 14 months, Prudential ICICIs product portfolio has grown from 2 closed ended funds to 8 open ended funds and 2 closed ended funds.
UTI UTI Mutual Fund is managed by UTI Asset Management Company Private Limited (Estb: Jan 14, 2003) who has been appointed by the UTI Trustee Company Private Limited for managing the schemes of UTI Mutual Fund and the schemes transferred / migrated from UTI Mutual Fund. UTI AMC is a registered portfolio manager under the SEBI (Portfolio Managers) Regulations, 1993 on February 3 2004, for undertaking portfolio management services and also acts as the manager and marketer to offshore funds through its 100 % subsidiary, UTI International Limited, registered in Guernsey, Channel Islands. UTI Mutual Fund has come into existence with effect from 1st February 2003. UTI Asset Management Company presently manages a corpus of over Rs. 34500 Crore. The fund managers are also ably supported with a strong in-house 57
equity research department. To ensure better management of funds, a risk management department is also in operation.
DSP Merrill Lynch DSP Merrill Lynch Asset Management (India) Ltd., has been set up by DSPML and MLAM, to act as the Asset Management Company (AMC) to the Fund. The AMC has been appointed as the Investment Manager to the fund, MLAM holds 40% of the paid up share capital of the AMC, while the balance 60% (approximately), is held by DSPML. DSP Merrill Lynch, originally called DSP Financial Consultants Ltd., traces its origins to DS Purbhoodas & Co., a securities and brokerage firm with over 130 years of experience in the Indian market. After a decade long association, DSP Merrill Lynch & Co. Inc. took up a 40% stake in DSPFC and the name was changed to DSPML Ltd. DSPML is a full fledged financial services organization with a broad employee base and offices in Mumbai, New Delhi, Calcutta, Chennai, Bangalore, Hyderabad and Cochin. MLAM is a unit of Merrill Lynch Asset Management Group, the money management arm of ML & Co. It is based in Princenton, N.J., USA and offers a wide range of investment products in virtually all U.S. domestic and international asset classes and in major capital markets of the world. Merrill Lynch Investment Managers investment philosophy is designed to seek consistent, long-term strategic performance results. Its disciplined value oriented approach to managing its clients portfolios has been with the primary objective of seeking consistent returns over a long period. The name of DSP Merrill Lynch Asset Management (India) Ltd. has been changed to DSP Merrill Lynch Investment Managers Ltd. w.e.f 20th July, 2000.
Canbank Mutual: Canbank Investment Management Services Ltd., a wholly owned subsidiary of Canara Bank, has been set up as per the Securities and Exchange Board of India (Mutual Funds) Regulations, 1933. Investment Management Agreement has been signed between Canbank Mutual Fund and the Investment Manager, whereby the Investment Manager is empowered to manage the affairs of Canbank Mutual Fund and operate its various 58
Schemes. The sponsor-Canara Bank, is a leading Nationalised Bank operating in India and abroad, through its network of branches in India and offices in London, Moscow, UAE and Hong Kong. Canbank Mutual Fund was one of the pioneers of the Mutual Fund Movement in India. Canbank Mutual Fund has launched 20 Schemes since its inception. Of the twenty Schemes, five Schemes have been fully redeemed so for and remaining fifteen Schemes are being managed by the Investment Manager.
Comparative Performance Study: Scheme v/s BSE Sensex Scheme Asset Management Company CanInfrastructure DSP Merrill Lynch Tiger Fund ICICI Prudential Infrastructure Fund UTI Infrastructure Fund Canbank Mutual Fund DSP Merrill Lynch Mutual Fund ICICI Prudential Mutual Fund UTI Mutual Fund 40.02 31.80 8.22 44.56 36.34 8.22 Scheme Returns 27.39 52.35 Index Returns 34.91 43.47 -7.52 8.88 Difference
Scheme v/s NSE Nifty Scheme Asset Management Company CanInfrastructure ICICI Prudential Infrastructure Fund Canbank Mutual Fund ICICI Prudential Mutual Fund Scheme Returns 27.39 44.56 Index Returns 32.25 33.38 -4.86 11.18 Difference
As evident from the performance analysis of the mutual fund schemes in question, we can clearly see that Caninfrastructure has underperformed when it comes to comparison with its own benchmark i.e. BSE-100. Moreover, when we compare it with a common platform using the BSE Sensex or NSE Nifty, too, it has shown a relatively low performance. Further, from the point of view of investment returns, we hereby observe that, ICICI Prudential Infrastructure have performed satisfactorily and seem to have generated returns well above the Exchange indices. If numbers are to be considered, DSPML T.I.G.E.R shows the highest returns since inception. Thus, from analysis of the past performance since inception of the schemes in question, we may recommend DSPML T.I.G.E.R to investors with an expectation that the positive performance will be maintained even in future by the fund scheme.
Section II- Index Funds In India, we are used to the concept of professional fund management. Today, a host of mutual funds are available to investors. A unifying feature of all of these funds is that they are all actively managed funds -- fund managers select a portfolio of stocks so as to get "high returns".
An alternative approach towards fund management exists: that of a fund which is passively managed. Such funds are called index funds. An index fund is a fund whose daily returns are the same as the daily returns obtained from an index. Thus, it is passively managed in the sense that an index fund manager invests in a portfolio which is exactly the same as the portfolio which makes up an index. For instance, the NSE-50 index (Nifty) is a market index which is made up of 50 companies. A Nifty index fund has all its money invested in the Nifty fifty companies, held in the same weights of the companies which are held in the index. It is hence obvious that an index fund can never "beat the index". On the other hand, it can also never do worse than the index. This type of fund management leaves no decisions open, about what companies to hold and how much to invest in each company. This is contrary to active management, where a good fund manager is considered to be one who can invests a lot of resources into researching which are the companies to hold so that the returns on the managed portfolio is more than what the "market" offers. Thus, index funds explicitly give up the biggest objective of every active fund manager, which is that of "beating the market". This sounds completely unlike the efforts of all fund managers in the country. Why would it be a good idea? 1. The simplest fact is that beating the market is hard. Two decades of study of evaluation of mutual funds suggest that most funds fail to beat the market, on a risk-adjusted basis. That is, when funds offer high returns, typically they are more risky than those which offer lower returns. Results of this nature have been observed in a wide variety of markets, all over the world. In India also, the track record of funds at outperforming the market is dismal. 2. The behaviour of an actively managed fund fluctuates more than passively managed index funds. When funds do beat the market, on a risk-adjusted basis, it is often the case that this owes to good fortune, and the excess returns are not repeated in following years. The problem of identifying a good fund manager is as hard as picking good stocks. Matters are made worse by the fact that the performance of fund managers fluctuates with changes of the management team that runs a fund changes. The behaviour of the market index, in comparison, is 61
more predictable -- it has a more reliable risk-return tradeoff. You know more about what the volatility of Nifty is going to be next month, based on past experience, as compared with the volatility of a fund NAV (which could change for a variety of reasons). 3. There is an additional issue of management fees. Active managers incur various expenses: wages for research and fund management staff, costs of buying data and computer power, and transactions costs in trading. Ultimately, investors who buy into these funds are paying these costs. In contrast, Index funds avoid almost all these costs. The above set of points seems to suggest a strong case for index funds. But an argument can be made that different investors have different needs. A young person, at the start of her career, might be willing to make a more risky investment for higher returns compared to a retired person, who would not be as willing to accept so much risk in her investment and would settle for a lower amount of returns. In this case, portfolios need to be tuned to specific situations. If a rich person can afford to hire a personal fund manager, wouldn't the personal fund manager do something unique that addresses his needs? In this sense, don't we need something more than just holding the index? A well-researched body of financial economics suggest that there are exactly two assets that are important: the riskless asset (like money in the bank, or government treasury bills) and the market index. Any investor can choose an acceptable level of return and risk by mixing these two in varying proportions. Low risk portfolios can be constructed by putting a smaller fraction of money into the market index. Risk greater than the market index can be obtained by borrowing at the riskless rate and investing in the market index. Hence, we only need two funds -- a riskless investment and an index fund -- to take care of the investment objectives of everyone. Index funds are available from many investment managers. Some common indices include the S&P 500, the Wilshire 5000, the FTSE 100 and the FTSE All-Share Index.
UTI Master Index Fund
Objective The fund is an actively managed index fund, and will invest at least 90 per cent of the funds mobilised in a basket of securities drawn from NSE 50 and BSE 30 indices. Up to 10 per cent of the corpus would be invested in fixed income securities and money market securities. It was converted in to an open-ended scheme in October 2000. The fund was earlier known as Index Equity Fund.
Scheme Snapshot Fund Manager Scheme Objective Scheme Sub-Objective Scheme Type Min. Investment(Rs) Total Assets(Rs./Mn) Registrars Launch Date Asset Allocation Equity Shares Net Current Assets Swati Kulkarni Equity Equity-Index Open 5000 492.87 UTI Branches 01-JUN-98 as on 30-Apr-07 94.26 % 5.74 %
Returns* (%) Absolute
3 months 12.89
6 months 4.89
1 year 49.09
3 years* 43.53
Relative to Sensex ** Relative to Nifty **
Sector Allocation Sector I T - Software Banks Petroleum Products Telecommunications -service Consumer Non Durables Industrial Capital Goods Auto Cement Oil Finance Pharmaceuticals Power Ferrous Metals Non-ferrous Metals Net Current Assets
as on 30-Apr-07 % Of Asset 18.97 14.62 12.27 9.94 7.24 7.24 5.73 4.46 4.41 4.22 3.30 3.14 2.52 1.43 0.50
Our View 64
The fund being an index fund invests only in equities. And as we see the fund style it shows that the investment style is growth oriented. Thus investors who are capable of taking moderate level risk are advised to invest in this fund. But we also see that in an index fund can never do worse than the index. So investors who are ready to take moderate risk to low level risk can invest in this scheme.
When we try to compare the performance of the fund v/s category average we see that the fund has outperformed the category average till the month of February. But its performance is diminishing for the past 3 months. I think one of the prime reasons for this fall is that around 18.97% of the mobilized funds are invested in IT sector. And from past few months IT sector is not doing well. The reason being is the appreciation of Indian rupee against the US dollar.
Reliance Index Fund - Sensex Plan Objective The objective of the Sensex plan is to replicate the composition of the sensex, with a view to endeavor to generate returns, which could approximately be the same as that of Sensex.
Scheme Snapshot Fund Manager Scheme Objective Scheme Sub-Objective Scheme Type Min. Investment(Rs) Total Assets(Rs./Mn) Registrars Launch Date Ashwani Kumar Equity Equity-Index Open 5000 38.5 Karvy Consultants Limited 29-JAN-05
Asset Allocation Particulars Equity Shares Cash And Other Assets Percentage
as on 30-Apr-07
NAV Performance (NAV Chart of growth option)
Returns (%) 1wk 3 months 6 months 5.13 1 year 43.11 3 years* -NM36.17 Inception*
Relative to Sensex ** Relative to Nifty **
Understanding the fund: Reliance Index Fund is an open-ended Equity Index Scheme which aims to provide medium to long-term growth of capital. In comparison to actively managed funds, Reliance index fund has a lower risk-return profile. Simply put, this fund will not turn in that high returns as a diversified equity fund would when bulls are on a rampage. At the same time, it will not be as severely hurt as the diversified equity category when stock markets tank. Entry into the fund requires a minimum investment of Rs 5000. The fund is available for subscription at an entry load of 1%. There is no exit load. The scheme was managing assets worth Rs 38.5 mn as on April 30, 2007.
Our View 67
The fund being an index fund invests only in equities. And as we see the fund style it shows that the investment style is growth oriented. Thus investors who are capable of taking moderate level risk are advised to invest in this fund. But we also see that in an index fund can never do worse than the index. So investors who are ready to take moderate risk to low level risk can invest in this scheme. When we try to compare the performance of the fund v/s category average we see that the fund has underperformed the category average till the month of February. The ongoing monetary tightening in the economy has negative impact on the Sensex, which has resulted in the underperformance.
LICMF Index Fund - Sensex Plan Objective An open ended Index linked equity scheme seeking to provide capital growth by investing in index stocks.
Scheme Snapshot Fund Manager Scheme Objective Scheme Sub-Objective Scheme Type Min. Investment(Rs) Total Assets(Rs./Mn) Registrars Launch Date Nagendra Singh Equity Equity-Index Open 5000 282.81 Karvy Computershare Ltd 14-NOV-02
as on 30-Apr-07
Particulars Equity Shares Cash And Other Assets
Percentage 97.06 2.04
Returns (%) 1wk 3 months 6 months 0.70 1 year 50.00 3 years* 35.33 29.32 Inception*
Relative to Sensex ** Relative to Nifty **
Relative Performance (Fund Vs Category Average)
Understanding of the fund LICMF Index Fund is an open-ended Equity Index Scheme which aims to provide medium to long-term growth of capital. In comparison to actively managed funds, Reliance index fund has a lower risk-return profile. Simply put, this fund will not turn in that high returns as a diversified equity fund would when bulls are on a rampage. At the same time, it will not be as severely hurt as the diversified equity category when stock markets tank. Entry into the fund requires a minimum investment of Rs 5000. The fund is available for subscription at an entry load of 2.25% and exit load of 0%. The scheme was managing assets worth Rs 282.81mn as on April 30, 2007.
Our View The fund being an index fund invests only in equities. And as we see the fund style it shows that the investment style is growth oriented. Thus investors who are capable of taking risk are advised to invest in this fund. But we also see that in an index fund can never do worse than the index. So investors who are ready to take moderate risk to high risk can invest in this scheme. When we try to compare the performance of the fund v/s category average we see that the fund is an underperformer. Only in the month of June the fund has outperformed the fund category. One reason which I would like to cite is that since the entry load is high as compared to other funds in the same category there is less attractiveness from the investors. Comparison of funds 70
Absolute returns Absolute returns measure how much a fund has gained over a certain period. So you look at the NAV on one day and look at it, say, six months or one year or two years later. The percentage difference will tell you the return over this time frame. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - a mutual fund achieves over a given period of time. NAV= (Market Value of Equity investments) + (NAV of Equity Mutual Funds) + (Debt & Fixed Income Securities on face value + accrued interest) + (NAV of Debt Mutual Funds) + (Cash) + (Balances with Broker) + (Dividend/Interest/any other receivables) – (Liabilities) – (Accrued Expenses i.e. taxation (NRI)/portfolio management fees, and other statutory liabilities} High Watermarking is arrived at after deducting performance-based fees from the closing NAV. Opening NAV (for purpose of calculating performance based fee) would be highest of all previous year closing NAV (adjusted for Infusions and Withdrawals). Absolute return is calculated as a difference between Closing NAV and the High Watermark as at the end of the previous year. Return% is computed as a percentage of Absolute returns on the Opening NAV LIC MF Index - Sensex Plan (G) 1 Year 39.3% Reliance Index-Sensex Plan (G) 37.8% UTI Master Index Fund (G) 41.3%
We clearly know the importance of absolute returns in judging the attractiveness of a fund. The above table states that UTI Master Fund is the best fund amongst the three when absolute returns are considered. Thus when an investor tries to evaluate the performance of a fund UTI would be the best fund to invest in.
Expense ratio 71
The expense ratio denotes that percentage of the mutual fund's total net assets/corpus that goes towards meeting its expenses. These expenses are recurring in nature and must be differentiated from one-time expenses like loads (on entry and exit). The fund's recurring expenses that are broadly covered by the expense ratio are fund management fees, the marketing and selling expenses and registrar fees, among other charges. All these expenses are borne by the mutual fund. In other words, all these expenses are deducted from the net assets/corpus of the fund. Since the NAV (net asset value) per unit is based on the net assets, higher net assets for a given number of units will result in a higher NAV. Conversely, lower net assets for a given number of units will result in a lower NAV. Since expenses erode the net assets, one way for a mutual fund to improve its returns is by keeping expenses on the lower side. However, investors would do well to understand that this doesn't mean that funds with lower expense ratios are necessarily better than the funds with higher expense ratios. Investors should appreciate that the expense ratio is just one parameter amongst many others, which is used to judge a fund's attractiveness. What a lower expense ratio effectively does is that it provides investors with a better chance to rake higher returns.
LIC MF Index Sensex Plan (G)
Reliance IndexSensex Plan (G) 1.49
UTI Master Index Fund (G) 0.75
From the above table we can clearly see that the expense ratio of UTI Master Index Fund is very low as compared to other two 2 funds. Thus when an investor takes a decision whether to invest or not to invest in any of the above mentioned funds, the above table gives a clear picture stating that UTI is the right fund to invest in as far as expense ratio is concerned.
Load is the price of buying a unit. An entry load is a charge that may be levied on an investor when buying the units of a scheme. Typically, the investor pays a „premium‟ over the NAV of the scheme to account for the entry load, in proportion to the percentage charged to the investor as an entry load. The entry load percentage is added to the prevailing NAV at the time of allotment of units. An exit load is a charge that may be levied on an investor when exiting a scheme. When an exit load applies to redemption from a scheme, the investor may sell his units back to the fund at a „discount‟ to the stated NAV, in proportion to the percentage charged as an exit load. The exit load percentage is deducted from the NAV at the time of redemption (or transfer between schemes). This amount goes to the Asset Management Company and not into the pool of funds of the scheme. Entry/exit loads and initial issue expenses qualify as one-time charges, as opposed to recurring expenses. First, let's consider the case of new fund offers (NFOs). Over the last few years, investors have been faced with a deluge of NFOs. But in recent times, a perceptible trend in NFOs has been a rise in the number of close-ended funds. This phenomenon can be traced to the rules governing initial issue expenses. Close-ended funds are not permitted to charge any entry load; instead 6% of the sum mobilized during the NFO period can be utilised to meet the initial issue expenses. The same can be amortised (charged to the fund) over the fund's close-ended tenure. Conversely, in the case of open-ended NFOs, funds are required to meet all the sales, marketing and distribution expenses from the entry load. They are not permitted to charge any initial issue expenses. The rules governing entry/exit loads state that taken together, the two cannot account for more than 6% of the net asset value (NAV). Charging an entry load for the entire 6% upfront would adversely affect the fund's performance in the initial period. Hence AMCs choose to have rather "rational" entry loads in the range of 2.25%2.50%. Like initial issue expenses, entry loads also eat into the investor's returns, since the investor has that much less money working for him. It is not difficult to understand why AMCs have a newfound liking for close-ended funds. With the provision for charging 6% of amount mobilized towards initial issue expenses, AMCs are better equipped to compensate the distributors and agents, who in turn help the 73
fund houses in accumulating more assets. Higher assets translate into higher revenues for the AMCs. Of course, close-ended funds do offer advantages as well. For example, the fund manager can make investments from a long-term perspective and investors are given the opportunity to invest for a pre-defined investment horizon. However, investors would do well to factor in the costs involved.
Entry Load LIC MF Index - Sensex Plan (G) Reliance Index-Sensex Plan (G) UTI Master Index Fund (G)
Entry Load 2.25% 1% 0%
Exit Load 1% 0% 1%
In the above table when we compare three different funds on the basis of load charges we see that Reliance charges an entry load of 1% and 0% exit load while it‟s the other way round for UTI Master Index Fund. UTI charges an entry load of 0% and an exit load of 1%.So then how do we decide which is a better fund. In a fund where there is an entry load means that you have already paid the charges irrespective of whether you make profit or loss. While in a fund where there is an exit load you pay the charges only when you make an exit. Thus you have a chance to earn profits and then pay the load. And normally an investor would only make an exit when he earns some profit. So I think that UTI Master Index Fund is a better fund to invest in.
Asset management companies Jeevan Bima Sahyog AMC Ltd. Jeevan Bima Sahyog AMC was established in the year 1994 to manage the investments and operate the schemes of LIC MF.Jeevan Bima Sahyog Asset Management Company Ltd is a company promoted by Life Insurance Corporation of India with an authorized capital of Rs.25 crores. The day to day operations of the AMC are looked after by
experienced and qualified professionals, consisting of senior officials on deputation from Life Insurance Corporation of India as well as directly recruited officials of the AMC.
Reliance Capital Asset Management Ltd Reliance Capital Asset Management Limited (RCAM), a company registered under the Companies Act, 1956 was appointed to act as the Investment Manager of Reliance Mutual Fund.RCAM is a wholly owned subsidiary of Reliance Capital Limited, the sponsor. The entire paid-up capital (100%) of Reliance Capital Asset Management Limited is held by Reliance Capital Limited.
Reliance Capital Asset Management Limited was approved as the Asset Management Company for the Mutual Fund by SEBI dated June 30, 1995. The Mutual Fund has entered into an Investment Management Agreement (IMA) with RCAM dated May 12, 1995 and was amended on August 12, 1997 in line with SEBI (Mutual Funds) Regulations, 1996. Pursuant to this IMA, RCAM is authorized to act as Investment Manager of Reliance Mutual Fund. The net worth of the Asset Management Company including preference shares as on March 31, 2005 is Rs.30.13 crores.
RCAM has been registered as a portfolio manager with SEBI and was renewed effective 1st August, 2003.RCAM has commenced these activities. It has been ensured that key personnel of the AMC, the systems, back office, bank and securities accounts are segregated activity wise and there exists systems to prohibit access to inside information of various activities. As per SEBI Regulations, it will further ensure that AMC meets the capital adequacy requirements, if any, separately for each such activity.
RCAM has been appointed as the Investment Manager of "Reliance India Power Fund", a Venture Capital Fund registered with SEBI dated June 16, 2005 but this activity is yet to commence.
UTI Asset Mgmt Company Pvt. Ltd 75
UTI Asset Management Company Private Limited is a company incorporated under The Companies Act, 1956. It has been appointed as the Asset Management Company of the UTI Mutual Fund by the Trustee in terms of Investment Management Agreement dated December 9, 2002 executed between UTI Trustee Company Private Limited and UTI Asset Management Company Private Limited. The AMC was approved by SEBI to act as the asset management company for UTI Mutual Fund dated January 14, 2003. Out of the AMC's total paid-up capital of Rs.10 crores, 25% is held by each of the Sponsors. The AMC apart from managing the schemes of UTI Mutual Fund will also manage the schemes transferred/migrated from UTI MF, in accordance with the provisions of the Investment Management Agreement, the Trust Deed, the SEBI (Mutual Funds) Regulations and the objectives of the schemes.
UTI AMC will be entering into a service agreement with the Administrator of the Specified Undertaking of The Unit Trust of India to provide back office support for business processes excluding fund management.
UTI AMC has been registered as a portfolio manager under the SEBI (Portfolio Managers) Regulations, 1993 on February 3 2004, for undertaking portfolio management services.
UTI International Ltd., a 100 % subsidiary of UTI AMC, registered in Guernsey, Channel Islands, and acts as manager to offshore funds and markets these offshore funds abroad.
Systems are in place to ensure that bank and securities accounts are segregated and there is no conflict of interest between the various activities undertaken by UTI AMC.
Investment philosophy UTI Mutual Fund‟s investment philosophy is to deliver consistent and stable returns in the medium to long term with a fairly lower volatility of fund returns compared to the broad market. It believes in having a balanced and well-diversified portfolio for all the 76
funds and a rigorous in-house research based approach to all its investments. It is committed to adopt and maintain good fund management practices and a process based investment management. UTI Mutual Fund follows an investment approach of giving as equal an importance to asset allocation and sectoral allocation, as is given to security selection while managing any fund. It combines top-down and bottom-up approaches to enable the portfolios/funds to adapt to different market conditions so as to prevent missing an investment opportunity. In terms of its funds performance, UTI Mutual Fund aims to consistently remain in the top quartile vis-à-vis the funds in the peer group.
NAV growth NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the Asset Management Company (AMC) at the end of every business day. Net asset value on a particular date reflects the realisable value that the investor will get for each unit that he is holding if the scheme is liquidated on that date
NAV per share = Current value of fund holdings / No. of fund shares Eg: Rs.100, 000 / 3,333 = 30 The NAV is calculated by dividing the current value of the portfolio by the number of fund shares outstanding. For open-ended mutual funds, new shares are issued as money flows into the fund. Likewise, the number of shares outstanding is reduced as investments are redeemed. The NAV increases as the value of the portfolio's holdings increase. For example, if a share of a stock fund costs Rs.30 today and Rs.18 one year ago, there has been a gain (or profit) of Rs.12 a share, or about 66%, before fund expenses. The change in a fund's NAV determines its performance. Comparing NAV performance enables investors to differentiate funds on a relative basis.
LIC MF Index - Sensex Plan (G) 77
NAV (%) GROWTH
1WEEK 1MONTH 3MONTH 6MONTH 1YEAR
Reliance Index-Sensex Plan (G)
NAV (%) GROWTH
1WEEK 1MONTH 3MONTH 6MONTH 1YEAR
UTI Master Index Fund (G)
NAV (%) GROWTH
1WEEK 1MONTH 3MONTH 6MONTH 1YEAR
In the above three tables we can clearly see the NAV growth of three different schemes for a period of 1 year. What we understand from the above data is that for the 1 st week and first month the growth of all the 3 schemes is the same. But when we look at the growth figures for 3 months UTI appears to be a better fund. And then we compare the figures for a period of 6 months. It shows that Reliance has performed better. Finally when we compare the NAV growth over a period of 1 year UTI Master Index Fund is the best performing fund amongst the three. Comparative Performance Study Scheme v/s Nifty Scheme LICMF Index Fund – Sensex Advantage Plan UTI Master Index Fund Reliance Index Fund – Sensex Plan AMC LIC Mutual Fund UTI Mutual Fund Reliance Mutual Fund Scheme Returns 29.36 18.73 36.23 Index Returns 35.72 0.00 34.28 Difference
-6.36 18.73 -1.95
Scheme v/s BSE Sensex 78
Scheme LICMF Index Fund – Sensex Advantage Plan UTI Master Index Fund Reliance Index Fund – Sensex Plan
AMC LIC Mutual Fund UTI Mutual Fund Reliance Mutual Fund
Scheme Returns 29.36 18.73 36.23
Index Returns 38.60 0.00 38.04
Difference -9.24 18.73 -1.81
As we see from the comparative performance analysis of the mutual fund schemes in the above tables, we can clearly see that only one fund that has outperformed both the indices is UTI Master Index Fund. Both the other funds have underperformed in respect to both the indices. Thus if these numbers are considered, we come down to conclusion stating that UTI Master Index fund shows the highest returns since inception.
Now when we try to consolidate the outcomes of all the judging parameters, we recommend UTI Master Index Fund to investors.
Section III- Equity Link Savings Scheme
Equity Link Savings Schemes are similar to the normal equity diversified schemes that invest across the board and market segments. Features that differentiate ELSS from an open ended equity diversified scheme are tax saving benefit (deduction under Sec 80C) and a lock in period of three years.
The common retort to the oft-asked question by anxious investors, of the best way to save tax, is to invest in Post Office savings schemes, or perhaps a regular investment in a public provident fund, or to buy insurance policies. It is unfortunate that the greatly advantageous Equity Linked Savings Scheme (ELSS) is hardly ever mentioned, which is not a surprise, since, even though it is one of the high yielding products, it remains one of the lesser known ones. That is another reason that investors do not yet comprehend the potential benefits of this product.
ELSS holds the advantage of being the only equity-based tax saving instrument available in the country today and offers tax deduction on investments up to Rs 1, 00,000, under Section 80C of the Income-Tax Act.
Why investing in ELSS? Tax Benefit: Upto Rs one lakh under Section 80C. Saves from Short Term Volatility: Lock in of three years. Better Return than that of other savings instruments and similar to other equity schemes.
ICICI Prudential Taxplan –Growth Fund Snapshot:
Structure Fund Manager Fund Objective
Open Ended Equity Growth fund Sankaran Naren The scheme seeks to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities.
Indicative Investment Horizon Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30 April, 2007) Minimum Investment Expense Ratio Benchmark
5 yrs. & more 9th Aug, 1999 Rs. 700.1381 Crores Rs. 10 Growth option : Rs. 90.26 Rs. 500 2.22% S&P CNX Nifty
Portfolio as on 31st May, 2007
Portfolio as on 31st May, 2007 (% to NAV) Technology 14.09
Health Care FMCG Diversified Financial Services Chemicals Services Automobile Energy Textiles Basic/Engineering Construction Metals & Metal Products Other Current Assets Total
12.94 10.68 9.90 8.83 8.39 6.45 6.17 5.96 5.32 2.37 1.99 1.53 5.38 100
Portfolio Characteristics: Portfolio as on 31st May, 2007 Average Market Cap(Rs Cr) Market Capitalization Giant Large Mid Small Tiny 2895.84 % of Portfolio 19.94 2.62 35.23 40.95 0.56
Scheme Performance (%) As On 31st May, 2007: 14 days -1.57 1 month 2.84 3 months 10.88 1 year 38.97 3 yrs* 53.99 Inception* 32.55
Understanding the portfolio: Prudential ICICI Tax Plan continues to be a high-return high-risk game for investors. It may not go down well with investors who are looking for stability over flashy returns. Its concentration in small and mid cap stocks is a testimony to this fact. Mid caps and small caps occupy humungous space in its portfolio, at 35 and 41 per cent, respectively. Large cap companies have a small presence in its portfolio (2.62 per cent in May, 2007). The fund is no doubt aggressive but it has been able to justify its strategy through good returns. The fund is not only aggressive in selecting stocks but also churns its portfolio very vociferously. It has restricted its portfolio to around 50 stocks. The fund manager loves to try out stocks but the buy-and-hold strategy does not seem to be his priority. It paid the price for being too aggressive when the markets went down. After the May crash, the fund had lost heavily. In the June quarter, the fund had lost 15.75 per cent, slightly more than the category's loss of 15.35 per cent. Since then, the going has been a little tough. During the six month period ending January 11, 2007, the fund has delivered 28.65 per cent to under-perform the category's 30.20 per cent returns. Technology sector remains the top holding of the fund followed by Healthcare, Diversified and FMCG. Cadila Healthcare is currently its top holding with an over 5 per cent allocation (as per December 2006 portfolio). Sundaram-Clayton (4.84 per cent), Kesoram Industries (4.76 per cent) and Trent (4.10 per cent) are the other major holdings.
UTI Equity Tax Savings Plan - Growth Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity Growth fund Swati Kulkarni Aims at providing investors the opportunity to participate in the reasonable growth in the value of investments in equities and equity - linked securities, over a period of time, in addition to tax benefits. Indicative Investment Horizon Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30 April, 2007) Minimum Investment Expense Ratio Benchmark
5 yrs. & more 15th Dec, 1999 Rs. 302.5493 Crores Rs. 10 Growth option : Rs 30.92 Rs. 500 2.34% BSE 100
Portfolio as on 31st May, 2007
Technology Diversified FMCG Energy Basic/Engineering Financial Services Metals & related products Construction Health Care
Auto Mobile Services Textiles
Portfolio as on 31st May, 2007 (% to NAV)
Technology Diversified FMCG Energy Basic/Engineering Financial Services Metals & Metal Products Construction Health Care Automobile Services Textiles Other Current Assets
19.84 12.24 9.96 8.85 8.51 8.41 6.56 5.57 4.90 3.94 2.82 1.02 7.38
Portfolio Characteristics: Portfolio as on 31st May, 2007 Average Market Cap(Rs Cr) Market Capitalization Giant Large Mid Small Tiny Scheme Performance (%) As On 8 June, 2007: 14 days -0.77 1 month 3.9 3 months 11.38 1 year 38.53 3 yrs* 33.69 Inception* 19.34 14540.42 % of Portfolio 52.81 12.97 17.07 11.87 2.97
Understanding the Portfolio: UTI Equity Tax Savings Plan continues to be a medium-return high-risk game for investors. It may not go down well with investors who are looking for stability over flashy returns. Its concentration in small and mid cap stocks is a testimony to this fact. Mid caps and small caps occupy humungous space in its portfolio, at 17 and 12 per cent, respectively. Large cap companies have also small presence in its portfolio (13 per cent in May, 2007). Technology sector remains the top holding of the fund followed by Healthcare, Diversified and FMCG.Bharati Tele Ventures is currently top holding with an over 5 per cent allocation (as per May 2007 portfolio).Reliance Industry Ltd (4.36 per cent), Satyam Computer Services Ltd (4.19 per cent),Aditya Birla Nuvo Ltd (4.17 per cent) are other major holdings. As per see the portfolio P/E ratio (28.89 per cent) of UTI is better than ICICI Prudential (18 per cent).
Reliance Tax Saver Fund - Growth Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity Growth fund Ashwani Kumar The primary objective of the scheme is to generate long-term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments. Indicative Investment Horizon Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 31 May, 2007) Minimum Investment Expense Ratio Benchmark Fund Style
5 yrs. & more 23rd Aug, 2005 Rs. 1703.44 Crores Rs. 10 Growth option : Rs. 14.52 Rs. 500 1.93% BSE 100 Portfolio Characteristics
Portfolio as on 30th April, 2007
Basic Engineering Auto Mobile Technology Construction Chemicals Services Diversified
Financial Services FMCG
Portfolio as on 31st May, 2007 (% to NAV) Basic/Engineering Automobile Technology Construction Chemicals Services Diversified Financial Services FMCG Other Current Assets Total 25.67 16.41 13.51 11.28 3.47 3.40 3.34 3.12 1.92 17.88 100
Portfolio Characteristics: Portfolio as on 31st May, 2007 Average Market Cap(Rs Cr) Market Capitalization Giant Large Mid Small Tiny Investment Valuation Portfolio P/E Ratio 3089.47 % of Portfolio 14.58 6.55 36.16 42.71 -Stock Portfolio 25.53
Scheme Performance (%) As On 31st May, 2007: 14 days -0.27 1 month 3.86 3 months 9.5 1 year 50.16 3 yrs* NA Inception* 24.74
Understanding the Portfolio: Reliance Tax Saver Fund Plan continues to be a high-return high-risk game for investors. It may not go down well with investors who are looking for stability over flashy returns. Its concentration in small and mid cap stocks is a testimony to this fact. Mid caps and small caps occupy humungous space in its portfolio, at 36 and 43 per cent, respectively. Large cap companies have a small presence in its portfolio (6.55 per cent in May, 2007).
The fund is no doubt aggressive but it has been able to justify its strategy through good returns. The fund is not only aggressive in selecting stocks but also churns its portfolio very vociferously. 91
Basic Engineering sector remains the top holding of the fund followed by Automobile, Technology and Construction. Areva T and D India Ltd is currently its top holding with an over 7.39 per cent allocation (as per May 2007 portfolio). Alstom Projects India Ltd (5.36 per cent), Punjab Tractors Ltd (4.86 per cent) and Tata Consultancy Services Ltd (4.26 per cent) are the other major holdings.
Our View: Risk-averse investors may complain about the volatility factor in an equity-linked instrument but the same is taken care of by the mandatory three-year lock-in period. Equities tend to be volatile over the short-term, but the performance tends to get smoothened-out over a longer, three-year time frame. Even the fund manager is not under pressure to take risky, aggressive investment calls to deliver short-term growth, as investors are in the Fund for the long haul. This translates into lower volatility in an ELSS, as compared to that in a diversified equity fund. Moreover, equities outperform other investment avenues like bonds, real estate and gold, over the long term (at least 10 years). Therefore, ELSS offers investors a window to benefit from the 'power' of equities and also claim tax benefits to boot! No doubt NSC and PPF offer investors an assured return, but equities have the potential to offer a higher return vis-à-vis fixed income avenues, as has been established in several studies.
Another factor that is often ignored by investors and rarely factored-in while calculating returns is inflation. Inflation dampens returns and pulls down the 'real return on investment'. To put it simply, if your investment offers you a return of 8% p.a. and inflation is at 4%, your real return is (8% minus 4%) 4%, at the end of the first year. Equities are the only investment avenue that can counter inflation effectively and enable investors to post a healthy return, post-inflation.
Our Recommendations Out of the list of ELSS stated in the above we recommend ICICI Prudential Tax Plan, Reliance Equity Tax Saving Plan and UTI Tax Saver Fund. All of these schemes have been performing consistently from past five years and have witnessed rough phases of the market. Also, all of them command reasonably good risk-ratios; out of this ICICI Pru Tax Plan and UTI Tax Saver Fund are more aggressive than Reliance Equity Tax Saving. Therefore, investors can pick any of these three schemes according to their risk profile.
Section IV- Diversified Equity Funds
Equity fund is one of the oldest and most widely found fund types of mutual fund. Technically, a mutual fund scheme that has more than 65% of its total investments in equities and other equity linked products is regarded as an equity fund. so the schemes like sector schemes, growth schemes, tax saving schemes are primarily equity schemes. Diversified Equity funds diversify their portfolio evenly across stocks and industry sectors. The returns from them tend to be moderately high over a long-term horizon but since the prices of equity shares fluctuate on the stock markets, the net asset value is subject to these fluctuations. These funds suit investors who have moderate risk appetite. In a diversified fund, the risk of down-side is mitigated by the breadth of variety of stocks in the portfolio. Since the portfolio is diversified, the under-performance in some stocks or sectors in which the fund has invested is balanced by the superior performance of other stocks or sectors. Such schemes are designed for the investors who have an investment horizon of at least 3 to 5 years and are also willing to take some risk, though the risk appetite may not be too big. There is a lot of buzz of equity funds since all fund houses have multiple equity funds. So here we are making an attempt to compare diversified equity funds of various fund houses.
Canbank Mutual Fund: Canequity Diversified - Growth.
Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund N S Sriram (since 22/1/06) To generate capital appreciation by investing in equity and equity related securities Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007) Minimum Investment Benchmark 12th September, 2003 98.0789 crore Rs. Rs. 10 Growth option : Rs. 31.11 Rs. 5000 S&P CNX Nifty
Portfolio as on 31st May, 2007:
Asset Allocation as on 31st May, 07
0% 4% 4% 4%
Energy Diversified Services Automobiles
Basic/Engineering Construction Metals and Metal Products FMCG
Technology Health Care Financial Services Chemicals
Portfolio as on May , 07 Energy Basic/Engineering Technology Diversified Construction Health Care Services Metals and Metal Products Financial Services Automobiles FMCG Chemicals
% of Net Assets 14% 14% 12% 9% 8% 7% 7% 6% 5% 4% 4% 3%
Understanding the Portfolio: The fund aims at achieving capital appreciation of investment through investing in growth shares of large cap companies. As we can see, the maximum investment is made 96
in the energy and Basic/Engineering sector, followed by technology sector. The portfolio also has invested significant amount in Health Care, the relatively new sector. Comparing fund’s performance to the category average:
The above graph shows that the fund is performing at par with the category average. The fund neither outperforms nor underperforms the category average with a major margin.
Our View: The fund is expected to de well since its major contribution comes from industrial capital goods sector. Capital goods sector is giving attractive returns and is expected to
consistently perform well.
DSP Merrill Lynch Equity Fund Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Anup Maheshwari The scheme seeks to generate long-term capital appreciation, from a portfolio which is substantially constituted of equity and equity related securities and may also invest a certain portion of its corpus in debt and money market securities, in order to meet liquidity requirements from time to time. 15th April, 1997 Rs. 98.0789 crore Rs. 10 Growth option : Rs. 31.11 Dividend option : Rs. 14.91 Minimum Investment Benchmark Rs. 5000 BSE 2000
Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007)
Portfolio as on 31st May, 07 98
Asset Allocation as on May, 07
3% 2%2% 5% 3% 5% 6% 6% 8% Technology Services FMCG Health Care Diversified Construction Textiles 10% 10% Energy Financial Services Basic/Engineering Metals & Metal Products Chemicals Automobile 23%
Portfolio as on May, 07 Technology Energy Services Financial Services FMCG Basic/Engineering Health Care Metals & Metal Products Diversified Chemicals Construction Automobile Textiles
% of Net Assets 22% 16% 10% 10% 8% 6% 5% 5% 5% 3% 3% 2% 2%
Understanding the Portfolio: 99
The fund is particularly a mid cap fund. it has a blend of growth as well as value shares of mid-cap companies. The portfolio shows that the maximum investment is made in the technology sector, followed by energy sector followed by services and financial services sector.
Returns of the Fund Compared to the Benchmark
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Last 1 year Last 3 Years Last 5 Years Sice Inception DSPML Equity Fund S&P CNX Nifty 42.86% 39.88% 58.11% 52.11% 42.53% 33.07% 28.93% 14.90%
The above graph shows the comparison of the fund‟s performance with that of the benchmark – S&P CNX Nifty. it is shown that the fund has consistently outperformed the benchmark ever since its inception.
Our View: Mid-caps have not been doing well in past one year. Even though the fund has given very good returns compared to the benchmark. In coming time, the mid-caps are expected to undergo a turnaround. As a result this fund certainly has very good returns because, even in the adverse scenario for the mid-cap companies, it has consistently given good returns,
so if the scenario changes to better, we can surely expect robust returns. This fund is a good bet for the investors who have a longer time horizon, say, more than 3 years.
UTI Masterplus Plan:
Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Sanjay Dongre. To achieve long-term capital appreciation through investments in equities and equity related
instruments, convertible debentures, derivatives in India and also in overseas markets. Inception Date Fund Size (as on 31st May) Face Value (Rs./Unit) NAV (as on 30th April, 2007) 9th December, 1991 964.60 crore Rs. Rs. 10 Growth option : Rs. 69.66 (introduced w.e.f. 1/8/05) Income option : Rs. 53.46 Minimum Investment Benchmark Rs. 5000 BSE SENSEX
Portfolio as on 31st May, 07:
Sector Allocation as on 31st May, 07
1% 0% 6% 5% 2% 8% 9% 14% 14% Financial Services Basic/Engineering Construction Health Care 14%
Technology Energy Automobile Services
Diversified FMCG Textiles
Portfolio as on May, 07 Technology Financial Services Diversified Energy Basic/Engineering FMCG Automobile Construction Textiles Services Health Care
% of Net Assets 28% 14% 14% 13% 8% 8% 5% 5% 2% 1% 0%
Understanding the portfolio: It is positioned as a fund which primarily invests in stocks comprising of BSE 100 Index. It aims to focus on high growth stocks of BSE 100 index which has the potential to emerge as industry leaders in medium term. Hence portfolio of the fund will present a good blend of industry leaders and emerging industry leaders. 103
As we can see from the style box, this fund invests in growth shares of large cap companies. The fund is well diversified, with investment in sectors such as technology, financial services, energy, FMCG, automobiles, construction etc. Closely analyzing the portfolio, we understand that the contribution of the technology sector is highest followed by services and energy. The fund has invested in technology sector in companies like Bharti Airtel, Reliance Communications, Tata Consultancy Services, Bharat Electronics, and Infosys. The portfolio is skewed towards large cap as the fund seeks to maximize the risk-return payoff. The fund has investment in other reputed companies like UTI Bank, SBI, Mahindra and Mahindra, ONGC, Siemens, Larsen and Tubro and many more. Comparing fund’s NAV with the Benchmark The following graph shows the comparison of fund‟s NAV with BSE SENSEX.
We can see that the fund has been giving returns almost similar to its benchmark. It is observed that it has never been able to outperform the benchmark with a great margin; nevertheless, it has never dipped down with a great margin in comparison to the benchmark. If we consider the returns from February, 07 to March‟07 we realize that the fund is giving lesser returns. Also, during the third quarter of FY 06-07, the downfall in NAV is mainly because of the dividend declared in the month of Nov, 06. 104
Our View: We believe that the fund is underperforming since last 4 months majorly because of rupee appreciation, the technology sector contributes the highest percentage to the portfolio and hence the impact of appreciation of INR is clearly seen. However, it is expected that INR would stabilize and would not experience much correction. As a result, we expect this fund to bounce back.
ICICI Prudential Power Plan: Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Anand Shah Long term investment of funds for capital
appreciation in a concentrated multi sector portfolio. Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 30th April, 2007) 1st January, 1994 Rs. 1,558.24 Crores Rs. 10 Growth option : Rs. 89.20 Dividend option : Rs. 21.77 Minimum Investment Benchmark Rs. 5000 S&P CNX Nifty
Portfolio as on 31st May, 07.
Asset Allocation as on May, 07
12% 12% 11% Auto Anicilliarie Auto Anicilliarie Industrial - Products Pharmaceuiticals Industrial Capital Banks 11% Oil 8% 8% Construction Textile - Products Telecome Services Petroleum Products Media 2% 2% 3% 2% 2% 4% 4% 5% 7% 7%
Transportation Cement Ferrous Metals Softw are
Portfolio as on May, 07 Auto Ancillaries Oil Construction Auto Transportation Textile – Products Industrial - Products Cement Telecom Services Pharmaceuticals Ferrous Metals Petroleum Products Industrial Capital Software 107
% of Net Assets 1% 2% 2% 2% 2% 3% 3% 4% 7% 7% 7% 7% 10% 11%
Understanding the Portfolio: The fund seeks to optimize risk- adjusted returns by building a portfolio of predominantly large and mid-cap stocks across selected sectors. As we can see from the style box, the fund concentrates itself in most of the large cap investments along with mid cap investment. Banking sector holds the highest investment in the portfolio followed by, software, media and industrial capital goods sector. The top holdings of the portfolio are Reliance Industries, Bharati Airtel, Punjab National Bank, ICICI Bank, Zee Entertainment Enterprises. Comparing the Fund’s Performance with the Benchmark:
The graph below indicates the movement of Rs. 10000 invested at inception vis-à-vis the benchmark performance.
Performance Record: 108
We can see from the above graph the fund has constantly outperformed its benchmark ever since its inception except for last one year. But the fund has bounced back in last six months.
Our View: The fund‟s major investments are made in the banking, media and software sector. The fund is expected to perform very well since; the outlook of the equity market considers banking sector as the flagship fund (as on 31st May, 07). The performance of the fund was not affected by the rupee appreciation even though software sector holds the second largest investment because the banking sector has given robust returns. So the downfall that was expected because of rupee appreciation was compensated by the robust returns of the banking sector. The fund has great potential firstly because rupee appreciation is expected to stabilize and hence the returns can rise again from this sector. Secondly, the media sector is giving attractive returns which would certainly improve the funds performance since media occupies second highest part of the portfolio and thirdly, the banking sector is giving robust returns.
Reliance Equity Advantage Fund:
Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Ashwani Kumar The primary investment objective of the scheme is to achieve long-term growth of capital by investment in equity and equity-related securities through a research-based investment approach. Indicative Investment Horizon Inception Date Fund Size Face Value (Rs./Unit) NAV (as on 31st May, 2007) 5 yrs. & more 8th October, 1995 Rs.2,970.37 Crores Rs. 10 Growth Plan - Growth option : Rs. 200.00 Growth Plan – Bonus Option : Rs. 33.52 Dividend option : Rs. 51.05 Minimum Investment Benchmark Rs. 5000 BSE 100 Index
Portfolio as on 31st May, 07:
Sector Allocation as on 31st May, 07
4% 3% 5% 8% 8% 8% Technology Diversified Energy Health Care Financial Services Chemicals 9% Automobile Basic/Engineering Services Construction FMCG Metals and Metal Products 11% 3% 2% 13% 11%
Portfolio as on May, 07 Technology Automobile Diversified Basic/Engineering Energy Services Health Care Construction Financial Services FMCG Chemicals Metals and Metal Products
% of Net Assets 13% 11% 11% 9% 8% 8% 8% 5% 4% 3% 3% 2%
Understanding the Portfolio: The fund is positioned as a growth fund investing in large cap companies. Technology sector holds the highest investment in the portfolio followed by the automobile and diversified followed by basic / engineering. The top holdings of the fund are Infosys 111
Technologies, Larsen & Tubro, Reliance Communications, Tata Motors, HPCL, TCS, Siemens and the list continues.
Performance Record: The graph below shows the comparison of fund‟s performance with SENSEX.
Comparison of Fund's Performance with SENSEX
70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Last 1 Year Last 3Years Last 5 Years Since Inception Reliance Vision SENSEX 58.71% 48.38% 46.16% 43.20%
It is clearly seen that the fund has consistently outperformed the SENSEX with a considerable margin ever since its inception. Returns are good since investment is made in the growth shares of the large cap companies.
Our View: The fund is positioned as a growth fund because investment is being made in the growth shares of the large cap companies. As we can see above, returns have been consistent and this trend is expected to continue in coming time too. Growth in returns may also be expected since the fund has sustained rupee appreciation. Now that rupee is expected to stabilize, good returns can be expected from the technology sector, it being the one holding the highest investment. Technology sector is followed by the automobile sector. Automobile sector is also expected to give attractive returns and hence, the returns from this fund would surely be attractive. The fund has very less investment in the financial
service sector. This is the plus point of the fund since banking sector is expected to under perform, banking sector would only form some part of the investment in the financial service sector. This will help the fund to avoid the burnt of downfall in the banking sector.
Section V- Debt Funds
Across the investing community, most investors turn to liquid funds to park their investible short term funds as they offer superior returns than bank fixed deposits. Liquid fund is a good vehicle to park the funds with almost negligible chance of capital depreciation. The average return that the investors get comes to around 6.5 per cent to 7 per cent. The investors are unwilling to invest in income or gilt funds on account of the risk of capital depreciation in the short term as these funds with their longer average maturity are exposed to the impact of market volatility. In the short run, investors may have to bear capital depreciation in case unfavorable market conditions. Investors who have short term investment needs, instead of going for liquid funds, if they are willing to take little extra risk, can think of investing in short term debt schemes offered by mutual funds, which offer higher returns than the liquid funds. Such schemes are short term gilt funds, Fixed Maturity Plans (FMPs), short term debt plans etc. Fixed-income funds (i.e. debt funds) are likely to provide better risk-adjusted and taxadjusted returns to an investor over a period of time. Let us understand how fixed income mutual funds work. Fixed-income mutual funds receive money from various investors and they in turn invest in variety of fixed income securities depending on the view on interest rates. Because of their size and reach, they may be in a position to bargain better interest rates on fixed-income securities than retail investors could possibly obtain. If the view on the interest rates is that they are going to come down, the fund may invest in long-dated fixed-income securities to capitalise on possibility of price appreciation as the interest rates decline. It has been observed that due to their presence and continuous monitoring of the fixed income market, fixed-income mutual funds are in the position to offer better risk-adjusted returns. Apart from offering attractive returns, fixed-income mutual funds offer liquidity to the investor, which may not be available to retail investor in case if the investor decides to invest on his own. This element of safety combined with liquidity, and attractive riskadjusted returns may provide the investor with an attractive investment proposition.
ICICI Prudential Short Term – G: Fund Snapshot:
Structure Fund Manager Fund Objective
Open Ended Short Term fund (Debt) Chaitanya Pande The scheme aims to generate income through investments debt and money market instruments, Debt Securities upto 100 per cent, Money Market instruments and cash upto 50 per cent, while maintaining low to medium maturity profile of the portfolio.
Indicative Investment Horizon Inception Date Face Value (Rs./Unit) NAV (as on 30th April, 2007) Minimum Investment Expense Ratio Benchmark
5 yrs. & more Oct, 2001 Rs. 10 abc Growth option : Rs. 242.14 Crores Rs. 5000 1.10% CRISIL ST Bond
Portfolio: Instrument Break-Up As on 31st May, 2007: Instruments Commercial Paper Cash, Call and Others Securitised Debt Bonds/NCDs Total Portfolio Characteristics: Portfolio as on 31st May, 2007 (% to NAV) P1+ Cash & Money Market Unrated AAA AA Total Understanding the portfolio: In this particular fund minimum investment of Rs 5000 and maintain the balance is also of Rs 5000.The fund style of ICICI Prudential is medium – low. Its concentration in P1+ and cash & money market is a testimony to this fact.P1+ and cash & money market occupy humungous space in its portfolio, at 52.26 and 27, respectively. Unrated have a small presence in its portfolio (10.32 per cent). As asset allocation, its concentration in Debt fund around 73 per cent and others around 27 per cent. 52.26 26.78 10.32 7.75 2.89 100 % Net Assets 32.59 26.78 22.44 18.19 100
The average maturity period is 0.52 years and Average yield to maturity is around 11 per cent. Others remain the top holding of the fund followed by UTI bank, Canara bank and Ranbaxy Holding Co.Pvt.Ltd.
Reliance Short Term – G: Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Short Term fund (Debt) Prashant R Pimple The scheme aims to generate stable returns for investors with a short term horizon by investing in fixed income securities of a short term maturity. Indicative Investment Horizon Inception Date Face Value (Rs./Unit) NAV (as on 31st May, 2007) Minimum Investment Expense Ratio Benchmark Style Box: 5 yrs. & more Dec, 2002 Rs. 10 Growth option : Rs. 238.43 Crores Rs. 50000 0.64% Crisil Liquid
Portfolio: Instrument Break-Up As on 31st May, 2007: Instruments Bonds/NCDs Certificate of Deposit Pass Through Certificate Cash & Net Receivable/Payable Commercial Paper 118 % Net Assets 45.29 32.65 15.43 6.42 0.21
Portfolio Characteristics: Portfolio as on 31st May, 2007 (% to NAV) AAA P1+ AA+ A+ Cash & Money Market Total 42.87 28.66 13.25 8.81 6.41 100
Understanding the Portfolio: In this particular fund minimum investment of Rs 50000 and maintain the balance is nil. The fund style of Reliance Short Term is high – medium. Its concentration in AAA and P1+ is a testimony to this fact.AAA and P1+ occupy humungous space in its portfolio, at 42.87 and 28.66, respectively. AA+ has a small presence in its portfolio (13.25 per cent).
As asset allocation, its concentration in Debt fund around 94 per cent and others around 6 per cent.
The average maturity period is 1.13 years and Average yield to maturity is around 8 per cent. Others remain the top holding of the fund followed by Allahabad bank, G E Capital Services and DSPML Capital. 119
UTI Liquid Short Term - G Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Short Term fund (Debt) Sanjeev Bhasin The fund seeks to generate steady and reasonable income, with low risk and high level of liquidity from, a portfolio of money market securities and high quality debt. Indicative Investment Horizon Inception Date Face Value (Rs./Unit) NAV (as on 31st May, 2007) Minimum Investment Expense Ratio Benchmark Style Box: 3 yrs. & more June, 2003 Rs. 10 Growth option : Rs. 7.41 Crores Rs. 30000 0.75% CRISIL ST Bond
Portfolio: Instrument Break-Up As on 31st May, 2007: Instruments Bonds/NCDs Net Current Asets Total % Net Assets 66.28 33.72 100
Portfolio Characteristics: Portfolio as on 31st May, 2007 (% to NAV) AAA Cash & Money Market Total 66.28 33.72 100
Understanding the Portfolio: In this particular fund minimum investment of Rs 30000 and maintain the balance is not required. The fund style of UTI Short Term is high - medium. Its concentration in AAA and cash & money market is a testimony to this fact. AAA and cash & money market occupy humungous space in its portfolio, at 66.28 per cent and 33.72 per cent, respectively.
As asset allocation, its concentration in Debt fund around 66 per cent and others around 34 per cent.
The average maturity period is 1.19 years. Others remain the top holding of the fund followed by National Bank Agr Rur Devp, Export-Import bank and Citi Corp Maruti Fin.
In the current period, liquid funds and floaters are a better bet than longer duration funds. In the income fund category, the short term plans are very good products offering attractive risk adjusted returns in the current environment. Inflation should be in a band of 5% to 5.5% over the year and would be higher than what the government is projecting. Investors should look at debt fund returns with a one-year investment horizon. Markets are expected to be more volatile in the short term and returns would be more normalized over a one-year period.
An uncertain market has given a good opportunity for making new investments. But, what can present investors do in such a scenario? From the above portfolio of three companies, one can clearly see that investments made 2 months before are still giving decent returns. If the uncertainty continues, fund managers would change the duration to minimise any negative impact. But one has to keep in mind that the days of astronomical returns are over. Given the running 6.5-6.75 per cent yield on portfolios, returns would be around 7.5-8 per cent, depending on your holding period.
For short-term investors, who have an investment horizon of around 3 months and are invested in short term income funds, can liquidate now and park the proceeds in liquid funds, as the risk-reward ratio for these short-term investors looks negative. Though negatives in the market will get smoothened in the long run, markets may remain extremely choppy in the short run; it would therefore be prudent to shift your money to liquid funds, adopting a wait-and-watch strategy.
Our Recommendation Out of the list of Debt Fund stated in the above we recommend Reliance Short Term fund, ICICI Prudential Short Term fund and UTI Short Term Fund. All of these schemes have been performing consistently from past five years and have witnessed rough phases of the market. Also, all of them command reasonably good risk-ratios, out of these; Reliance Short Term fund and ICICI Prudential Short Term Fund are more aggressive than UTI Short Term Fund. Therefore, investors can pick any of these three schemes according to their risk profile.
Bibliography: AMFI Handbook Indian Financial System by Bharati V Pathak www.investopedia.com www.mutualfundsindia.com www.valueresearchonline.com www.myiris.com www.amfi.com www.canbankmutual.com Fund Factsheet- ICICI Prudential Fund Factsheet- DSP Merrill Lynch Fund Factsheet- UTI Fund Factsheet- LIC Fund Factsheet- Raliance Mutual Fund Factsheet- Canbank Mutual