Know more information on the Current Indian Mutual Funds, their comparisions and performances in the Indian Stock Market..
The domestic stock market is likely to continue its record-breaking journey with expectations of a robust response to the two public issues hitting the market today, strengthening the already upbeat investor sentiment.
posted by eshwar @ 9:12 pm
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The retail investor's fascination for something "new" in his portfolio is a phenomenon which has repeatedly confounded us. In fact, the most often-repeated request from investors tends to be for a new fund.
So what makes the idea of investing in a new fund tick and does it make sense to do so? Let's find out.
Firstly, investors seem to have developed an insatiable appetite for new fund offers (NFOs). The huge asset sizes amassed by some of the NFOs bear testimony to the same. Simply put, an NFO is a new fund launched by an asset management company (AMC).
And investors are given the opportunity to invest therein at a price (termed as net asset value or NAV) of Rs 10 during the NFO stage. This is the clincher! The Rs 10 NAV is often perceived as a cheaper buy vis-�-vis existing funds with higher NAVs. Most investors make the mistake of confusing a mutual fund NFO with a stock IPO (initial public offering).
In a stock, the book value (its intrinsic worth) and market value (determined by market factors) are divorced from one another. Hence, a stock with a market value lower than the book value would be termed as an attractive buy.
Conversely, in a mutual fund, the book value and market value are the same and are represented by the NAV. Simply put, the NAV is computed by reducing the fund's expenses from the total assets and then dividing the result (this figure is called "net assets") by the number of units held.
Hence in a mutual fund, the NAV represents the assets backed by each unit. Effectively the Rs 10 NAV offered by a fund in the NFO stage is not cheaper than an existing fund with an NAV of say Rs 100.
However, this seemingly simple rationale is often lost on investors. Unscrupulous investment advisors and mutual fund distributors should be "credited" for the same. Investors are convinced to participate in every NFO which hits the markets, on the grounds that it is an opportunity to buy at a lower price.
Fortunately, for investors, the incessant NFO launches caught the regulator i.e. Securities and Exchange Board of India's eye. Sebi issued guidelines that made the launch of open-ended NFOs rather unattractive for AMCs and distributors alike.
Apart from NFOs, the urge to hold something new also surfaces, when an investor wants to invest in a fund that is distinct from the existing ones in his portfolio. Again the driving factor isn't what the new fund can add to the portfolio i.e. its potential utility; instead it's the "newness" of the fund.
An ideal portfolio is one which is comprised of funds/investment avenues that match the investor's risk profile and work towards achieving his predetermined objectives.
The performance of the funds (and thereby the portfolio) should be monitored regularly. If any fund fails to deliver the results expected from it, corrective steps need to be taken. The same could involve exiting the fund or reducing the allocation made to it.
Conversely, in a situation wherein the funds are performing in an expected manner, there is no need to consider another fund while making fresh investments.
Additions can be made to the existing holdings. Sure, diversification is important, but then we are assuming that the portfolio is already a well-diversified one.
A portfolio with an unduly large number of funds stands the risk of becoming an untenable one. Monitoring and managing a portfolio which is fragmented can prove to be a cumbersome and time-consuming task.
Furthermore, by investing in a new fund, instead of the existing ones, the investor forgoes the opportunity to invest in funds with proven track records and performance. And that may not be a smart move.
We aren't suggesting that investors should necessarily refrain from investing in NFOs or funds distinct from the ones presently held by them. However, the reason for doing should be the value-add they can bring to the portfolio.
The NFO/new fund should have an offering that is distinct from the existing funds and the same should also contribute towards making the portfolio a more comprehensive one. A Rs 10 NAV or the fact that the fund is distinct from your current investments don't qualify as good enough reasons for investing in a fund.
posted by eshwar @ 8:42 pm
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Principal Income Fund — Short Term Plan has delivered an annualised return of 7.9% in the last three months ended October 31. In comparison, the CRISIL Short Term Bond Index, against which the fund is benchmarked, delivered a return of 7.25%.
The short-term fund category gave an average return of 7% during the period.
Capital gains from G-secs and corporate bonds helped the fund deliver. Government bonds rallied on the back of lower US bond yields and a fall in energy prices. Also, yields on corporate bonds in the 2-3 year segment eased. One-year AAA-rated corporate paper rates fell to around 7.7% per annum from 8%-plus per annum levels in the last quarter.
Since the fund was able to anticipate this in advance, the fund’s three-month performance has been good and the corpus has swelled as a result.
In the one-year returns also the fund has outperformed the benchmark by quite a distance. The fund gave a return of 6.1%, while the benchmark returns was 4.8%. The category of short-term funds gave returns of 5.8%.
Portfolio
As per available data, the corpus of the fund as of October 31, ’06 was Rs 1,365.85 crore. Over 65% of this amount was invested in commercial papers of banks. Most of these instruments carried the P1+ rating denoting ‘very strong’ credit quality of these instruments.
The fund has also invested in corporate bonds to the extent of 24.5%. If credit off-take moderates, corporate sector issuances may come down. This could further reduce corporate spreads (difference between corporate bond yields and government securities) over the medium term.
One-year corporate papers are attractive from a carry perspective. If the yield curve flattens, the one-year bonds will lose attractiveness. The fund will have to shuffle to maintain returns.
It has taken full advantage of the bond rally to enhance returns in the last quarter. The fund has reduced long positions to moderate levels as the fund manager does not see an immediate upside in the curve. Going ahead, the fund is looking at investing in G-secs as the inflationary scenario is milder than before.
Principal STP is quite bullish on the one-year maturity. This offers investors an opportunity to
earn decent spreads over money market rates and also ensure higher capital gains if they hold for 3-6 months.
The fund, typically, buys into longer duration paper and earns higher interest rates; as the holding period falls, the fund earns capital gains accruing from the lower yields. This is because after 3-6 months, the one-year paper becomes a nine-month or six-month paper, which attracts lower yields.
However, with RBI hiking rates, though higher interest rates are still possible, capital gains accrual seems unlikely.
Investors looking to park short-term funds can consider this option as it is expected to generate higher returns than cash fund in a benign interest rate environment with 2-3 month investment horizon. Investments should be made with a time horizon of 3-6 months.
posted by eshwar @ 7:52 pm
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Capital protection funds have made their way into India and soon domestic investors will witness quite a few of these schemes hitting the market. Investors may be wondering how this concept operates and how these funds can provide a risk-free scenario for their capital. However, investors should realise that they can construct the same structure as that of the capital guarantee fund in a manner that is suitable for them. Here is how this can be done.
Capital guarantee
First, investors should understand what the term capital guarantee implies. Capital guarantee means the capital sum invested by an investor is intact at the end of a specific time period. For example, if a person invests Rs 20,000 in a capital guaranteed scheme, then at the end of a certain time period, say five years, he will get back a sum of at least Rs 20,000. There can be a higher payout depending on the earnings of the scheme, but this will be additional earnings. So, an investor can be sure that he will not lose his capital. Hence, there is a guarantee of protection of capital, but no guarantee of return.
How to evaluate
While evaluating such offerings, investors should not concentrate on the capital returns, but should consider the amount they earn. This is because there are additional options present in the market. Using these routes, they can earn a specified sum by investing in a fixed deposit (FD) where the capital is safe, and at the same time there is also a fixed earning. The earnings have to be higher to justify the investment, or else the investor will be better off by putting his funds in an FD and earning returns.
Final calculation
The investors should first consider the time period for which they want a capital guarantee. This can be around three year.
The other option is to consider a slightly longer time period of five or seven years. Let us consider the example of a three-year period. Consider the earnings on the various FDs available for a three-year period. Suppose the rate is 7%. Now, you need to figure out the sum of money that invested today at the above mentioned rate will yield Rs 10,000 over the time period under consideration.
The same objective can be achieved by doing a backward calculation from Rs 10,000. The whole idea is to figure out the amount of investment that is needed today to have a cash in hand of Rs 10,000 three years down the line. One also needs to consider whether this is a simple return or whether there is some compounding at the end of the period; this can change the amount required for investment.
Suppose an individual has an amount of Rs 10,000 and he wants to ensure that at the end of three years, he has a minimum capital guarantee. In such a situation, the amount that needs to be invested, which will provide a sum of Rs 10,000 at the given earnings rate on a simple interest basis, is around Rs 8,264. The remaining Rs 1,736 can be invested in equities. Depending upon the earnings generated, the total earnings for the investor can be determined.
Assume that at the end of three years, the equity invested is completely wiped out, which is an unlikely scenario unless one invests in low-rung scrips that stop trading on the exchange. Even if this happens, the individual will get his capital back. Any additional sum earned implies that the earnings of the investor continue to increase.
The key lies in selecting the correct rate of return for the debt instrument so that there is complete safety as far as the basic investment is concerned. After that, the investor only has to try and generate some earning from the equity part to ensure that the total returns are boosted.
The higher the rate and the time period, the lesser is the amount that is required to be invested in the debt part. As a result, the additional amount goes to the equity part, which has a better chance of generating higher earnings. While ensuring capital guarantee, one has to be aware of the tax impact. The earnings from the debt part will be taxed as normal income without any deduction.
posted by eshwar @ 9:04 pm
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Most fund managers have parked nearly half their assets in mid- and small-cap stocks despite their recent underperformance, data from a mutual fund tracking firm showed.
This, fund managers say, is because they expect these stocks to catch up with their large-cap counterparts in the next six-nine months.
"On a historic basis, mid-caps are looking cheap versus the large-caps. On forward basis they were always cheap. So there's definitely a valuation gap," Prateek Agrawal, head-equities, ABN AMRO Asset Management (India) Ltd., said.
Diversified equity funds had 43.79 per cent of their assets parked in mid- and small-cap stocks at end-September, according to data from Value Research.
While India's benchmark Sensex wiped out all its losses since its May 11 peak and was a net 5.27 per cent higher on Nov. 2, the BSE Mid-cap and BSE Small-cap indices were down 8.90 per cent and 16.32 per cent respectively.
"Money is coming in, market indices are at a high...mid-caps part of the markets should really do well," Agrawal said, adding that there was lot of opportunity in engineering, construction, real estate and mid-cap pharma sectors.
Not only have fund managers maintained their optimism for mid- and small-caps, investors too seem to believe that the mid-cap story is far from over, fund watchers said.
DSP Merrill Lynch Small and Mid Cap Fund's collection of more than 14 billion rupees during its initial offer period between Sep. 29 and Oct. 18 is an indication of investor interest, they said. The fund house said though it would take some time to invest these funds, it saw enough opportunities in the segment.
"We will take our time to do it (invest) and we do think there's enough choice across different themes and sectors," S. Naganath, President and Chief Investment Officer, DSP Merrill Lynch Fund Managers Ltd., said.
"In the next six to nine months we do expect that they (mid- and small-cap stocks) should play catchup," Naganath said.
The recent rebound in the markets has left a majority of mid- and small-cap stocks untouched, with 70 per cent of the BSE Mid-cap index constituents still trading below their May 11 levels.
Data compiled by broking house Sharekhan showed that while the earnings of the 30 Sensex constituents grew by 27.7 per cent year on year in the second quarter of 2006/07, the same was 35 per cent for BSE 200 companies.
"Over a long period of time in an economy like India, it is still likely that mid-caps will only outperform," said Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Ltd.
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posted by eshwar @ 9:02 pm
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How is the stock market today? The answer to this common question is in the form of a number, which is an index, such as the BSE Sensex or NSE Nifty. Imagine there is no index. How would we gauge the performance of the stock market?
How would we know whether the stock market has gone up or down? In fact, till 1986, there was no index in India. In 1986, the Bombay Stock Exchange compiled the Sensex. The base year for calculation was taken as 1978-79 and base value was 100. So, we can say that the stock market, which today is at around 10000 level, was at 100 in 1978-79.
An index is a representative number which indicates the current position and helps to compare the movement of the stock market. For example, when we say the temperature at noon in Mumbai has risen to 38 degrees celsius from yesterday’s temperature of 36 degrees, it is a movement of a representative number.
There could be some places like open grounds where the temperature could be more than 38 degrees today and could have been 35.5 degrees yesterday. Similarly, if we stand on the ocean front below a tree, the temperature could be 37.5 degrees today and could have been 36 degrees yesterday. However, as long as the majority of the region has a temperature of around 38 degrees today and had 36 degrees yesterday, it is a well-represented number.
Similarly, if the Sensex was at 10000 yesterday and is at 10250 today, it is an upward movement of 2.5%. This logically indicates that the majority of shares have moved up by 2.5%. Obviously, some stocks would have fallen, and similarly, there could be some stocks which have risen more than or less than 2.5%.
However, as long as the average has moved around 2.5%, the index is said to be well-represented and serves its purpose (the actual movement of the Sensex depends on the market capitalisation and weighted averages.)
The Sensex or Nifty are representatives of the stock market. If we were able to invest in these indices, we would get (stock) market returns. In 1992 — during Harshad Mehta’s time — there used to be a joke. A man who had come from a village wanted to invest in the stock market.
Not knowing which scrip to buy; he said he wanted to invest in the Sensex, as it kept going up routinely. That joke is a reality today. There are mutual fund (MF) schemes which are called index funds. An investor can invest in MF schemes which replicate index stocks in its portfolio. For example, the Sensex Index Fund will only invest in those 30 companies which are constituents of the Sensex. By investing in a Sensex Index Fund, the investor is indirectly buying the Sensex.
Index funds for the common investor were first introduced in the US in 1976 by Vanguard Group. The founder of the Vanguard Group, John Bogle, as part of his senior thesis in Princeton University, had studied the MF industry and its practices in detail.
He made several important observations: 1. The order of top-performing funds is continuously changing. This means there isn’t any MF which consistently remains the top-performing category year-on-year.
Also, it is only in hindsight that one will know which funds were top performers in the previous year. 2. Sales, marketing and other administration expenses are eating away returns generated by fund managers. 3. All fund managers are not consistently able to beat market returns (read indices returns).
Index funds are passive form of investing. This means the fund manager does not use any of his/her skills in stock-picking. There is absolutely no research needed. A fund manager simply invests money in all those companies which are constituents of the index.
This will save MFs huge costs. Funds where a fund manager uses his/her skills in stock-picking are called active funds. In India, active funds usually charge annual expenses in the range of 2-2.5%.
Compared to this, passive funds (index funds) charge around 1.1-1.4%, which results in a saving of about 1% every year. It is important to note that in mature markets, the difference in cost between active and passive funds is higher.
While it is true that active funds are usually top performers, it is also true that the same funds rarely retain their top slots continuously. The caveat that past performance may not be repeated is true. On the other hand, though index funds are not the best performers, they are consistently above-average performers.
In India, private sector MFs began their journey in 1993. The erstwhile Kothari Pioneer Mutual Fund Company — now Franklin Templeton Mutual Fund Company — was the first to launch diversified (active) equity funds. The past 13 years’ record suggests that fund managers are able to beat the index returns consistently; but as the market matures further, efficiencies increase and this becomes more and more difficult.
An efficient market is one where all the news and information about a company is disseminated to all current and potential investors equally and simultaneously. Therefore, all investors — big and small — take informed decisions. In developing markets, larger investors have better access to news and information and hence, they are able take more prompt action on the investments, thereby beating the market returns.
Over a period of time, as our market matures and becomes more efficient, fund managers will struggle to beat market returns (read indices). Under such circumstances, expenses will play a major role. Funds with lower expenses like index funds will turn out to be winners. Therefore, one must keep track of index funds too.
posted by eshwar @ 8:54 pm
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Will you put your money in an actively-managed equity fund or prefer to plough it in passively-managed index funds. But then what’s the difference, you may ask? Here’s a major one. While an index fund puts your money into the benchmark index — Sensex or Nifty, a diversified fund will invest in the broader market.
Index funds are likely to deliver returns in line with the benchmark indices and are, therefore, preferred by dynamic investors during volatile times, such as the present.
Passively-managed funds do not try to beat the index, but simply aim to track it by investing in companies in accordance with the constituents of an index. The managers of the fund have far lower expenses, and the charges to investors are lower than for active funds.
While investing in passive mutual funds, or index funds, investors should not choose just any fund. Not all passively-managed funds in India fail to deliver returns in line with the benchmarks.
An ETIG study since the beginning of the bull run showcases that almost half the passively-managed funds underperformed the benchmarks by a margin larger than acceptable. A little deviation is okay. But more than, say 1-2% per annum is too much. Some of this underperformance could be due to expense ratios, which are 1% to 1.5%.
This is too large compared to international trends. In the US, passive funds charge around 0.5%. This is fair, since passive funds do not require any active fund management. So, there is no reason they should charge high fees, which are not too different from active funds.
Blame that on the tracking errors. To that, add loads and you make a little less than 12%, on an average, of what the benchmarks deliver. On the other hand, pick the right active fund and you could rake in the moolah.
Take, for instance, Reliance Growth. If you invested Rs 10,000 in April ’03, just when the bull run started, it will now be a staggering Rs 78,338 as in October end. In comparison, the Sensex has gone up by only 3.2 times and your Rs 10,000 will currently be Rs 32,274.
Over varied periods of times, diversified funds have outperformed, though outperformance seems to have declined in these volatile times. In the West, where markets are mature, it’s seen that outperformance by actively-managed diversified mutual funds is minimal.
Most of these actively-managed funds actually underperform too. But in India, it’s seen that actively-managed funds always outperform the benchmarks by huge margins.
Many sectoral funds or small- and mid-cap funds, which may outperform during a bull phase, may start showcasing negative returns in volatile times when the sector starts underperforming. These may be high-risk high-gain funds. Therefore, an actively-managed diversified fund is perhaps the best bet for a lay investor.
The difference is huge when you look at returns from passive funds and the actively-managed ones. So what do you do? For those investors who want a product that closely mirrors a major index, such as the Nifty or the Sensex, going for a passive fund is probably the wisest move.
posted by eshwar @ 8:50 pm
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Tata Pure Equity suits the profile of conservative investors. The fund has the mandate to invest mostly in large-cap companies. At this juncture, many mid caps are relatively undervalued and since it invests only in large caps, the fund may not be able to benefit from any mid-cap rally in future.
But given its past track record, its NAV is expected to be less volatile than the rest. As a fund house, its prowess in equity fund management has not been consistent across its own equity schemes. ET’s rating for its equity schemes varies from Bronze to Platinum. However, this scheme has been ET’s best performer till date in terms of risk-adjusted returns.
Profile: Tata Pure Equity is ET’s Platinum fund, the highest rating given for any fund, as per the latest ET Quarterly MF Tracker. Its above-average returns and low risk emanating from a large-cap-oriented investment strategy helped it get this rating. The fund was launched in 1998 as Tata Twin Option Fund.
It had a balanced option and pure equity option. In ’00, the fund house restructured the Tata Twin Option fund by merging balance option with Tata Balanced fund and renamed equity option as Tata Pure Equity fund. As on October 31, it had a corpus of Rs 290 crore. M Venugopal has been managing the fund since February ’05.
Performance: While its returns over three years have been above average, the fund couldn’t ‘fully’ capitalise on the large-cap rally seen in ’06. In the calendar year so far, the fund has given a return of 34.4%, which matches that of
ET 100.
This was better than the equity-diversified category, which gave a return of 27%. However, the Sensex gave a return of 38.7% during the period. Though it is a very short duration to assess the performance of the fund in the equity space, the fund’s performance has largely suffered due to the narrow-based rally the market has been witnessing since the crash in May.
The fund gave returns of 57.5% in the one-year period. This was lower than both the fund’s benchmark, Sensex, which gave a return of 65.1 and the broader ET 100, which gave returns of 60.4 %. It was relatively less exposed to the private sector banking and telecom space, which has been one of the reasons for its near-term underperformance.
While banks had a portfolio allocation of 10.2% as of September ’06, the private sector banking stocks, which have done well, comprised a meagre 2%. Telecom stocks accounted for 3.7% of the portfolio. However, over the three years, its returns have been phenomenal, beating the benchmark and category average. While the fund gave a return of 46.6% p.a., that of the Sensex was 38.5 % p.a. during the period. On the other hand, the equity diversified category as a whole has given returns of 43.7%. ET 100 gave a return of 38.9% p .a.
Portfolio: The fund’s allocation is predominantly large-cap-oriented and it intends to invest anywhere between 80% and 95% of its assets in large caps, as per the fund mandate. Over 80% of the portfolio is currently invested in large-cap stocks.
Sector-wise, the technology sector, which includes IT and telecom stocks, finds the highest allocation of 19.6%. Infosys Technologies (6.7%) and HCL (2%) are some of the stocks in this sector the fund has invested in. Index stocks like Infosys, Reliance and Airtel, which have driven the recent rally, accounted for 13% of the fund’s total portfolio.
The fund also has a high allocation in capital goods and basic engineering sectors. The fund manager is bullish on capital goods as he feels growth will continue to come from capex creation and strong exports.
As on October 31, the fund had an allocation of close to 5% in Bhel. The cement sector, led by Grasim (6%) and ACC (5%), continues to be a favourite for the fund. Though the fund is overweight on the cement sector, the latter has been a drag on its near-term performance.
posted by eshwar @ 8:49 pm
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Investors are sighing with relief that the markets are up again after a frightening plunge. Those who have been in the market from the early days of the bull run are happy to have sat through the trough. One class of investors who benefited from the fall are mutual fund SIP investors. They picked up the lows by default and averaged their costs down. Implementing a discipline in investing through mechanical tools is as old as investing itself. Its merits shine through during periods of volatility, when decision-making becomes tough. The realm of quant-based investing extends beyond the SIP and is growing rapidly. Fund houses, hedge funds and institutional investors have taken the application of quantitative models in investment decision making to a new high. Quant models use a variety of techniques, such as fuzzy logic, neural networks, genetic algorithms, Markov models, fractal methods, and clustering techniques. The investment techniques they use draw more from physics than from economics. It is estimated that three out of 10 hedge funds are purely quantitative model-based funds. Barclays Global Investors, the world's largest money manager, is a pure quant investor with $1.6 trillion in quantitatively managed funds. This category of funds has grown at twice the rate of the world's mutual funds in the last year. The Times magazine recently carried a story which found that large cap funds run by quants consistently beat those run by non-quants since the beginning of 2003, by up to 2 percentage points a year. Quants take about half as much risk as non-quants and do not lose as much money in the down years, it noted. It is now widely believed that in contrast with the individual style-based investing that was dominant in the 1990s, going forward, sophisticated quantitative tools that take the emotion out of investment decisions are likely to rule. It is not as if quantitative investing has not been criticised. Many argue that selecting stocks is more an art than a science, not amenable to being captured in computer programs. Quant models use extensive back testing of past data to create their investment algorithms, raising the issue that the past may not accurately represent the future. Some of the early techniques that used simple technical rules based on past price behaviour have been accused of being exercises in 'torturing data until it confesses'. Then there is the danger that models would simply be replicated once they succeed and, therefore, follow a path of self-destruction. Sophisticated tools that used quant models to identify arbitrage opportunities not visible to the human eye have suffered such a fate in the past. However, the cycle seems to be turning, driven by three factors, in favour of the quants. First, the huge growth in the size of markets has made it possible to invest in these models and still get benefits of scale. The Indian derivative market has grown in volume from zero to Rs 20,000 crore (Rs 200 billion) a day in less than 10 years, and is dominated by mechanical arbitrage strategies. Second, the availability of computing prowess at low costs and the penetration of Internet trading have moved quant investing from the realms of professional managers to retail investors. Several geeks are creating programs that enable them to make quick bucks from stock trading. Some have extended these programs to pick stocks. Third, the investment industry has formalised quant investing. It is no longer taboo to tell investors that quant models are doing most of the work. For those who like machines over men when it comes to managing money, a new world of opportunities beckons.
posted by eshwar @ 8:25 pm
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