Dematerialization of Mutual Fund Units – Simplifying the Investment Process

For quite few months, Mutual Funds in India have witnessed investors’ friendly regulatory changes, thanks to SEBI.  Right from the ban of entry loads in Aug 2009 to facilitating transactions in mutual funds schemes through the existing stock exchanges infrastructure in Nov 2009, SEBI now allowed mutual fund investments to be held in dematerialized form. It means that investors will have the option to convert their existing mutual fund investments into dematerialized form and buy/sell units through stock exchanges.

Background

With the removal of entry loads, SEBI intends to bring an advisory model where the intermediary charges a fee directly to the investors for providing advisory services to them. This reduced distribution incentive for distributors who found difficult to serve customers in far-flung areas or tier-3 & 4 cities. With this intent to provide mutual fund services to every nook and corner of India, SEBI decided to utilize the existing stock exchange infrastructure for mutual fund transactions.

Dematerialization of Mutual Fund Units

1.       Process

·        If you are an existing demat account holder, you can submit a Conversion Request Form (CRF) from your DP and submit the fully filled CRF form along with the Statement of Account to your DP. After due verification, the DPs will co-ordinate with the Asset Management Companies (AMC) and their Registrar and Transfer Agents which in turn after due verification
will credit the mutual fund units to your demat account.

·        If you are not a demat account holder, you will require to open a demat account with a DP before you can convert existing mutual fund units in demat form.

2.       Subscription of Units

Investors can subscribe to Mutual Fund units through their Stock Broker using the Stock Exchange platform. Upon subscription, the AMC/RTA will credit the mutual fund units to your demat account.

3.       Redemption of Units

Investors can redeem their dematerialized mutual fund units through two different modes. They can submit Redemption Request Form which in turn will send to the AMC/RTA after due
verification. The AMC/RTA will verify the form and credit the maturity proceeds in the bank account available in the depository system.

Why should you convert Mutual Funds into demat form?

1.      Consolidation – Even you are holding mutual funds investments with a number of AMCs, say 10 or 20, you can view all the transactions in a single statement instead of managing and collection statement of accounts from all AMCs.

2.      Easy Monitoring – Once you have your holdings at one place, you will be able to monitor them effectively and can also analyze its performance in one go.

3.      Fast transactions – Having all Mutual Fund units in a demat account can allow you to buy/sell the units without any inconvenience. It can be done either through a phone call or an online instruction unlike in physical units where you need to sign the repurchase form with each
AMCs and submit it in their point of presence (PoPs).

Drawbacks

The holding of MF units in demat account will necessarily lead an additional cost, a cost charged by stock broker on maintaining the demat account along with transaction charges. Currently, all brokers are offering transactions on MF units at free of cost which they might abandon once the volume picks up.

The impact will be minimal for those who already have a demat account with DPs. The potential of dematerialization of mutual fund units nullifies the cost associated with the demat account. Once powered with the demat units, the convenience and ease of transactions will definitely overrule the process of managing transactions with different AMCs. It provides a single platform to transact across multiple fund houses and their associated schemes. This is one of simplified steps which will help in simplifying investors’ financial life. Moreover, dematerialization of mutual fund units will improve the documentation process.

The glitter of Gold – its unprecedented hike

Old is Gold – the Gold shines more than its spark. In the current global financial breakdown, Gold emerged as the safest asset and its price headed northwards reaching a record $ 1,431.25 an ounce on Dec 07, 2010, the longest Bull Run in at least 90 years. What led to the unprecedented hike in its prices? India and China hoard a major portion of gold outputs in the world.

In the 19^th century, the Gold Standard took place and lasted until the First World War. It was partially reestablished during the interwar period. The Great Depression of the 1930s brought the gold standard to a final end.

In that era, the world subscribed to the Gold Standard which implied specific rules for the system of international payments. International payments lead to gold transfers between countries. Banque De France explains in its Focus (authored by Gong Cheng, Laurent Ferrara, Yannick K and Pascal T)

When a country runs a balance of payments deficit (surplus), it has to make (receive) a payment in gold. Domestic gold holdings decrease (increase) and domestic money supply contracts (expands). Domestic money supply is thus determined by the balance of payments. This provides an adjustment mechanism to external imbalances. Suppose for instance that a country runs a trade deficit. This leads to a decrease in gold holdings and a monetary contraction. This contraction generates a decrease in domestic prices. With lower relative prices, the country becomes more competitive and its current account is brought back to balance. This adjustment mechanism was described by David Hume in his famous 1752 essay.

The more can be read here…

However, the Gold Standard met its ending with the major economies moving away and after the Second World War, the Bretton Woods system replaced the gold standard. Instead of a gold parity, countries announced a fixed but adjustable parity to the dollar, which in turn was initially fully convertible into gold.

While there were many advantages but it got several drawbacks, which would probably turn out to be very dangerous and a source of instability for the world economy.

What led to Gold roaring a high of $ 1,431.25?

No doubt the financial crisis prompted investors in lapping up gold in big denominations; the back end analysis shows that the assets soared of Gold ETFs accumulating the major portion of world gold output. Globally, the 10 biggest such funds now hold a combined 2,113 metric tons of gold, more than the official reserves accumulated by every country in the world save four: the U.S., Germany, Italy and France. India and China hoard of major portion of gold outputs. Recently, the Central Bank of India, RBI bought a major portion of gold which also helped in showing investors’ interest in gold.

The story goes as below:

James Burton, the then Chief Executive Officer of California Public Employees’ Retirement System (CALIPERS) didn’t invest a penny in Gold of the total assets of $ 142.8 billion managed in 2002. The quiet obvious reason – the yellow metal had been in a bear market for two decades.

Christopher Thompson, the Chairman, World Gold Council convinced him to help in allowing investors to buy a previous metal they had shunned for generation. The key was dividing bars of gold into securities tradable on the New York Stock Exchange. And thus, the SPDR Gold Trust got its way and found the cheapest way of holding gold which now holds around 1,299 metric tons of gold valued at $ 57 billion, more than Swiss central bank. Their popularity (number of other Gold ETFs) helped driving unprecedented gains for the precious metal which can go even higher, as per analysts.

Read more on the parabolic rise of Gold.

Should we continue subscribing to it?

Gold’s worth is determined by fears of inflation or financial collapse. Unlike other eatable assets which are determined based on economic factors, gold’s true value is hard to judge for retail investors. In India, the demand will be factored by its sparkle coupled with the ETF demand.

Happy Reading!

Amar Ranu

Corporate Bond Markets - Robust Credit Cultures a Key to Development

Post the recent global economic crisis, there has been a significant shift in powers from developed nations to emerging market economies (EMEs). The sovereign crisis of European Countries, famously called as PIIGS (Portugal, Ireland, Italy, Greece and Spain) have questioned the dominance of emerging nations. In order to boost the economy growth, several developed nations have pledged to keep their interest rates at or near zero for an elongated period. The sovereign ratings of PIIGS have been cut and their fiscal deficits have reached to a record high.

The Asian story depicts a different perspective; the strong domestic consumption especially in India and China has led to the rally in the economy which has forced the central banks and governments to roll back their accommodative measures to tame the inflation. Out of these issues, it remains an important question how developed our bond markets – government bonds and corporate bonds are and it helps in measuring the pulse of the economy.

While the Asia-Pacific countries have made a good progress in developing local corporate bond market, they have a long way to go ahead. In India, Government Securities market are fairly developed on account of large quantum of government borrowings which have led to active trading and price discovery in securities of all tenures. However, in corporate bond market, we have a long way to go.

M. T. Raju, Upasana Bhutani and Anubhuti Sahay (2004) in their working paper “Corporate Debt Market in India – Key Issues and Policy Recommendations” have rightly pointed out for the need of “Single Trading Platform” instead of different platforms operated under NSE, BSE and FIMMDA. It tells that the different platforms allow liquidity bifurcated. They also emphasized the need of repo market in corporate debt. Recently, the RBI allowed the repo trading in corporate bond which might provide the liquidity in corporate bonds.

In another commentary report by Standard & Poors – “Fostering Robust Credit Cultures Is Key to Developing Deep and Liquid Corporate Bond Markets in Asia-Pacific”, Thomas G Schiller rightly pointed out that many Asia-Pacific seek to build market maturity and sophistication so as to attract many issuers to their countries. They have been emphasizing on robust credit cultures which are built on key elements such as transparency, independent and objective credit analysis, risk-based pricing, creditors’ rights and arm’s length relationships. In his commentary, he explained about the growing and maturing corporate bond markets in Australia, Hong Kong, Japan, Korea, Malaysia, New Zealand, Singapore, and Taiwan, and emerging markets in China, India and Thailand. About India, he mentions that India is a mostly sound credit culture that is still improving in some areas such as creditors’ rights. India’s corporate bond market is small but growing rapidly. Issuance grew by about 60 per cent over the two years to end-financial year March 31, 2010. However, the recent regulatory developments are enabling bond market development, including: the easing of issuance and listing requirements; the enhancement of disclosure requirements for issuers; the clearing of bonds through stock exchanges; and the introduction of credit default swaps (CDS) and interest rate swaps. He concluded that the process of building capital markets in banking dominated environment is a long and laborious one because it involves changing of a country’s business culture.

Read more about other countries here.
Happing Reading!

- Amar Ranu

(Permission sought from S&P to post their articles on this blog)

Equity Outflows dampened; Net assets grew to Rs. 6.65 lakh crore

In 2010 YTD, FIIs have been pouring money (referred as ‘hot money’) following the continuing global economic turbulence all over and thus, in some aspects, the inflows have been providing a temporary relief to burgeoning Current Account Deficits (CAD), expected to be over 3 per cent in current Fiscal Year. On the contrary, Mutual Funds have been bleeding seeing their assets depleting rapidly, especially Equity outflows. However, in Nov 2010, the situation improved in favour of domestic Mutual Fund Industry. On an average, the total industry AUM increased to Rs. 6.65 lakh crore, up by 2.92 per cent. Since the last four months, assets had been depleting continuously. The maximum growth was seen in Liquid/Money Market where the assets grew to Rs. 99,190 crore, a growth of 15.37 per cent over the last month.

Gilt Funds, where the investments are predominantly in Government Securities have seen an increased activity where a lot of investments flew in. The AUM grew to Rs. 4,410 crore, an increase of 11.08 per cent while the total inflows were Rs. 431 crore. This is the only category which has been witnessing positive inflows for the last 6 months. The high gilt yields scenario is throwing an opportunity for investors to reap the capital gains once the yields come down on account of eased liquidity situation, low inflation and improved economic outlook.

In Equity, the outflows continued albeit at much lesser amount. In Nov 2010, it saw an outflow of Rs. 41 crore only in comparison to an average outflow of Rs. 3,523 crore in last five months. The ELSS category too continued with the net outflow. This month, the outflow had been to Rs. 62 crore. In last eight months, the category saw the redemption of Rs. 993 crore, the maximum in recent years. However, the Balanced Fund category which involves a mix of Equity and Debt investments saw an inflow to the amount of Rs. 255 crore. However, its AUM declined to Rs. 18,871 crore in Nov 2010 from Rs. 19,462 crore in Oct 2010.

ETFs continue to move unidirectional with inflows. The Gold ETFs have drawn an added interest from investors which led to an inflow of Rs. 172 crore. In last 19 months, the category witnessed positive inflows in 18 months, the maximum among all categories. In other ETFs section, the inflows continued with a major addition of Rs. 328 crore. The AUM also rose to Rs. 1,852 crore in Nov 2010 from Rs. 1,690 crore a month earlier.

In Income category, the total AUM increased by 3.99 per cent to Rs. 3.31 lakh crore. The category saw an inflow of Rs. 11,307 crore in Nov 2010.

There were no new funds launched in Equity category; however, there was an open ended Gold ETF (Axis Gold ETF Fund) and Fund of Funds investing Overseas (JP Morgan EEMA Equity Offshore Fund) launched in Nov. However, there was a flurry of Fixed Maturity Plans (FMPs). A total of 36 FMPs was launched in Nov 2010 collecting a total fund of Rs. 5,281 crore. The liquidity deficit has sent the short term yields higher which have helped the Fund Managers to lock in the opportunity in dolling out FMPs which provide tax benefits in comparison to other investment products.

Source: MOSL

Happy Reading!

Policy Tools post Global Financial Crisis – US Perspective

Since 2008, the world economy is in bad shape! Post the Lehman fall in Wall Street in 2008, the contagion effect ran scathe through the entire global economy. The governments in conjugation with their respective Central Banks announced a series of monetary and fiscal policies which helped in containing the reversal in growth and boost the economy. Also many countries announced bail out programs for many of its big institutions who had over leveraged themselves and became a victim of sub-prime crisis.

It is largely considered that the world biggest economy, United States defines the path of the market and the world market swings around it. Since the financial crisis that emerged in summer of 2007, the Federal Reserve used various liquidity and credit programs and other monetary policy tools. These tools aimed at addressing severe liquidity strains in key financial markets, cultivating faster economic recovery by lowering the longer-term interest rates and providing ready available credit to troubled and fractured financial institutions.

Here is a brief about the different policy tools used by Federal Reserve; these tools are widely used by other countries too.

Open Market Operations – The Federal Reserve considers it as the principal tool for implementing monetary policy. The objective of OMO can be a desired price (Federal Funds rate) or a desired quantity of reserves. The federal funds rate is the interest rate at which the depository institutions lend balances at the Federal Reserve to other depository institutions overnight (similar to Call rate in India).

However, Fed objectives on OMOs have varied over the years. During the 1980s, it concentrated on attaining the specified level of the federal funds rate and in 1995, it explicitly targeted federal fund rates. Table 1 explains the movement of Fed’s fund rates.

The Discount Rate – It is the interest rate charged by the Federal Reserve Bank to commercial banks and other financial institutions on loans under its lending facility – the discount window (Similar to Call Money in Overnight Segment). The Federal Reserve Bank offers three discount windows to depository institutions – primary credit, secondary credit and seasonal credit, each with its own discount rate. All discount window loans are fully secured.

In the primary credit program, the loans are extended for a very short term (usually overnight) for financially sound institutions. Those institutions which are not eligible for primary credit may apply for a secondary credit to meet short-term liquidity needs or to resolve severe financial difficulties. Seasonal credit is extended to relatively small depository institutions that have recurring intra-year fluctuations in funding needs, such as banks in agricultural or seasonal resort communities. The rates charged are minimum in Primary Credit followed by Secondary Credit while the discount rate for seasonal credit is an average of selected market rates.

Reserve Requirements

Against specified deposit liabilities, the banks are required to hold a minimum percentage of holding in reserve in the form of vault cash or deposits with Federal Reserve Banks. Reservable liabilities consist of net transaction accounts, non-personal time deposits and Eurocurrency liabilities. Since Dec 27, 1990, non-personal time deposits and Eurocurrency liabilities have had a reserve ratio of zero. Beginning Oct 2008, the Federal Reserve Banks will pay interest on required reserve balances and excess balances. The table 2 shows the reserve requirements as decided by Federal Reserve.

Interest on Required Balances and Excess Balances

The Federal Reserve pays interest on required reserve balances – balances held with Federal Reserve to satisfy reserve requirements and on excess balances – balances held in excess of required reserve balances and contractual clearing balances.

The interest rate on required reserve balances and excess balances is determined by the Federal Reserve Board. It gives the Federal Reserve an additional tool for the conduct of monetary policy.

Term Asset-Backed Securities Loan Facility

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility that will help market participants meet the credit needs of households and small businesses by supporting the issuances of asset-backed securities (ABS) collateralized by loans of various types to consumers and businesses of all sizes.

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.

Term Deposit Facility

It is a new tool announced in 2010 by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. It will facilitate the implementation of monetary policy. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thereby drain reserve balances from the banking system. Reserve Banks will offer term deposits through the Term Deposit Facility (TDF), and all institutions that are eligible to receive earnings on their balances at Reserve Banks may participate in the term deposit program.

While the above mentioned policy tools are currently operative, some of the programs has been wound down on improved economic scenario. The Money Market Investor Funding Facility expired on Oct 30, 2009, and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility were closed on February 1, 2010. Also, the final Term Auction Facility auction was conducted on March 8, 2010.

The world dynamics has changed; so with geo-political issues. PIIGS (Portugal, Ireland, Italy, Greece, Spain), once a flying and splendid investment horizon have been on the verge of sovereign crisis. We believe that the Keynesian has left a strong theory to be followed by US which have initiated many quantitative programs – QE-I (worth Trillion dollars) followed by QE-II (worth US$ 600 billion). 

Happy Reading!

Source: Federal Reserve

The New Financial Landscape – Islamic Finance to fuel the growth

The economic crisis followed by the revival; world markets are poised to grow at an unexpectedly high rates barring some uneven European’s crisis and Korean’s geo-political tensions. However, Asian region capturing 50 per cent of world population has its own growth story, thanks to high consumption story. Emerging from the worst of the crisis, the global financial landscape will be a markedly different one from before. India and China’s stories support the theory.

Asia accounts about 60 per cent of world Muslim’s population which makes a case for Islamic Banking; however the industry has been facing challenges. Mr. Ng Nam Sin, Assistant Managing Director, Monetary Authority of Singapore says that

The industry faces several challenges.  Let me just highlight three key issues facing Islamic finance in Asia. Firstly, as was noted by Governor Rasheed Al Maraj, most Shariah-compliant banks like conventional banks need to continue to improve their risk management and corporate governance standards.  Asset-liability management, liquidity and risk concentrations are some of the key issues confronting financial institutions.  They need to ensure their business models are sustainable in the long-term. 

Secondly, the Islamic Financial Services Board (IFSB) has pointed out that Islamic banks need an international Islamic short-term liquidity market. This will further facilitate asset-liability management.  In Asia, we need an active pan-Asian Islamic securities market to provide more short-term liquid instruments for Islamic banks as they expand across the region.  It is encouraging that more countries in Asia are now familiarising with Islamic finance and its structures, and have expressed interest to issue sukuk.  Several are adopting the necessary legal and regulatory frameworks to enable Islamic finance to take root and grow.  More focus on growing the issuance of tradeable liquid instruments, over time, would help to improve liquidity and cross-regional flows.

Thirdly, a shortage of human capital; the number of financial professionals who are well-versed in Shariah-compliant products is still relatively small.  We need more universities and training institutes to offer better quality education and training in Islamic law and finance in order to meet the rising demands of the industry as it embarks on the next phase of growth.

Read more on it.

In this phase of organic transformation, Singapore has emerged as the major economy in developing Islamic Finance. Singapore boasts of largest Real Estate Investment Trust (REIT). Its Singapore Management University has set up an Islamic Law and Finance Centre, the first institution in the world to combine Islamic Law, Banking and Finance programmes in a single, multi-disciplinary university centre.

Some specific Muslims organizations have always been in focus for all wrong reasons which deteriorate their images all over the world, especially after 09/11. If they just dig their strengths and do well for their communities and bring a change in their thinking, many Muslim dominated countries will get benefitted.   

Women and Environment - Comments from Italy

In the 21st century, the women share a new power statistics ruling almost every domains of life. Worldwide, different governments have given different reservations to motivate them to come at par with their men counterparts. Throughout history, women and nature have been closely linked.  Also the idea of “mother earth” is common to many Indo-European cultures. Even in the current Bihar election (2010) where the NDA regime (JD-United and BJP) thwarted its opposition by an unprecedented margin, the women voters played an important role in affecting the political economics.


Moreover, the financial crisis has defined a new power shift from West to East. In industrialized economies, the availability of high quality forms of energy has greatly reduced the amount of time and effort that women must dedicate to housework. Nonetheless, there is substantial evidence that women are more sensitive to environmental matters.

Read more on Women nurturing sustainable development – remarks by Anna Maria Tarantola, Deputy Director General of the Bank of Italy. The paper explains the relationship between women and the environment in developing countries including The Industrial World: A green economy led by women.

Happy Reading!

- Amar Ranu

Macro-prudential policy: Asian Perspective

Macro-prudential policy has become a norm after the outbreak of global financial crisis. The international bodies such as IMF and the Financial Stability Board (FSB) stated clearly that implementing macro-prudential policy should be central banks’ responsibility. It is a new concept and counter cyclical.
Read more on the opening remarks at the High Level Seminar of “Macro-prudential policy: Asian Perspective”…


Happy reading!

- Amar Ranu

Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach

The world had been overleveraging in pre-financial crisis. Post Lehman scathe, there has been talks of deleveraging and the liquidity including debt which seem like a trap again. Paul Krugman from Princeton University and Gauti B. Eggertsson (NeyYork Fed) talk about Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach.


The approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

Read more…

Aiding the economy: What the Fed did and why

Aiding the economy: What the Fed did and why?

For a quite long time, all the economies have been struggling to keep pace or evolve after the worst financial crisis (last we had in 1930s). More monies were pumped into throughout the world amounting into trillion of dollars - US had QE-I followed by QE-II and various other measures by other countries too.
QE II may be a fait accompli but the Fed Governor justifies it citing the high unemployment rate and low inflation. Read his opinion Aiding the economy: Why the Fed did and why
Enjoy reading!

12th March – a reason to rejoice or lament

The 12th March has always been an unforgettable day in my life – not for the reasons I am born blissfully on this day to my proud parents to whom I cannot return my duties but it will always be remembered for the barbaric crime done on Indian soil. The reasons – avenge; a thirst to kill each other which the British rulers successfully imbibed into us. Yes, I am talking about the non-ending story of Hindu – Muslim dilemma where the chapter of Babri Masjid, Mumbai’s Serial Bomb Blasts, Gujarat riots and riots post Babri Masjid’s demolition were red lettered.
I always wonder – should I celebrate my most important in my life where every year I lose an important year or should I go ahead without remembering those who were either killed or wound permanently in the Mumbai’s serial blast of 12th March 1993, the Black Friday in Mumbai History. Recently I happened to read the book “Black Friday – The True Story of the Bombay Bomb Blasts” by S. Hussain Zaidi. Though it was out for public circulation in 2002, I happened to read it in recently. It was better than sure that the events had been an avenge to Babri Masjid’s demolition post which Muslims were butchered albeit Hindus were also killed. The book also described the involvement of Sanjay Dutt, the Bollywood star and the son of MP and another Bollywood veteran, Shri Sunil Dutt, who had nothing to do with Bomb Blast and had procured an AK 56 in curiosity to defend himself after he was threatened from pro-Hindu fundamentalists. I still wonder how he thought of defending himself after he was threatened from fundamentalists as he showed some good friendly gestures to Muslims’ communities after Bombay’s riots of Dec 1992 and Jan 1993.

The book also describes the heroic efforts put by Mumbai Police and its network. Now I believe why it is named after Scotland Yard in its service and work-style. Its nexus with dons, bhais, bollywood stars and many unrecorded relations, also known as informants made it one of the strongest Bhai of aamchi Mumbai. Mr. Rakesh Maria, Deputy Commissioner of Police (Traffic) and the then in-charge of Bombay’s Bomb Blasts in 1993 and now the Joint Commissioner of Police and also investigated the recent Mumbai’s Terror Attack of 2008 really deserve a pat. He handled both the cases in a very intuitive way.

While India leaves behind its story and Mumbai goes forward in its spirit, there are some people who try to erase their past memories but unable to do so.

I must think on – should I still go ahead in celebrating my birthday with a big bang where I extinguish my candle or should I light a candle in the memory of those who were directly or indirectly killed or wound and their life are still a challenge for them. Let someone answer this million dollar question!

Hats-off to the spirit of Mumbai! I love it.

Infrastructure Funds – poised to grow

A robust infrastructure; ask any individual he will define or relate it. Infrastructure has become a new catchphrase in India with more government allocations, both through policy reforms and increased spending. This has been well emphasized in Budget 2010 where a massive Rs. 1,73,000 crore or 46 per cent of total plan was allocated to infrastructure only. Infrastructure augments the growth of Indian economy and India’s economic growth has been attracting wide attention. The International Monetary Fund (IMF) has come out to state that Indian economy will grow at 9.7 per cent in FY 2010 and 8.4 per cent in FY 2011. The economy is on the fulcrum of an increasing growth curve; thus, economic prosperity is placing huge demands on infrastructure. It is attributed that India’s submissive infrastructure is the key reason for the country not achieving double digit GDP growth.

Though the Government of India has been addressing the infrastructure requirements, the pace of growth has been lacking.

Infrastructure – Has it performed well?

While Infrastructure has been defined differently from different Portfolio Managers, we have considered sectors such as Telecom, Consumer Goods, Utilities – Gas and Power, Real Estate, Petroleum and Gas, Engineering as basic components of Infrastructure (combining all the definitions as per different Offer Documents of Infrastructure Funds). Banks have also found a prominent place in major of the funds; so, we would also consider it.

Indian equity markets have delivered superb performance in the last quarter including CYTD , thanks to increased capital inflows and extended quantitative easing in developed countries which have forced cheap money to move into emerging markets including India too. India has emerged as the best performing market globally and is poised to be one of the earliest to scale its previous peak and create new highs. From peak of CY 2007-08, major sectoral movers are Auto, PSU-Banks, FMCG, Pharma and IT moving in the range of 39 to 71 per cent while the Engineering, Petroleum and Gas, Utilities, Telecom and Real Estate – which comprise predominantly Infrastructure have underperformed in the range of (-) 21 to (-) 72 per cent.

Does it say that the infrastructure story is over in India?

If we believe the 11th Five Year Plan (2007-2012), it calls for more than doubling the financial outlay for infrastructure. The investments will touch US $ 1.48 trillion by 2017. Some of the major developments in the past such as world class airports, flyovers, CWG Event which helped in creating world class sporting complexes (barring inappropriate use of funds) have proved to be the major boost to Infrastructure in the near future.

Similarly, we are on Capex boom (dhoom) driven by impending large investment in infrastructure and industrial activity. India is among leading global destinations for infrastructure and investment spending over the next decade. Sectors which have shown growth rates consistently over the last six quarters are Engineering, Banking, FMCG and IT. However, telecom continues to post its fifth consecutive quarter of earnings decline. We believe that the 2HFY11 will have changed growth pattern across sectors like Cement, Engineering, Real Estate, Infrastructure, Utilities reporting better earnings growth than they did in the past. Telecom will continue to post negative earnings growth for 2HFY11. As per MOSL estimates as given below, Engineering and Real Estate are poised to report better quarterly earnings growth in 2HFY11 at 31.8 per cent and 47.2 per cent against the 2Q10 estimates of 17.3 per cent and -1.5 per cent respectively. Infrastructure is also poised to grow at 37 per cent in 4Q10 against 2Q10 figures of 12.6 per cent; ditto with Utilities growing at 15.1 per cent against 8 per cent in 2Q10.

Also, the 2QFY11 earnings for MOSL universe (139 stocks) are more broad-based with 73 per cent of companies (v/s 70 per cent in June 2010) in a positive earnings growth trajectory and vice-versa.

Infrastructure Funds in India – Are they poised to grow?

Mutual Funds in India have been growing through rough patches but are poised to bounce back with a big-bang. The industry has several infrastructure funds to offer – as on Sept 30, there are 21 funds – it includes both open-ended and close-ended. Infrastructure Funds invest in stocks of companies which cover several sectors like petroleum and gas, utilities, real estate, engineering, FMCG etc. Unlike in other thematic funds, they are not restricted to a few sectors. On an average, they manage total assets of over Rs. 18,932 crore as on Sept 30, 2010.

From table 1, it can be seen that infrastructure funds have highest average allocation to Energy (24.64%) followed by Industrial Manufacturing (15.3%), Financial Services (14.92%), Construction (12.64%) and Metals (7.94%).

Performance – muted but poised to grow in future

Infrastructure Funds remained a mute spectator in the current Bull Run. In pre-crisis era, these funds had given a reasonable performance but it underperformed when compared to diversified fund category. As per table 2, it paralleled headline indices’ performance like Sensex and Nifty 50 in bull phase while it underperformed them in bear phase. However, in 5-year category, it outperformed all major categories except Bankex which gave an exception performance.

Among the largest infrastructure funds in terms of assets managed, ICICI Pru Infrastructure Fund, DSP BR TIGER Fund among others have outperformed major indices in 5-year category.

Conclusion

• Despite many hiccups including political unwillingness, infrastructure is sure to pick up in future which will augur well for various sectors like power, construction, engineering, energy, cement etc. It will also bode well for funds with these themes.

• Though riskier than diversified equity funds, investors with higher risk appetite can consider allocating 10-15 per cent of their portfolio to these funds.

• Investors must stick to good performing funds having less volatility and lesser concentration risk.



Source: MOSL

Nov 02 policy review eyed

Highlights:

• Amid tight systematic liquidity, the RBI announced a special second LAF, a liquidity window for scheduled commercial banks to borrow to the extent of up to 1.0 per cent of their Net Demand and Time Liabilities (NDTL) as on Oct 08 on all days during Oct 29-Nov 04, 2010. The RBI also announced a special 2-day repo auction under the LAF on Oct 30, 2010 which saw a total borrowing of Rs. 11,025 crore under LAF. The RBI also allowed waiver of penal interest, if any for any shortfall in maintenance of SLR on Oct 30-31, 2010 out of these special facilities.

• The buy-back programme as announced by the government did not draw good responses from the market – with bids worth Rs. 3,174 crore tendered against the notified amount of Rs. 12,000 crore. However, the total amount accepted for buy-back was Rs. 2,148 crore only.

• The benchmark bond seemed to lose its appetite after volume shifted to 8.13% G-Sec 2022 as the market expected that 7.80% G-Sec 2020 may not see any auctions further. However, comments from a Finance Ministry official who hinted that the 10-year bond will retain its benchmark status till fiscal year end led to a swift rally in it. Further, the RBI’s special liquidity window led to fall in yields. The 10-year benchmark paper closed at 8.11, down by 3 bps over the week.

• India’s primary articles’ inflation fell to 16.62 per cent in the week ended Oct 16 from 18.05 per cent in the last week while food articles’ inflation fell to a 50-week low of 13.75 per cent from 15.53 per cent a week before.

• Growth in India’s key infrastructure industries, which constitute 26 per cent of IIP figures fell to a 19-month low of 2.5 per cent in Sept compared to 3.9 per cent and 4.3 per cent in Aug and a year ago respectively.

View & Recommendations:

• The special liquidity window announced by RBI may ease the structural liquidity crisis. The RBI is looking to normalize policy rates given high inflation; however, it feared that the QE-II (Quantitative Easing 2 to be announced by Fed Reserve) may bring more capital inflows into the system which will force the RBI to contain the rupee appreciation. This may lead to inflation hike further.

• The market participants have expected a hike of 25 bps in policy rates to be announced by RBI on Nov 02. The market has already factored into the 25 bps hike in policy rates. So, yields might not move significantly if there is hike in policy rates. However, the government may decide to cancel the auction after which the government bonds may witness a rally.


Broader Perspectives:

Bond Front

The buy-back programme announced by RBI did not draw strong interests from market participants. Bids worth Rs. 3,174 crore were tendered against the notified amount of Rs. 12,000 crore. However, the total amount accepted for buy-back was Rs. 2,148 crore. The securities which are bought back are 8.75% G-Sec 2010, 12.32% G-Sec 2011 and 6.57% G-Sec 2011 for notified amount of Rs. 28.97 crore, Rs. 616.35 crore and Rs. 1,502.97 crore respectively. The inflation continued to remain in uncomfortable zone which may allow the central bank to use all its ammunitions, policy rate hikes being the most prominent one. The RBI policy will be announced just before the much awaited US Federal Reserve announcement regarding the much touted QE-II, or second round of quantitative easing. The probability goes high as the US jobless rate hovered around 10 per cent for a third month in October.

The benchmark yield kept on spiraling and touched its near months high of 8.18 per cent. Meanwhile, the borrowing limit in benchmark bond saw a shift in active trading to other yields. The 10-year benchmark paper closed at 8.11 per cent, down by 3 bps. The 8.13% G-Sec 2022 became the most actively traded securities during the last week.

The tight liquidity scenario, an example of structural liquidity deficit led to a hike in interbank call money markets which rose as high as 12 per cent. During the week, the banks borrowed a net amount of Rs. 4.80 lakh crore against the previous week of Rs. 3.17 lakh crore. The Repo and CBLO rate closed at 6.43 per cent and 7.96 per cent, an increase by 72 bps and 261 bps respectively.

The 1/10 year G-Sec spreads fell to 112 bps from 124 bps a week earlier. And the average G-Sec volume reported was Rs. 47,412 crore compared to Rs. 53,776 crore a week earlier.

Bond Supply

The market didn’t have any central government auctions scheduled for this week; however, the SDL (State Development Loans) auctions raised Rs. 8,601.8 crore as against the notified amount of Rs. 8,226.8 crore with the state of Tamil Nadu exercising the green show option to the tune of Rs. 375 crore.

Liquidity

The systematic liquidity remained in deficit mode which allowed RBI to open an additional liquidity window. The liquidity as measured by bids for reverse repo/repo in the LAF (Liquidity Adjustment Facility) auction of the RBI reported a net borrowing of Rs. 4,80,180 crore or daily average of Rs. 80,030 crore.

Corporate Bonds

The corporate bond yields saw a hike in the concluding week. The 10-year AAA bond ended at a yield of around 8.80 per cent compared to 8.76 per cent in the previous week. Credit spreads moved up with 5-year AAA spreads moving up by a basis point to 69 bps levels.

Source: MOSL

Liquid, income and equity led to total outflows of Rs. 71,838 crore

Sensex at its 33-month peak; a cycle from 20,000 to 20,000. Investors are anxious, markets are overheated. Mutual fund industry has been bleeding and it remains continuous, in fact certain. Equity funds have been witnessing redemptions; in Sept 2010, equity funds saw its maximum ever redemption amount of Rs. 7,011 crore. In the last 14 months, since the ban of entry load on mutual funds, the outflows have been for 11 times while inflows have been for 3 times. In totality, the redemptions till date since Aug 2009 are Rs. 21,461 crore. Not only equity funds, Balanced Funds too witnessed an outflow of Rs. 414 crore. It is the maximum outflow in Balanced Category in recent years.

Earlier, the fund houses were complaining of low incentives to boost distributors to sell products; now the investors have been redeeming the funds as many fear that there could be a correction in Equity Markets. With many funds reaching new NAV highs, investors preferred trimming their holdings. However, the gross inflows in Equity Funds during the month were the highest since April this year. It was Rs. 5,793 crore in Sept 2010 compared with Rs. 4,928 crore in Aug 2010. Also, the total assets as in Sept 2010 in Equity Category grew to Rs. 1,85,484 crore from Rs. 1,79,200 crore in Aug 2010 mainly on account of rising of equity.

Except Gilt Funds and ETFs, all other categories witnessed net outflows triggering systematic outflows. Liquid/Money Market Funds witnessed the maximum outflow to the tune of (-) Rs. 36,108 crore. Similarly, Income Funds witnessed outflow by Rs. 28,637 crore. Both categories which cater mainly to institutional investors witnessed heavy redemptions due to liquidity deficit in the financial system. Banks, major investors in these funds have also redeemed their investments in Sept 2010. In totality, the total exposure of banks to Mutual Funds as per the RBI estimates have declined from Rs. 59,984 crore as on Aug 27, 2010 to Rs. 33,534 crore as on Sept 24, 2010.
Overall the industry witnessed net outflows of Rs. 71,838 crore due to large redemptions in debt funds.
ELSS, Equity Linked Saving Schemes where investors get benefits for investments up to Rs. 1 lakh under Sec 80C also saw redemptions to the tune of Rs. 270 crore for the sixth consecutive times since April 2010.

On a positive note, Gilt Funds witnessed a net inflow to its kitty. It witnessed a net inflow of Rs. 521 crore. The G-Sec yields have been trading at their high levels mainly on account of RBI’s aggressive monetary policies and high inflationary pressures. Headline Inflation as measured by WPI is set to moderate by the end of this fiscal year. Moreover, liquidity may also improve by Jan-Feb next year. All these factors may bring down G-Sec yields which will benefit these Gilt Funds to the maximum.

In Equity Category, there were 3 NFOs – IDBI Nifty Junior Index Fund; Reliance Small Cap Fund, Reliance Index Fund – Nifty Plan and Sensex Plan which collected a total amount of Rs. 677 crore. Two Ultra Short Term Funds – IDBI Ultra Short Term Fund and Pramerica Ultra Short Term Bond Fund were launched which collected Rs. 597 crore in combine. FMPs continue to rule the industry with a total of 37 new NFOs which collected a total amount of Rs. 7,454 crore. The high short term yields can be attributed to these launches which have caught the attraction of investors.

Decoupling - a class example

German DAX Index and India's NSE Nifty 50 are just now at the same numeric value of 6153. In March 2003, DAX was at 2423 point and Nifty was at 934 point. That's what the Decoupling stand for. India's strong consumption story supports it.

RBI Mid-Sept Monetary Policy Review – Loans to become dearer

The hawkish global economy recovery coupled with high inflationary pressures forced the Central Bank to raise Policy Rates at the pace faster than the market expectations. The Central Bank, RBI in its Mid-Quarter Monetary Policy Review increased the repo rate and reverse repo rate under LAF.


• Repo Rate and Reverse Repo Rate under Liquidity Adjustment Facility (LAF) increased by 25 bps and 50 bps to 6 per cent and 5 per cent respectively, thus, bringing out the LAF rate corridor to 1 per cent.
• Bank Rate and CRR (Cash Reserve Ration) retained at the same level of 6 per cent each

Domestic Scenario
The RBI stressed on that fact that Inflation has become a kind of concern; even the new index of headline inflation as measured by WPI suggests that the monthly average of WPI inflation for Q1 of 2010-11 under the new series at 10.6 per cent was about 50 bps lower than the rate of 11.1 per cent under the old series. Inflation rates have reached its peak and are most likely to remain at the same level for the next few months. However, Food Inflation continues to move northwards and touched 14 per cent in Aug 2010 as per new series.

Another concern that the RBI documented that the negative real interest rates have been affecting deposit growth rates of banks as savers look for higher returns elsewhere. The RBI wanted deposit growth rates to increase as accordingly the bond supply will be a thorough affair in its weekly auctions without any devolvement which may put pressure on yields. The trend suggests that higher deposit growth rate require higher demands for federal bonds as the bank need to maintain the SLR requirement.

The RBI also indicated that higher than expected realizations on 3G and BMA auctions combined with robust tax revenues have virtually eliminated the risk of the fiscal deficit overshooting its target of 5.5 per cent, even after the additional demand for grants from the Central Government have come up in the Parliament. The Water God, Monsoon has revived the growth prospects in Agriculture which will contribute to good rabi harvest.

Liquidity – from a large surplus to deficit
From a surplus mode, the liquidity entered into a deficit mode after the July Policy review, thus, making the repo rate as the operative policy rate. The current hike will prompt many banks to raise the lending and deposit rates which will sustain the strength of the transmission mechanism.

Global Factors
The RBI remained elusive of global circumstances where the slow recovery has halted many advanced economies to hold their rates further for an extended period. This led to massive inflows into developing economies including India. Moreover, the weak global demand coupled with strong domestic demand has increased the trade deficit and the current account deficit has also been widening. However, Europe has demonstrated remarkable resilience; China too bounced back with industrial production and trade numbers reviving sharply. “Overall, even as the global environment continues to be a cause for caution, the big picture has not worsened significantly since July”, said RBI in a press note.

Need for the hike in Policy Rates
Though the hike in policy rates were expected but by increasing the Reverse Repo Rate by 50 bps, higher than the market expectation of 25 bps, the RBI has used this opportunity to reduce the LAF rate corridor, which will reduce the expected volatility in overnight rates. Moreover, it also wanted to reduce the impact of negative real interest rates which led to savers to move to alternate products giving higher returns.

Yields to take cues from Inflation and Policy meet

Highlights:

• The bonds remained jittery throughout the week; however, it settled down at low levels as compared to last week closures.

• The Industrial Output Data as measured by Index of Industrial Production (IIP) rose a more-than expected 13.8 per cent in July 2010, or nearly twice the 7.2 per cent seen in last month.

• Retail Inflation and Food Inflation rose over 15 per cent and 11 per cent, causing a concern for RBI which may hike the rates again.

• The market liquidity remained comfortable with the net absorption of Rs. 27,640 crore under LAF window. However, it would remain in deficit mode going forward.

• The market speculation that the current benchmark paper will be replaced have been put on hold after a Senior Finance Ministry official stated that there is adequate headroom in the current 10-year paper and the bond is expected to last for the entire borrowing in FY11.

View & Recommendations:

• The unexpected factory output at 13.8 per cent plus the high inflation figures may prompt the central bank RBI to revise the policy rates upwards. However, the market has already factored into the 25-bps hike in policy rates.

• Bond yields may soften further in view of global economic environment especially from US i.e. better than expected US Employment data.

• The absence of debt sale in the coming week will keep the demand for debt papers high. The real tone will be set after the mid-quarter policy review this week. Any positive surprise will be greeted with a rally in bond prices. The market is likely to focus on domestic data and policy measures. The policy meet will also review the awaited headline inflation figure due on Sept 14, 2010.

Broader Perspectives:
Bond Front
It is concerned that policy makers are running out of ammunition to control inflation and high factory output is also reigning in strongly; the RBI may go for an upward hike in policy rates. However, the mixed sentiments emanating from global markets are preventing RBI from taking any extreme measures. US President Barack Obama commented that US economy was taking longer than expected time to recover from economic shivers. However, the better-than-expected growth in US employment increased the odds of a fifth interest-rate hike this year.

Bond prices moved up with the 10-year benchmark yield witnessing a drop of 7 bps. The benchmark bond 7.80% 2020 yield nosedived from 7.98 per cent to 7.91 per cent. The comment by the Senior Finance Ministry over the continuance of the current 10-year benchmark bond for the remaining fiscal year 2010-11 boosted the sentiments among traders and investors which lapped the bond to make the prices attractive. He added that the government's preference was to borrow through papers of longer maturity, in order to evenly spread out its outstanding. However, the 8.13% G-Sec 2020 eased only 1 bps to 8.04 per cent. The G-Sec volume was also strong as reported in NDS-OM platform; it showed a daily average of Rs. 12,353 crore over the week. The 1-10 year spread also reported a sharp drop from 168 bps to 149 bps.

Bond Supply
The government auctioned securities worth Rs. 11,000 crore last week. The bonds auctioned were the 7.17% 2015 for Rs. 4,000 crore, the 8.13% 2022 for Rs. 4,000 crore and the 8.26% 2027 for Rs. 3,000 crore respectively. The cut-offs were in line with the market expectations which came in at 7.69 per cent, 8.02 per cent and 8.35 per cent. Five State Governments namely Maharashtra, Punjab, Tamil Nadu, Uttar Pradesh and West Bengal conducted the auction of their State Development Loans for combined amount of Rs. 5,300 crore on Sept 07, 2010. Their cut-off yields were in the range of 8.29 per cent to 8.41 per cent.

Liquidity
The liquidity was comfortable throughout the week as measured by bids for Repo and Reverse Repo auctions in Liquidity Adjustment Facility (LAF). The net absorption amount was Rs. 27,640 crore for this week. This week, there won’t be any auction which will ease off the liquidity. However, the advance tax outflow to the tune of Rs. 50,000 will put the liquidity in deficit mode. The average Call and CBLO rates dropped to 4.65 per cent and 4.28 per cent from 4.77 per cent and 4.75 per cent respectively over the week.

Corporate Bonds
Corporate bonds’ yields fell over the week. The 10-year AAA bond ended at a yield of around 8.71 per cent compared to 8.75 per cent. However, the 1-year bond hardened by 15 bps to 7.95 per cent from 7.80 per cent a week earlier. In the primary market, EXIM Bank raised Rs. 100 crore with 5-year paper and another Rs. 100 crore with 10-year paper with an annualized yield of 8.45 per cent and 8.68 per cent.

IRDA regulations – Policyholders to be benefitted

The recent spat between IRDA, the Insurance Regulator and SEBI, the Capital Market Regulator created an outcry in the market with each party holding its supremacy over the much sought and widely circulated insurance product, Unit Linked Insurance Products (ULIPs) in India. The Government of India in quick solution passed an ordinance to support the IRDA regulation over ULIPs ending the market speculation that SEBI might make Ulips in line with Mutual Funds.

Fresh from its victory in the regulatory turf war over ULIPs, the IRDA announced a set of regulations. With the expansion of insurance sector and more innovative insurance products, particularly Unit Linked Insurance Products (ULIPs) entering into Life Insurance products list, IRDA has been sensitive to the changing scenario. In the past, IRDA has come out with various steps to bring in changes in the regulatory framework to address various concerns of the policyholders.

IRDA in a note stipulated that insurers must provide the prospect/policyholder all relevant information regarding amounts deducted towards various charges for each policy year so that the prospect could take an informed decision. IRDA also raised the concerns of mis-selling and Distance Marketing which require guidelines from the insurance regulator. Further, IRDA set up an exclusive Customer Affairs Department that focuses on consumer related issues and initiatives including grievance redressal and consumer education through Insurance Awareness Campaigns. It is perhaps the most important step in the interests of policyholders.

Recent Regulatory Proposals

ULIPs are hybrid instruments that combine elements of mutual funds and insurance. In most cases, the insurance amount is capped to 5-times of initial insurance premium. Recently, IRDA came out with guidelines governing ULIPs – how such products are sold/bought; how ULIPs can be better financial instruments for providing risk coverage and many more. Some of the ULIPs related regulations are as given below:

1) Level Paying Premium

All regular premium /limited premium ULIPs shall have uniform/level playing premiums. Any additional payments shall be treated as single premium for the purpose of insurance cover.

2) Compulsory Cover

Currently there are a number of ULIPs schemes where there is maximum insurance cover up to five times of the premium paid or no insurance cover. Now it has been recommended that the life insurance component has to be at least 10 times the premium paid for policies up to 10 years and at least 1.05 times the annual premium for policies of 20 years and above.

3) Lock in Period increased to Five Years

IRDA has increased the lock-in period for all ULIPs from three years to five years, including top-up premiums, thereby making them long term financial instruments which basically provide risk protection.

4) Minimum Premium Paying term of Five Years

All limited premium ULIPs, other than single premium products shall have premium paying term of at least five years

5) Even Distribution of Charges

Charges on ULIPs are mandated to be evenly distributed during the lock-in period, to ensure that high front ending of expenses is eliminated.

6) Pension Plans to have Guaranteed Return

As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.

7) Rationalization of Cap on Charges

With a view to smoothen the cap on charges, the capping has been rationalized to ensure that the difference in yield is capped from the 5th onwards. This will not only reduce the overall charges on these products, but also smoothen the charge structure for the policyholder.

Though these regulations have been rolled out for the benefit of common policyholders, the insurers will have a level playing field with other players and will benefit in the long run.

Yields to fall – Focus on Income Funds

Inflation has started coming down. WPI, the official figure for measure of Inflation came down to 9.97 per cent, 0.03 per cent shy of two digits. The RBI concern on ballooned inflation, a shift of focus from growth to inflation led to a series of monetary policy measures this year, already four times witnessed. More worrisome is the fact that the inflation is no longer food prices driven; in fact it has become more generalized. Non-food inflation has risen from almost zero level in Nov 2009 to 10.9 per cent in June 2010, contribution 70 per cent to inflation.
The bond yields rose abruptly in India, however, the bond yields came down globally. For the first time in its history, the 10-year Indian and US bond yields are facing a divergent state.

The G-Sec markets witnessed hardening of yields in July and Aug 2010. The 10-year G-Sec Bond and Short Term Bonds’ yields have spiked in the recent past; which we believe that they may go up further projected the advance tax outflows in Mid September. The short term yields (1-year CD and CP) have already spiked by 200 bps in the last 3 months. The benchmark bond 7.80 per cent 2020 has already touched 8.08 per cent, currently hovering at 8.03%. It touched its four months high since May 2010. The RBI is still not comfortable with the inflation figures and the market opines that it may go with further rate hikes in the upcoming Monetary Policy meet due in mid-Sept.
We believe that the G-Sec yields in long term will follow its logical course of softening. The reasons are:
• Softening of inflation in coming months
• Improvement in Government revenues in the form of improved tax inflows, 3G and WIMAX auctions
• Reduction in fiscal deficit, if the excess revenue is used efficiently
• Spread in the Repo rate and 10-year G-Sec rate (already at multiple year high) should reduce
• Liquidity is bound to improve; temporarily we might witness liquidity deficiency in the system
• For the first time since 2002, interest rates in India are divergent to US yields (Check the above table)

Since US government continues to follow an expansionary monetary policy to revive growth, the Fed has kept its interest rates abysmal low for another extended period. However, in India, RBI has shifted its focus from good GDP/IIP growth to inflation management; therefore, we witnessed tightening of monetary policy. When inflation comes under control over next few months, bond yields (long dated bonds) will follow its logical course of softening. For those seeking to ride the yield curve at the longer end which could potentially ease in the 2nd half, we would recommend allocations to Income Fund having high average maturity. In the above stated scenario, the income funds stand to benefit with a time horizon of 12 to 18 months.

Equity outflows continue; industry added Rs. 31,654 crore

Mutual Fund industry saw a temporary relief after witnessing outflows in last two months consecutively. In July 2010, the industry saw a net inflow of Rs. 31,654 crore to its kitty mainly on account of net inflow of Rs. 34,303 crore in Liquid/Money Market category. On the other hand, the total AUM increased to Rs. 6.68 lakh crore, a rise of Rs. 38,420 crore or 6.10 per cent over the last month figure. All categories except FOF Investing Overseas reported an increase in its net AUM. While Income Funds comprising 50 per cent of total AUM reported a meager increase of 1.11 per cent in its AUM, Liquid/Money Market Fund category reported an increase of 46.56 per cent. The latest AUM figures for Income and Liquid/Money Market Fund stand at Rs. 3,31,949 crore and Rs. 1,05,333 crore respectively. The Other ETFs category shows a dramatic increase in AUM after Motilal Oswal Mutual Fund successfully closed its maiden fundamentally modified ETF MOSt Shares M50 with a total AUM of Rs. 236 crore. It has a total AUM of Rs. 1,532 crore, an increase of Rs. 397 crore other its last month figure. The Diversified Equity category showed a negligible increase of 0.10 per cent to Rs. 1,78,492 crore. Other categories too moved up albeit marginally.


The Equity Diversified Fund category saw a major redemption having a total outflow of Rs. 8,413 crore against an inflow of Rs. 5,013 crore, thus, a net redemption of Rs. 3,400 crore. The equity markets have already touched their February 2008 level and investors have become cautious of overheat going in the equity market as they fear a correction from this level. Moreover, some investors who were sitting at their investment since 2007 had also redeemed their money. Hence mutual funds booked profit to meet investors’ redemption pressures. As per the latest SEBI figures, Mutual Funds had net sale of Rs. 4,405 crore in July 2010.

Table: Mutual Fund Asset Growth

The Liquid/Money Market saw the maximum inflow of Rs. 34,303 crore mainly on account of switch outs from Income/Ultra Short Term Funds to Liquid Funds. After the introduction of new MTM ruling on debt securities having average maturities more than 91 days, the Ultra Short Term Funds were the worst hit. Corporate fears that it will bring volatility to the funds which will bring down the returns. They eventually shifted to Liquid Funds or redeemed their investments. The Income category saw a net inflow of Rs. 475 crore only.


In other categories, ELSS saw a new outflow of Rs. 139 entering into fourth month having outflows consecutively month-on-month. Balanced Funds too saw an outflow of Rs. 43 crore continuing its last month losing streak. However, the industry has been witnessing a major shift since last few months from active funds to passive funds. ETFs which cater to passive funds category have seen a substantial increase in inflows. The Gold ETF and other ETFs category added Rs. 155 crore and Rs. 375 crore respectively.

The month also saw the launch of 7 open-ended NFOs and 15 close-ended NFOs (mainly FMPs). The 15 close-ended income funds collected Rs. 2,444 crore from the market while the 3 open-ended close ended funds collected Rs. 840 crore. The income category NFOs were Axis Income Saver, Canara Robeco InDiGo Fund and Peerless Income Plus Fund. The 2 open-ended Equity NFOs, mainly Mirae Asset Emerging Bluechip Fund and SBI PSU Fund collected a total of Rs. 705 crore. In other ETFs category, Motilal Oswal MOSt Shares M50 ETF collected Rs. 236 crore in its maiden NFO.

Source: MOSL Mutual Fund Desk