Highlights:
• RBI announced policy rate hikes; Repo, Reverse Repo and CRR hiked to 5.25 per cent, 3.75 per cent and 6 per cent respectively, up by 25 bps
• RBI followed “baby steps” instead of “big leap” as a part of unwinding accommodative measures
• RBI’s M3 growth, Deposit Growth and Credit off-take projected at 17 per cent, 18 per cent and 20 per cent respectively for Fiscal Year 2010-11
• CRR hike of 25 bps drained out Rs. 12,500 crore from the system; liquidity still abundant with weekly average of above Rs. 48,000 crore
• Bond Markets reacted positively to RBI announcements; Yields moved down. Benchmark G-Sec 6.35% 2020 settled at 8.06 per cent or Rs. 88.64; Introduction of new security G-Sec 8.20% 2022
• Bond Markets remained buoyant throughout the week following the RBI’s announcement of policy rate hikes.
• Inflationary pressures (food including non-food) and overseas cues such as US Treasury Yields and Crude Oil Prices may also influence domestic bond yields
View & Recommendation:
The policy rate hike is unlikely to put any large impact on short-term yields due to abundance liquidity in the system. The high steepness at the shorter end (1-5 years) of the yield curve may prompt fund managers to roll-down the yields to generate extra returns provided the yield curve does not move significantly. Liquid Funds and Ultra-Short Term Bond Funds will continue to be preferred for investors having investment horizon of 1-3 months and 3-9 months respectively. Investors should avoid investing in high average maturity funds and should restrict investments to funds having average maturity up to 1 year. Short Term Income Fund will fill the void in this category.
Broader Perspective:
The bond markets reacted positively at RBI’s Annual Policy for Fiscal Year 2010-11. The RBI’s calibrated approach in exiting accommodative measures announced during the crisis period of 2008 and early 2009 was welcomed by traders as RBI announced 25 bps hike each in CRR, Repo Rate and Reverse Repo Rate, lower than the market expectations of 50bps. The RBI seemed more concerned on Inflation front and accordingly shifted its actions to inflation-led, thus, giving a balanced approach to Growth-Inflation dynamics. However, the markets could not cheer for the later part of the week and yields moved northwards across the curve in the following days. High Inflation pressure, large week-on-week gilts supply including overseas cues such as US Treasury Yields and Crude Oil Prices has continued to weigh on the gilt prices. However, the better-than-expected 3G auction sentiments (The government hopes to collect Rs. 50,000 crore than its expectation of Rs. 35,000 crore), positive MET forecast of normal monsoons and lower than expected net borrowings (Rs. 25,000 crore net of redemptions) in the month of May can keep the sentiments positive.
During the week, the benchmark G-Sec 6.35% 2020 lost its significance and reported very thin volume as it got replaced by G-Sec 8.20% 2022 amid expectations that the RBI will announce a new benchmark next month. The 10-year 6.35% 2020 and 8.20% 2022 yields moved down. While the benchmark yield settled at 8.06 per cent, 2 bps less than the previous week close, the new G-Sec 8.20% 2022 lost 16 bps since its inception. Traders feared that 6.35% 2020 supply would either shrink or stop and volume shifted to G-Sec 8.20% 2022. Apart from this, the RBI successfully auctioned bonds worth Rs. 12,000 crore – the 7.02% 2016 for Rs. 6,000 crore, the 8.26% 2027 for Rs. 3,000 crore and the 2020 Floating Rate Bond for Rs. 3,000 crore. The RBI sold its first floating rate bond in this fiscal year 2010-11. Floating rate bonds are preferred by investors as the coupon is adjusted every six months, allowing to avoid booking nominal losses in their books. The RBI also announced that it would announce auction results of gilts on the following Monday of auction week instead of Friday of same week.
Liquidity as measured by bids for reverse repo/repo under Liquidity Adjustment Facility was comfortable with bids averaging Rs. 48,738 crore. The coming week may see a slight contraction in liquidity following Rs. 12,500 being drained out as a part of hike of CRR.
Corporate bonds also saw its credit spreads shrinking. Five- and Ten-year spreads dropped by 18 bps and 10 bps to 52 bps and 53 bps respectively. The 10-year AAA Corporate Bond yield closed at 8.75 per cent, a loss of 12 bps.
April 16, 2010
MF Industry saw a dip of Rs. 1.53 lakh cr; Equity also saw outflows
Indian Mutual Fund industry suffered a major jolt at the concluding month of fiscal year 2009-10. The Asset Under Management (AUM) for the month of March stands at Rs. 6,13,979 crore, a loss of Rs. 1,52,890 crore or 19.94 per cent over its last month figures. The industry saw a net outflow of Rs. 1,52,890 crore against a gain of Rs. 6,365 in the month of Feb. The Income category saw a maximum outflow of Rs. 1,64,487 crore or a loss of 34.57 per cent. Last month, this category had seen a net inflow of Rs. 4,887 crore. However, the Liquid/Money Market category has shown an improvement over its last month figures. The current month saw a net inflow of Rs. 3,971 crore. In Income Fund category, there have been net outflow as the banks have redeemed their investments from Mutual Funds following strict directives from RBI and SEBI. The major surge in Mutual Fund Industry AUM has been happening due to increased participation from banks. They have been keeping their surplus money with Mutual Funds as the credit off-take has been slow following the bleak economic. However, in the month of March, banks have reduced their Mutual Fund positions from Rs. 1,09,453 crore as on Feb 26, 2010 to Rs. 55,502 crore as on Mar 2010. In March 2009, the banks have total investments of Rs. 36,781 crore in instruments issued by Mutual Funds. Last year in Dec 2009, RBI issued a directive to all banks after banks increased their total investments in Mutual Funds to Rs. 1,69,236 crore. RBI argued that the money invested in Mutual Funds have been revolving in the system in the form of Certificate of Deposits (CDs) which banks have been placing with Mutual Funds. The category added three new income fund schemes. JP Morgan India Short Term Income Fund and Sundaram BNP Paribas Monthly Income Plan – Conservative & Aggressive were new schemes added.
On the other front, the Equity category AUM rose to Rs. 1,74,054 crore in Mar 2010 in comparison to Rs. 1,68,672 crore recorded last month, up by 3.19 per cent. However, in terms of total flows, it saw a net outflow of Rs. 2,016 crore. In the month of March, Fund Managers booked profits seeing stretched valuations of stock market. Moreover, they also distributed dividends rampantly. SEBI also banned the dividend distribution out of Unit Premium Reserve (UPR). It said that the dividend distribution amount must be from the profits booked by the scheme. Since the ban of entry loads, equity category has seen a constant outflow of its assets. However, the first two months of 2010 had seen some inflows. In fiscal year 2009-10, the equity category has seen a net inflow of Rs. 595 crore only. However, the overall Mutual Fund AUM has grown 47.13 per cent in FY 2009-10. Bharti AXA Focussed Infrastructure collected Rs. 41 crore from its NFO.
The ELSS category saw its maximum inflow in last 15 months. The category added Rs. 641 crore to its kitty. The inflows had been mainly due to tax-season month where investors put their money in ELSS to get tax rebate under Sec 80C of Income Tax Act 1961. It saw a total inflow of Rs. 1,554 crore in last one year.
The ETF category saw some major outflows in other ETFs category. While Gold ETF added Rs. 45 crore to its kitty, other ETFs category saw an outflow of Rs. 439 crore. Current the total AUM stands Rs. 957 crore, a loss of 28.69 per cent over its last month figures. Two ETFs were added to the category. Religare Gold ETF garnered Rs. 19 crore in its NFO period while Hang Seng Benchmark Exchange Traded Scheme added Rs. 55 crore from its NFO. Hang Seng ETF is the first international ETF being launched in India by Benchmark Mutual Fund.
Gilts saw a net inflow of Rs. 267 crore. Its AUM rose to Rs. 3,395 crore in the month of March 2010, a gain of 7.06 per cent over its last month figure. Given high borrowing programme, bond yields are poised to rise further. The category may saw some inflows in the months to come once the benchmark yield level reaches to 8.25 per cent to 8.5 per cent.
The industry also saw a herd of FMPs in the month of March 2010. A total of 69 schemes were launched which collectively garnered Rs. 14,642 crore. FMPs have seen a comeback after a brief lull. March sees the maximum numbers of new NFOs in FMP category as these products are launched mainly to avail the double indexation benefit, thus, minimizing the tax burden to investors on income earned.
On the other front, the Equity category AUM rose to Rs. 1,74,054 crore in Mar 2010 in comparison to Rs. 1,68,672 crore recorded last month, up by 3.19 per cent. However, in terms of total flows, it saw a net outflow of Rs. 2,016 crore. In the month of March, Fund Managers booked profits seeing stretched valuations of stock market. Moreover, they also distributed dividends rampantly. SEBI also banned the dividend distribution out of Unit Premium Reserve (UPR). It said that the dividend distribution amount must be from the profits booked by the scheme. Since the ban of entry loads, equity category has seen a constant outflow of its assets. However, the first two months of 2010 had seen some inflows. In fiscal year 2009-10, the equity category has seen a net inflow of Rs. 595 crore only. However, the overall Mutual Fund AUM has grown 47.13 per cent in FY 2009-10. Bharti AXA Focussed Infrastructure collected Rs. 41 crore from its NFO.
The ELSS category saw its maximum inflow in last 15 months. The category added Rs. 641 crore to its kitty. The inflows had been mainly due to tax-season month where investors put their money in ELSS to get tax rebate under Sec 80C of Income Tax Act 1961. It saw a total inflow of Rs. 1,554 crore in last one year.
Gilts saw a net inflow of Rs. 267 crore. Its AUM rose to Rs. 3,395 crore in the month of March 2010, a gain of 7.06 per cent over its last month figure. Given high borrowing programme, bond yields are poised to rise further. The category may saw some inflows in the months to come once the benchmark yield level reaches to 8.25 per cent to 8.5 per cent.
The industry also saw a herd of FMPs in the month of March 2010. A total of 69 schemes were launched which collectively garnered Rs. 14,642 crore. FMPs have seen a comeback after a brief lull. March sees the maximum numbers of new NFOs in FMP category as these products are launched mainly to avail the double indexation benefit, thus, minimizing the tax burden to investors on income earned.
April 13, 2010
Bond yields laddered to 8 per cent level on devolvement
Highlights
• Benchmark bond 6.35% 2020 yield touched to 8.01 per cent on account of devolvement* in first week auction
• Primary dealers had to devolve Rs. 448 Cr. of 6.35% 2020 paper
• Food inflation rose to 14.50 per cent for data on Mar 27, 2010 against 13.86 per cent observed a week before
• Limits for Ways and Mean Advance (WMA) set at Rs. 30,000 Cr. for first half of FY and Rs. 10,000 Cr. for second half of FY
• Inflationary pressures (data to be available next Thursday) and Industrial Output data to influence the policy review due on April 20, 2010; inflation likely to be in double digits
• Market to witness an auction of Rs. 13,000 Cr. on Government Securities and Rs. 5,800 crore of State Development Loans (SDL) this week
*Devolvement - is a mechanism used by Reserve Bank of India as part of its monetary policy to counter the volatility in the price of Government Securities. Under this mechanism Primary dealers would have to absorb the underwritten amount, when the bid prices are unacceptable to the RBI.
Views & Recommendation:
• The weekly bond issuances are likely to impact the bond prices in a greater way; any further devolvement will put pressure on bond yields.
• Liquid Funds and Ultra Short Term Funds (erstwhile called as Ultra Short Term Funds) would see its yields rising from the current yield as shorter end of yield curve is likely to move up in near future once the policy rates go up.
• Investors having longer investment horizon (more than 2 years) should wait for yields to reach to 8.25-8.5 per cent level and can then invest in Income Funds.
Broad Perspective:
The week started with a cooling in bond yields; the 10-year benchmark 6.35% 2020 G-Sec slipped to 7.80 per cent on Monday, down by 5 bps over its last week closing. However, the sentiments went against the market and the yields rose to its three week highs ahead of first week auction of Rs. 12,000 crore and monetary policy tightening to contain high inflation.
The auction results disappointed the market and the benchmark yield passed 8 per cent mark to close at 8.01 per cent on account of devolvement. It touched to 8.03 per cent level, its highest in more than 17 months and a level it touched on Mar 22, 2010. The auctioned bonds got timid response and primary dealers had to devolve Rs. 448 crore of 6.35% 2020 paper. RBI set the cut-off yield of 7.9645 per cent for the 6.35% 2020 bonds. The other bonds were fully subscribed amidst high demand. Both received demands for more than two times. Due to devolvement, primary dealers demanded high cut-off yields. This week, the choice of securities will decide the momentum of bond yields and primary dealers will demand higher underwriting fees and higher yields in fear of devolvement of securities. Moreover, the subdued response on 6.35% 2020 bond is putting pressure on its existence as the benchmark yield and traders have been demanding for a new benchmark so that they could concentrate on the movement on interest rates instead of choice of a benchmark bond.
Inflationary pressures continue to remain intact; food prices accelerated for second straight week. The inflation based on primary articles rose to 14.50 per cent for the week concluding on Mar 27, 2010 against 13.86 per cent observed a week before. Industrial output data for February due on Monday and March inflation data on next Thursday are the factors which will decide the direction of RBI Policy review due on April 20, 2010.
Liquidity as measured by bids for reverse repo/repo at the Liquidity Adjustment Facility auction went to an average level of Rs. 1 lakh crore against Rs. 2,000 crore reported last week. Overnight rates also remained at the level of reverse repo rates due to high liquidity in the system.
However, Corporate Bonds yields saw an increased activity in the trading circles. Its spread over its counterpart G-Sec slipped in all categories. The 5-year and 10-year corporate bond spread over its counterpart G-Sec slipped to 76 bps and 63 bps from 81 bps and 82 bps respectively. The 10-year Corporate Bond closed at 8.80 per cent for the week concluding on April 09, 2010.
RBI set the limit for Ways and Mean Advance (WMA) at Rs. 30,000 crore for first half of fiscal year (April to September) and Rs. 10,000 crore for second half of fiscal year (October to March). WMA is a window through which the government borrows from RBI to meet mismatches between payment and receipts. Any borrowing within the WMA limit is done at Repo rate and over the WMA limit, it is done at Repo plus 2 per cent.
• Benchmark bond 6.35% 2020 yield touched to 8.01 per cent on account of devolvement* in first week auction
• Primary dealers had to devolve Rs. 448 Cr. of 6.35% 2020 paper
• Food inflation rose to 14.50 per cent for data on Mar 27, 2010 against 13.86 per cent observed a week before
• Limits for Ways and Mean Advance (WMA) set at Rs. 30,000 Cr. for first half of FY and Rs. 10,000 Cr. for second half of FY
• Inflationary pressures (data to be available next Thursday) and Industrial Output data to influence the policy review due on April 20, 2010; inflation likely to be in double digits
• Market to witness an auction of Rs. 13,000 Cr. on Government Securities and Rs. 5,800 crore of State Development Loans (SDL) this week
*Devolvement - is a mechanism used by Reserve Bank of India as part of its monetary policy to counter the volatility in the price of Government Securities. Under this mechanism Primary dealers would have to absorb the underwritten amount, when the bid prices are unacceptable to the RBI.
Views & Recommendation:
• The weekly bond issuances are likely to impact the bond prices in a greater way; any further devolvement will put pressure on bond yields.
• Liquid Funds and Ultra Short Term Funds (erstwhile called as Ultra Short Term Funds) would see its yields rising from the current yield as shorter end of yield curve is likely to move up in near future once the policy rates go up.
• Investors having longer investment horizon (more than 2 years) should wait for yields to reach to 8.25-8.5 per cent level and can then invest in Income Funds.
Broad Perspective:
The week started with a cooling in bond yields; the 10-year benchmark 6.35% 2020 G-Sec slipped to 7.80 per cent on Monday, down by 5 bps over its last week closing. However, the sentiments went against the market and the yields rose to its three week highs ahead of first week auction of Rs. 12,000 crore and monetary policy tightening to contain high inflation.
The auction results disappointed the market and the benchmark yield passed 8 per cent mark to close at 8.01 per cent on account of devolvement. It touched to 8.03 per cent level, its highest in more than 17 months and a level it touched on Mar 22, 2010. The auctioned bonds got timid response and primary dealers had to devolve Rs. 448 crore of 6.35% 2020 paper. RBI set the cut-off yield of 7.9645 per cent for the 6.35% 2020 bonds. The other bonds were fully subscribed amidst high demand. Both received demands for more than two times. Due to devolvement, primary dealers demanded high cut-off yields. This week, the choice of securities will decide the momentum of bond yields and primary dealers will demand higher underwriting fees and higher yields in fear of devolvement of securities. Moreover, the subdued response on 6.35% 2020 bond is putting pressure on its existence as the benchmark yield and traders have been demanding for a new benchmark so that they could concentrate on the movement on interest rates instead of choice of a benchmark bond.
Inflationary pressures continue to remain intact; food prices accelerated for second straight week. The inflation based on primary articles rose to 14.50 per cent for the week concluding on Mar 27, 2010 against 13.86 per cent observed a week before. Industrial output data for February due on Monday and March inflation data on next Thursday are the factors which will decide the direction of RBI Policy review due on April 20, 2010.
Liquidity as measured by bids for reverse repo/repo at the Liquidity Adjustment Facility auction went to an average level of Rs. 1 lakh crore against Rs. 2,000 crore reported last week. Overnight rates also remained at the level of reverse repo rates due to high liquidity in the system.
However, Corporate Bonds yields saw an increased activity in the trading circles. Its spread over its counterpart G-Sec slipped in all categories. The 5-year and 10-year corporate bond spread over its counterpart G-Sec slipped to 76 bps and 63 bps from 81 bps and 82 bps respectively. The 10-year Corporate Bond closed at 8.80 per cent for the week concluding on April 09, 2010.
RBI set the limit for Ways and Mean Advance (WMA) at Rs. 30,000 crore for first half of fiscal year (April to September) and Rs. 10,000 crore for second half of fiscal year (October to March). WMA is a window through which the government borrows from RBI to meet mismatches between payment and receipts. Any borrowing within the WMA limit is done at Repo rate and over the WMA limit, it is done at Repo plus 2 per cent.
April 8, 2010
MF Industry assets grew 51.6 per cent y-o-y
Highlights:
• Mutual Fund Industry assets grew 51.6 per cent on year-on-year basis; shrink by 4.6 per cent on month-on-month basis
• The AAUM touched Rs. 7.47 lakh crore as on Mar 2010; saw its historical high of Rs. 8.07 lakh crore in Nov 2009
• Reliance Mutual Fund (Rs. 1.1 lakh crore) continues to be the top fund house in terms of AUM
• SEBI dedicated fiscal year 2009-10 for investors bringing in many regulatory changes which changed the mutual fund industry trends
• Equity funds saw major outflows after the ban of entry loads
• Liquid Funds/Income Funds/Ultra Debt Short Term (erstwhile called as Liquid Plus Funds) will continue to see the inflows given the uneven interest rate scenario in near future
The fiscal year 2009-10 ended into a happy note with Mutual Fund Industry assets growing 51.6 per cent year-on-year. The industry added a total of Rs. 2.54 lakh crore to its kitty with total Average Assets under Management (AAUM) of Rs. 7.47 lakh crore. The year also saw Mutual Fund AUM’s historical peak of Rs. 8.07 lakh crore as on Nov 2009. However, it lagged the bellwether indices Sensex and Nifty 50 which clocked 80.54 per cent and 73.76 per cent returns respectively for the fiscal year 2009-10. On monthly basis, the Mutual Fund Industry Assets slipped to Rs. 7.47 lakh crore or a loss of 4.6 per cent over its Feb end of Rs. 7.82 lakh crore. The Feb month saw a hike of 2.64 per cent on monthly basis.
Reliance Mutual Fund continues to top the chart with AAUM of Rs. 1.10 lakh crore with a hefty gain of 36.4 per cent. The other leading fund houses in terms of AAUM are HDFC Mutual Fund (Rs. 88,780 crore), ICICI Prudential Mutual Fund (80,989 crore) and UTI Mutual Fund (Rs. 80,218 crore). On absolute basis, the fund houses which saw windfall gains are UTI Mutual Fund (Rs. 31,463.6 crore), HDFC Mutual Fund (Rs. 30,823.4 crore), ICICI Prudential Mutual Fund (29,556.3 crore) and Reliance Mutual Fund (Rs. 29,450 crore). The massive increase in AUM was mainly due to inflows in Debt/Income/Liquid/Liquid Plus categories. However, equity had a net outflow after SEBI banned entry loads post Aug 2009.
The fund houses which saw maximum decline on month-on-month basis are JP Morgan Mutual Fund (-31 per cent), AIG Global Investment Group Mutual Fund (-24.9 per cent), Deutsche Mutual Fund (-19.5 per cent) among others. The prominent gainers in double digits were Peerless Mutual Fund (60 per cent) and Edelweiss Mutual Fund (23.3 per cent).
• Mutual Fund Industry assets grew 51.6 per cent on year-on-year basis; shrink by 4.6 per cent on month-on-month basis
• The AAUM touched Rs. 7.47 lakh crore as on Mar 2010; saw its historical high of Rs. 8.07 lakh crore in Nov 2009
• Reliance Mutual Fund (Rs. 1.1 lakh crore) continues to be the top fund house in terms of AUM
• SEBI dedicated fiscal year 2009-10 for investors bringing in many regulatory changes which changed the mutual fund industry trends
• Equity funds saw major outflows after the ban of entry loads
• Liquid Funds/Income Funds/Ultra Debt Short Term (erstwhile called as Liquid Plus Funds) will continue to see the inflows given the uneven interest rate scenario in near future
The fiscal year 2009-10 ended into a happy note with Mutual Fund Industry assets growing 51.6 per cent year-on-year. The industry added a total of Rs. 2.54 lakh crore to its kitty with total Average Assets under Management (AAUM) of Rs. 7.47 lakh crore. The year also saw Mutual Fund AUM’s historical peak of Rs. 8.07 lakh crore as on Nov 2009. However, it lagged the bellwether indices Sensex and Nifty 50 which clocked 80.54 per cent and 73.76 per cent returns respectively for the fiscal year 2009-10. On monthly basis, the Mutual Fund Industry Assets slipped to Rs. 7.47 lakh crore or a loss of 4.6 per cent over its Feb end of Rs. 7.82 lakh crore. The Feb month saw a hike of 2.64 per cent on monthly basis.
Reliance Mutual Fund continues to top the chart with AAUM of Rs. 1.10 lakh crore with a hefty gain of 36.4 per cent. The other leading fund houses in terms of AAUM are HDFC Mutual Fund (Rs. 88,780 crore), ICICI Prudential Mutual Fund (80,989 crore) and UTI Mutual Fund (Rs. 80,218 crore). On absolute basis, the fund houses which saw windfall gains are UTI Mutual Fund (Rs. 31,463.6 crore), HDFC Mutual Fund (Rs. 30,823.4 crore), ICICI Prudential Mutual Fund (29,556.3 crore) and Reliance Mutual Fund (Rs. 29,450 crore). The massive increase in AUM was mainly due to inflows in Debt/Income/Liquid/Liquid Plus categories. However, equity had a net outflow after SEBI banned entry loads post Aug 2009.
The fund houses which saw maximum decline on month-on-month basis are JP Morgan Mutual Fund (-31 per cent), AIG Global Investment Group Mutual Fund (-24.9 per cent), Deutsche Mutual Fund (-19.5 per cent) among others. The prominent gainers in double digits were Peerless Mutual Fund (60 per cent) and Edelweiss Mutual Fund (23.3 per cent).
April 6, 2010
Yields to reel under inflationary pressures; rate hikes imminent
Highlights:
- Government borrowing schedule of massive Rs. 4.57 lakh crore declared; 63 per cent of total borrowings are front-loaded in first half of fiscal year 2010-11.
- On an average, the weekly borrowing would be in the range of Rs. 11,000 to Rs. 13,000 crore; the May month may witness the maximum borrowing of Rs. 65,000 crore with minimal borrowing of Rs. 22,000 crore in September.
- No Open Market Operations (OMOs) transactions declared; unlikely to put any pressure on yields due to sufficient liquidity.
- The week saw a sudden yearend decline in bond yields following the borrowing schedule declaration; unlikely to sustain the spurt in bond prices.
- Inflationary pressures to continue putting pressures on bond yields.
- The 10-year benchmark G-Sec 6.35 % 2020 to trade in the range of 8-8.5 per cent for most of the year.
- There was a combined transaction of Rs. 9,540 crore under Repo Facility in the last 3 days of Fiscal Year 2009-10.
- The G-Sec spread between 1-5 years have widened to 238 bps from 227 bps in the previous week.
Views & Recommendation:
· For few weeks, the market may absorb the bond issuances without any impact on yields but in long term, the bond yields may witness upward revisions.
· The short-tenure bonds would be in demand in the month of April and May in the current fiscal year due to negligible issuances. This may lead to unexpected hike in prices of short to medium term papers. An opportunity lies ahead in booking profits in short-to-medium term bonds/Income Funds/Short Gilt Funds after a couple of months.
On return basis, Tata G S S M F – Growth (6.67%), UTI G Sec Fund – STP – Growth (5.06%) among others has been front runners under Short-term Gilt Funds in two-year category.
· Liquid Funds and Ultra-Short term Debt Funds (erstwhile called as Liquid-Plus Funds) will continue to see inflows as investors would continue putting their surpluses for a short duration.
Broader Perspective:
The market reacted positively on the announcement of Government Borrowing Schedule; about 63 per cent of total borrowings (Rs. 2.87 lakh crore) are front-loaded in the first half of fiscal year 2010-11. Thus, it would prevent crowding out for private firms as post-October used to be busy borrowing month for them. The market will see an average weekly auction of Rs. 11,000 – Rs. 13,000 crore. The benchmark bond 6.35 per cent 2010 yield saw some swings. The yield fell from 7.85 per cent to as low as 7.74 per cent before closing at 7.85 per cent level again. The 10-year benchmark G-Sec price closed at Rs. 89.90 down from Rs. 90.30 level as on Mar 30, 2010. Bond Prices and Yields move in opposite direction.
The high inflationary pressure is on the top agenda of policy makers as they are closely scrutinizing to negate its effects on yields since it would increase their borrowing costs. The inflation as measured by Wholesale Price Index (WPI) has already touched 9.89 per cent for the month of Feb 2010 and the March figures may touch the double digit. Though the government officials are of the view that inflation would drop down in couple of months citing the high base effect and falling food prices as the prominent reasons, it will continue haunting on non-food sides. The high crude prices including the high petrol and diesel prices for EURO IV vehicles will add pressures to inflation further.
The market may factor into the weekly bond supply and will see a smooth transition of bonds for first few weeks but the yields may harden in the weeks to come citing the absence of any Open Market Operations (OMOs) from the government side.
The other bonds 7.02% 2016 and 7.32% 2014 saw yields moving up 13 bps and 1 bps to 7.59 per cent and 7.25 per cent levels. Corporate bonds also saw yields dropping down. The shorter end of the curve saw yields falling piercingly after March-end liquidity worries went out of the system. The last three days of the fiscal year 2009-10 saw a total repo transaction of Rs. 9,540 crore under Liquidity Adjustment Facility (LAF). The liquidity as measured by Reverse Repo transaction under Liquidity Adjustment Facility (LAF) remained tight with an average volume of Rs. 4,027 crore.
April 1, 2010
New Mutual Fund regulations to benefit investors
The Mutual Fund Industry has a happy ending in 2009 with assets growing to a fabulous high. The industry also saw some investors’ friendly regulations turning to be unfriendly for distributors and IFAs. Starting from No-Load scenario post Aug 01, 2009 to host of other regulations, SEBI threw another set of regulations to all fund houses in the month of March 2010 signaling another round of reforms in world’s fastest growing Mutual Fund industry.
Reduction of NFO’s Period
Starting with the list, SEBI reduced the New Fund Offers (NFOs) duration to a maximum of 15 days from 30 days for open-ended funds and 45 days for close-ended funds. On completion of NFO period, the units’ allocation and dispatch of Statement of Accounts (SoAs) are required to be done within five business days after the closure of NFO period. The rule also says that Mutual Funds shall make investments out of NFO proceeds only on or after the closure of the NFO period. The new rule is effective from July 01, 2010.
Introduction of ASBA for MF Investors
SEBI introduced ASBA or Applications Supported by Blocked Amount in July 2008 for all equity investors investing in IPOs or Right Issues to make effective use of money put into it. Under this, the application money you put for subscribing to IPOs/Right Issues does not leave your bank account unless the allotment is done. So, there is no need for refund of money, thus, reducing the operational issues and you also earn interest even on blocked amount. Now, this facility is extended to Mutual Fund investors putting money in NFOs. Nevertheless ASBA means little for investors as most investors put money only on the last day of NFO period. Moreover, SEBI has mandated that the fund house has to allot units five days after the closing of NFOs.
Dividend distribution from realized profits
SEBI also mandated that the dividends to be paid to investors have to be out of realized profits only. Currently, some Mutual Fund houses pay dividends from their Unit Premium Reserve instead of booked profits. E.g. A fund XYZ has an initial NAV of Rs. 10. The amount Rs. 10 goes to an account called as Unit Capital or Face Value. Let us say the NAV grows to Rs. 15. The appreciation amount of Rs. 5 goes into a separate account called as Unit Premium Reserve (UPR). This ruling might affect many fund houses which used to declare dividends as a marketing gimmick to attract inflows. After this ruling, many fund houses have cancelled the dividends declared.
FoFs commission to decline
In case of FoFs, AMCs have been entering into revenue sharing agreements with offshore funds in respect of investments made. Typically they get around 50-100 bps from Offshore Funds along with 75 bps which they charge from investors. Out of 75 bps, they used to take care of marketing expense and other expenses. The Fund Houses used to pocket the sharing revenue (50-100 bps) from Offshore or Local Funds where they have invested. Post this ruling, an FoF may not be a profitable avenue for Mutual Funds in India.
Adherence to Corporate Governance
Since Mutual Funds invest in companies on behalf of investors, SEBI wants them to be more participating in company affairs and voice their opinions. SEBI has mandated that Mutual Funds must disclose participation in company’ annual or other affairs such as exercising voting rights in mergers, AGMs, changes to capital structure, appointment or removal of Directors, stock option plans and other management compensation issues and many more in their website and Annual Reports.
Following Satyam scam, SEBI wanted the companies to be more accountable for their acts and business rules and Mutual Funds which represent a group of investors will be the best fitted for this role.
Conclusion
Time to time, SEBI comes out with different regulations which ultimately helps retail investors. Thanks to our robust financial system which surpassed the economic crisis of 2008 post Lehman collapse, SEBI wants to ensure that India remains decoupled with financial breakdown which galloped major big names. Moreover, SEBI wants to make MF and its fund managers more transparent and accountable for investors’ money. However, the challenges lie ahead how the fund houses implement these changes. Happy Investing!
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