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Table of contents
Foreword ................................................................................................................ 3 Overview................................................................................................................ 5 I - Mutual fund industry reports double digit growth .................................................. 7 II - Way forward for the mutual fund industry.......................................................... 10 III - Equity market up 28% in 2012 ......................................................................... 12 IV - Gilt prices surge as RBI cuts Repo rate ........................................................... 14 Category wise mutual fund performance ........................................................... 17 I - Category wise risk / return trade-off & indicative investment horizons ................ 18 II - Equity & Hybrid Equity - Small & Midcap Funds outperform .............................. 20 III - Sector / Thematic - Banking Funds dominate 2012, Gold Funds lose lustre ..... 21 IV- Debt & Hybrid Debt - Gilt Funds outperform on softening interest rates ............ 22 Articles ................................................................................................................ 23 I - The Science of Financial Planning - Next Frontier for Investment Advisors ........ 25 II - Declining interest rate scenario - Long-term debt funds to benefit ..................... 28 III - Liquid funds - An alternative to savings bank deposits ..................................... 30 IV - Go for paper gold............................................................................................ 32 V - Protect the downside in equities through capital protection oriented funds ........ 34 Factsheets ........................................................................................................... 37 Annexures ........................................................................................................... 63 I - Fund House Wise Ranks (December 2012)....................................................... 65 II - AUM Trends..................................................................................................... 66 III - CRISIL Mutual Fund Ranking Methodology ..................................................... 69 IV - CRISIL Mutual Fund Ranking Category Definitions ......................................... 71 Glossary of terms used in the factsheets ............................................................... 73 List of Abbreviations used in the Year Book ........................................................... 75
Foreword
We are pleased to release the third edition of The CRISIL Mutual Fund Year Book, a one-stop insight on the mutual fund industry. This is in line with our objective of making markets function better and improving connect with retail investors. 2012 was a turnaround year for the Indian capital markets. Equities emerged as the star performer with the benchmark CNX Nifty gaining 28%. The debt market too performed well with long-term debt funds gaining prominence due to some easing of monetary stance by the Reserve Bank of India (RBI) and expectations of further easing by the central bank to pump prime the economy. The central bank announced a 25 basis points (bps) repo rate cut on January 29, 2013. The mutual fund industrys average assets under management (AUM) grew by 15% in 2012 to Rs 7.87 trillion in December 2012; debt funds AUM rose by over 26% to Rs 5.34 trillion and equity funds AUM by 19% to Rs 1.92 trillion. This trend continued even in 2013 when industry AUM touched an all-time high of Rs 8.26 trillion in January 2013. Assets of gold exchange traded funds (ETFs) climbed to Rs 11.7 billion (bn) in December 2012 as domestic gold prices increased by 12% over the year. The focus on retail investors and improving the penetration of mutual funds continued through the year with Securities and Exchange Board of India (SEBI) announcing various guidelines to promote investor education, reduce operational bottlenecks and costs. The regulator directed fund houses to allocate 2 basis points of their AUM towards investor education initiatives. Meanwhile, 29 asset management companies (AMCs) conducted over ten thousand investor education programs in 200 cities covering nearly two lakh participants during April 2012 to January 2013. Measures to improve mutual fund penetration included launch of the Rajiv Gandhi Equity Savings Scheme (RGESS), which provides tax incentives to first-time equity investors. Further, SEBI doled out incentives to fund houses that distribute their products beyond the top 15 cities. Single plan structures and introduction of direct plans were other investor friendly measures introduced by the regulator. It has always been CRISILs endeavour to help investors take better informed investment decisions. As part of our refreshed content, the Year Book contains articles on select themes which were very pertinent in the year gone by and continue to hold relevance. It also covers market and industry overview, key industry statistics, way forward and one-page factsheets on schemes which were CRISIL Fund Rank 1 in all four quarters of 2012. The CRISIL Mutual Fund Year Book is also available on www.crisil.com free of cost. We hope you find the coverage informative.
Overview
Inflows into income and gilt funds led to asset growth in 2012
Inflows of Rs 613 bn into income funds (long-term debt funds, Fixed Maturity Plans (FMPs), short term and ultra-short term debt funds) and gilt funds - on expectations of a fall in interest rates following slowing domestic growth - and easing inflation (see Figure 1) resulted in asset growth. Bond prices (Net Asset Value or NAVs) and interest rates (yields) move in opposite directions. Further, funds with longer average portfolio maturities benefit more in a falling interest rate environment. Accordingly, long term debt oriented funds benefit from a fall in interest rates and attract more AUM. The RBI lowered its key interest rate (Repo rate) by 0.50% (50 bps) first in April 2012 and later by 25 bps in January 2013 to 7.75%. AUM of long term bond funds and gilt funds rose by over 317% (YoY) in 2012 to Rs 680 bn while that of short maturity debt funds (including liquid funds) rose by over 22% to Rs 2.31 trillion. The debt category continued to corner a major share of mutual fund assets with 70% in 2012.
(Rs in bn)
8,000
5,000
Equity funds see profit booking though AUM grows with markets
AUM of equity funds rose by nearly 19% (y-o-y) to Rs 1.92 trillion as of December 2012. Equity funds rose on account of mark to market gains - the benchmark CNX Nifty was up by 28% in 2012 mainly on reform measures announced by the Indian government and inflows from foreign institutional investors (FIIs). Investors, however, booked profits in equity funds and the category witnessed net outflows of Rs 156 bn during 2012 compared with inflows of Rs 77 bn in 2011. The CNX Nifty had fallen by over 24% in 2011.
The industry also saw some consolidation with L&T Mutual Fund buying the assets of Fidelity Mutual Fund. AIG Mutual Fund changed its name to PineBridge Mutual Fund. Srei Infrastructure and Parag Parikh Financial Advisory Services received SEBIs approval to start mutual fund business in India. Industry players who sold some of their stake to foreign / domestic players were as follows Axis Bank inked an agreement with Schroder Singapore Holdings (wholly owned subsidiary of global AMC major Schroders) to sell Axis Asset Management Companys 25% share for an undisclosed amount. Religare Enterprises Ltd sold 49% of its stake in Religare Asset Management Ltd to the US-based Invesco Ltd. Bank of India acquired 51% stake in Bharti AXA Mutual Fund for an undisclosed amount. Nippon Life Insurance bought a 26% stake in Reliance Capital Asset Management for close to Rs 14.50 bn.
Mark-to-market valuation component in debt securities applicable to those securities with a residual maturity of more than 60 days from September 30, 2012 compared to 91-days-and-beyond earlier. Overseas individual investors allowed to invest up to US$1 bn in corporate bonds and debt schemes of mutual funds without any lock-in period.
SEBI allowed postal agents, retired officials from government, banks, retired teachers, etc. to distribute simple mutual fund products, to spread out mutual fund distribution. AMFI issuing mutual fund Common Account Statement (CAS) in an electronic form, called eCAS; this will replace paper statements.
3. Innovation
Steve Jobs once said: Innovation distinguishes between a leader and a follower. It is tru e for any industry. Over the years, different mutual fund products and services have caught investors attention such as gold fund of funds / gold ETFs and systematic investment plans (SIPs). Mutual funds in developed markets have a higher penetration through innovative products which offer long-term wealth creation options such as lifecycle and target maturity funds. In the US retirement industry, close to US$1 trillion or one-fifth of the total US$4.7 trillion as of 2011 is invested in hybrid funds (a bulk of target date and lifestyle funds is counted in this category). The nature of these products is such that the asset allocation between equity and fixed income is adjusted based on the investor s time horizon. Additionally, there are annuity products which provide regular income in the post-employment years. India too needs many more innovations in the retirement space. According to the United Nations population statistics, Indias share of people aged 65 and older is expected to increase from 5% to 14% between 2010 and 2050, while the share of the oldest age
10
group (80 years and older) is expected to triple from 1% to 3%. With only 12% of Indias current population under pension coverage, the need for innovation in this space is very high. Many simple innovations could be looked at like fixed income ETFs, real estate ETFs, strategy-based ETFs among others. Besides innovative products, out-of-the-box thinking is also required on the distribution side especially to target more new investors.
Summing up
The future of the mutual fund industry rests in the twin-power of increasing financial literacy and showcasing the suitability of mutual funds in an investors portfolio. AMCs and product distributors need to work closely to achieve the target of higher penetrat ion of mutual funds in household savings. The launch of RGESS is a step in the right direction to encourage the first-time investor to look at mutual funds for tax and investment planning. Quintessentially, a more investor-friendly approach in product development, communication and distribution would go a long way in making mutual funds a pull product.
11
5,700
204
5,400
148
5,100
92
4,800
36
4,500
-20
May-12
Mar-12
Feb-12
Jul-12
Dec-11
Oct-12
Apr-12
Nov-12
Strong global cues included global central banks liquidity easing stance as well as some signs of easing of the European debt crisis amidst approval of bailout funds for the critically impacted countries. The US Federal Reserve proposed to enhance its bondbuying (stimulus) program by $85 bn per month and resolved to keep interest rates at record lows until mid-2015. The European Central Bank (ECB) too unveiled a new bond-buying programme aimed at containing the region's debt crisis. Market gains were capped amid signs of economic weakness in the domestic and global economies. The Indian economic growth is expected to slide to 5% in 2012-13 as per the latest Economic Survey, the lowest growth rate in almost 10 years. The global economy too has shown deceleration with the International Monetary Fund (IMF) calculating growth at 3.2% for the calendar year 2012, down from 3.9% seen in the previous year. Worries on the fiscal cliff in the US and lack of any final resolution for the euro zone debt crisis later in the year also capped gains for the Indian equity market.
12
Dec-12
Aug-12
Sep-12
Jan-12
Jun-12
All sectoral indices ended higher in 2012 barring the CNX IT Index (down 1.86%) (see Table 1). Interest rate-sensitive sectors such as CNX Bank and CNX Realty were up 56.5% and 52.7%, respectively, on strong buying following expectations of more interest rate cuts by the RBI. CNX FMCG soared 48.5% as investors followed defensive sectors amidst the volatility seen in the market. The sector benefitted from strong earnings reports from index majors such as Hindustan Unilever (HUL). CNX IT was the only laggard, as the export-oriented sector was impacted by signs of a slowdown in the global economy, especially the US. Weak earnings report from index major Infosys also brought down the index in the year.
Global equity markets too reported a positive trend; key global equity indices analysed closed positive in 2012 (see Table 2). The positive growth for global equities was led by the US markets which rose on hopes of domestic economic recovery, especially after the US Federal Reserve enhanced its bond-buying program in the year. Re-election of Barack Obama as the US President and abatement of the US fiscal crisis also aided the US markets. Global equities were supported by measures taken in Europe to ease the debt crisis in the form of easy monetary stance adopted by major central banks and approval of bailout to highly fiscal debtridden countries in the region. Japans Nikkei was the biggest index gainer, up around 23% as the export -oriented index was helped by weakening of yen throughout the year. The index was also helped by stimulus measures both fiscal and monetary-induced in the country during the year. Hong Kongs Hang Seng came a close second, helped by the positive global cues and hopes of revival in grow th in the domestic economy. Meanwhile, Britains FTSE gained the least, up around 6% as gains for the index were capped by weak domestic economic indicators and worries about the European debt crisis.
13
0.50 0.00
21-Feb-12
31-Dec-11
18-Mar-12
26-Jul-12
21-Aug-12
16-Sep-12
12-Oct-12
07-Nov-12
13-Apr-12
03-Dec-12
Mibor
Repo
LAF (RHS)
Gilt prices rose in the calendar year especially in the second half driven by expectations of monetary easing by the RBI following signs of slowing gross domestic product (GDP) growth and fall in the inflation rate (wholesale price index or WPI). Indias G DP is expected to slow down to 5% growth rate in 2012-13 as per the Central Statistical Office (CSO) compared with 6.2% seen in the previous fiscal. CRISIL Research also expects that growth in the Indian economy is likely to fall below the 5% mark in the second half of the current financial year. The WPI inflation rate fell to 7.18% in December 2012 compared with 7.74% in the year ago period. This fell further to 6.84% in February 2013, however higher compared to a three year low of 6.62% in January 2013. The repo rate cut coupled with other liquidity infusing measures by the RBI also augured well for gilts. Sentiments for gilts improved due to strong measures by the central government to reduce fiscal deficit pressures and raising of FIIs limits in gilts by $5bn to $15bn. The yield on the 10-year benchmark paper 8.15%, 2022 fell to 8.05% as of December 31, 2012, down 51 bps from 8.56% in the year ago period. The yield sharply declined further to 7.87% as of February 28, 2013 on expectations of more repo rate cuts ahead.
14
29-Dec-12
26-Jan-12
30-Jun-12
04-Jun-12
8.6%
8.4%
8.2%
8.0%
31-May-12
31-Mar-12
29-Feb-12
31-Dec-11
30-Apr-12
31-Jul-12
30-Sep-12
10 Yr G-Sec Yield
31-Dec-12
31-Aug-12
31-Oct-12
30-Nov-12
30-Jun-12
31-Jan-12
15
16
17
Investment Universe
Large Cap Equity Oriented Equity Funds Diversified Equity Oriented Equity Funds Small and Midcap Equity ELSS Equity Oriented Funds Equity Oriented Funds
Funds that invest predominantly in large CNX Nifty cap stocks Funds that invest in stocks across market capitalisation and sectors CNX 500
Funds that invest predominantly in small CNX Midcap Very High and mid-cap stocks Diversified equity funds that have a 3 CNX 500 year lock - in period and provide income tax exemption under section 80 C upto Rs 1 lakh Funds that track an index and invest into companies in the same proportion as that index. These funds seek to provide returns (pre-expenses) in line with the index. Exchange traded index funds can be traded on an exchange The index that is tracked by the fund. High
High
Index
High
High
5 years
Arbitrage
Funds that buy equity securities in the CRISIL Low cash market and sell them in the futures Liquid Funds market. These funds seek to generate index returns through the mispricing that exists between the cash and futures markets. In these funds all the stocks are completely hedged Sector funds that invest in companies from a specified sector. Most common sector themes are infrastructure and banking Funds that follow an investment structure which seeks to protect the initial investment from capital erosion Relevant sectoral indices Very High
Low
Thematic Equity
Very High
Capital Protected
CRISIL Low Monthly Income Plans Index / CRISIL Balanced Funds Index CRISIL Balanced Fund Index Usually compared with FD rates Moderate
Low
3-5 years
Balanced
Funds that invest at least 65% of the corpus into equity stocks and the remainder into debt securities Closed ended mutual fund schemes with predefined maturities (30 days to 5 years) that invest predominantly in CDs, CPs and debentures whose maturity or tenure matches with that of the scheme. The basic objective of FMPs is to generate steady returns over a fixed tenure
Moderate
5 Years
10 FMPs
Moderate
Moderate
30 days to 5 years
18
Investment Universe
Benchmark Index
Expected Returns
Funds that invest into short term CRISIL Very Low corporate debt papers, CDs and money Liquid Funds market instruments with a residual index maturity of up to 91 days Funds that invest into short term corporate debt papers, CDs, money market instruments and government securities but whose maturity profile is upto 1 year. It lies between liquid funds and short term income funds Funds that invest into short term corporate debt papers, CDs, money market instruments and government securities and whose maturities are beyond that of ultra short debt funds and upto 3 years. Funds that invest in long-term corporate debt papers and government securities and whose maturities range between few months and can go even beyond 25 years depending on the prevalent interest rate scenario CRISIL Low Liquid Funds index
Very Low
Moderate
Low
Moderate
Moderate
3 years
15 Gilt
Funds that invest in securities issued by CRISL Gilt the central and state governments and Index whose maturities range between few months and can go even beyond 25 years depending on the prevalent interest rate scenario Hybrid funds that invest a small portion (15-30%) in equity stocks and seek to declare monthly dividends based on cash flows Funds that invest in physical gold and seek to track the domestic spot price of gold. These funds are traded on an exchange CRISIL Monthly Income Plans Index
Moderate
Moderate
3 years
Moderate
Moderate
3 Years
Moderate
5 years
19
Point-to-Point returns as of December 31, 2012 Categories as per CRISIL Mutual Fund Ranking of December 2012 except International Funds Returns are annualised for a period of more than 1-year Highlighted cells denote the maximum returns in that time period
Analysis
All equity oriented categories ended in the positive in 2012 due to upbeat domestic equity markets. The small and midcap category was the biggest gainer in the year, up nearly 42% mainly on the back of a rally in mid-cap stocks. The CNX Midcap index was also up by 39% in 2012. This category also outperformed other categories in the 3 and 10 year period. Diversified equity funds were the topmost gainers in the 7 year period. The equity oriented hybrid category, represented by balanced funds, performed strongly in the year 2012, with returns of 27% marginally lower than those of the CNX Nifty index. These funds mainly benefitted due to their dynamic allocation to equities, which rose during the year in a bullish market. A reduction in key interest rates also benefited the debt component of these funds as interest rates and bond prices move in opposite directions. Thus bonds benefit when interest rates fall. These funds also outperformed other equity categories in 2 and 5 year period.
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III - Sector / Thematic - Banking Funds dominate 2012, Gold Funds lose lustre
Category Average Returns % Sector Funds - FMCG Sector Funds - Pharma & Healthcare Sector Funds - Banking & Finance Sector Funds - IT Thematic - Infra Gold Funds* Benchmark Indices CNX FMCG CNX Pharma CNX Bank CNX IT CNX Infrastructure CRISIL Gold Index 48.53 31.88 56.54 -1.86 21.65 11.95 26.95 8.92 2.85 -10.30 -13.52 21.62 28.14 17.09 11.36 1.17 -10.46 22.05 19.09 13.70 4.80 4.59 -15.54 23.28 19.24 15.36 15.54 6.38 3.84 NA 21.37 19.40 26.08 -10.88 NA NA 1 Year 40.81 32.23 55.64 6.34 28.34 11.09 2 Years 27.19 9.84 1.60 -7.54 -7.84 20.39 3 Years 26.43 16.96 11.87 2.80 -3.31 20.86 5 Years 12.96 13.71 6.65 -0.50 -8.43 21.96 7 Years 18.44 14.68 18.30 7.36 9.69 NA 10 Years 29.39 NA NA 17.23 9.51 NA
Point-to-Point returns as of December 31, 2012 Returns are annualised for a period of more than 1-year Thematic Infrastructure category based on CRISIL Mutual Fund Ranking for December 2012 *includes ETFs and Fund of Funds Highlighted cells denote the maximum returns in that time period
Analysis
In the sector and thematic funds category, Banking & Finance dominated in 2012 and were up by 56% on expectations of interest rate cuts by the RBI thus reducing the cost of funds for the sector. The RBI cut the key repo rate by 0.50% in April 2012 and by 0.25% in January 2013. Defensive sectors like FMCG, Pharma & Healthcare were the next best performers as volatile markets prompted investors to go for stocks of these sectors as well. IT sector funds were the worst performers in 2012 as the export oriented sector was plagued by worries of slowdown in the global economy and weak earnings report from index majors. FMCG sector funds dominated the performance of longer periods like 2, 3, 7 and 10 years. Gold funds, especially Gold ETFs, which have seen huge demand in the past two years, posted lacklustre performance in 2012 due to range bound gold prices. However, these funds have given nearly 22% annualised returns in the 5-year period of their existence.
21
IV- Debt & Hybrid Debt - Gilt Funds outperform on softening interest rates
Category Average Returns % Long Term Income Funds Short Term Income Funds Liquid Funds Ultra ShortTerm Funds Gilt Funds Benchmark Indices CRISIL Composite Bond Funds index CRISIL Short Term Bond Funds index CRISIL Liquid Funds index CRISIL Gilt Index 0.85 0.66 0.65 1.51 2.14 2.03 1.97 3.17 4.81 4.56 3.94 6.11 9.38 9.15 8.54 12.01 8.12 8.48 8.33 8.46 7.06 7.21 7.25 7.70 1 Month 1.14 0.74 0.71 0.71 1.43 3 Months 2.39 2.18 2.10 2.14 2.66 6 Months 5.42 4.94 4.41 4.47 5.16 1 Year 10.53 9.95 9.52 9.62 11.00 2 Years 9.27 9.53 9.05 9.25 8.46 3 Years 7.73 8.01 7.68 7.94 7.03
Hybrid - Debt
Category Average Returns % Monthly Income Plans - Aggressive Monthly Income Plans - Conservative Benchmark Indices CRISIL Monthly Income Plans Index
Point-to-Point returns as of December 31, 2012 Categories as per CRISIL Mutual Fund Ranking of December 2012 except International Funds Returns beyond one year are annualised CRISIL Composite Bond Funds Index (CompBex) is the benchmark index for Long Term Bond Funds Highlighted cells denote the maximum returns in that time period
12.12
6.78
6.86
Analysis
All debt oriented categories ended positive across time periods as on December 31, 2012. Gilt Funds outperformed in 2012 on expectations of monetary easing by the RBI. The central bank cut the repo rate by 0.50% in April 2012 and by 0.25% in January 2013. Interest rates and bond prices move in opposite directions and long tenure bonds benefit more than short tenure bonds when interest rates fall. Thus, a fall in interest rates contributed to higher NAVs for long-term income funds. Short-term income funds outperformed over the 2 and 3-year periods in line with the high interest rate scenario in the earlier periods. The debt hybrid category, viz., Monthly Income Plans (MIPs), notched up strong gains in 2012 helped by a strong performance in both the equity and the debt component. The CNX Nifty was up by 28% in 2012 while a softening interest rate stance by the RBI benefited the debt component. MIP Aggressive funds performed better compared to MIP Conservative funds as the former has a higher exposure (15-30%) to equities compared with the latter (0-15%).
22
Articles
23
24
25
Goals
Goal Status
Met
Table 5 shows a typical cash flow based on annual income, expenses, liabilities like EMI, net disposable income after subtracting income from expenses / liabilities. The investors three goals, i.e., car, marriage and down-payment of second home are met through disposable income and partial withdrawal of investments. It is possible to improve these cash flows and meet additional goals through scientific financial planning wherein investments would be optimally deployed based on risk profile and asset allocation. 3. Asset allocation: This basically maps an investors risk appetite to a portfolio which contains a mix of asset classes (say equity, debt and gold). The portfolio is allocated across these asset classes in an optimal manner based on a mathematical model. Accordingly, an investor with a lower risk appetite (conservative) will have a higher allocation to debt while an investor with a higher risk appetite (very aggressive) will have higher allocation to equity.
26
A typical asset allocation chart is shown in Table 6. If one observes, the allocation towards gold and equity increases as the portfolio becomes aggressive (higher risk appetite). Further, as gold and equity have a higher risk and return profile, returns are commensurate with higher risks.
*Data represented for equity by CRISIL Fund Rank 1 Equity Funds, for long-term debt by CRISIL Fund Rank 1 Debt Long Term Funds, for short-term debt by CRISIL Fund Rank 1 Liquid Funds and for gold by returns of LBMA gold prices converted to Indian Rupees (does not consider duties and other aspects of landing costs).
4.
Product recommendation: The aforesaid asset allocation is mapped to products across mutual funds, ULIPs, direct equity, insurance and fixed deposits, among others.
5.
Monitoring the financial plan: A financial plan needs regular monitoring and alterations depending upon a change in the clients financial position and needs. This may include exiting from underperforming products and switching to better product s. Further, a reallocation of funds needs to be done if goals are achieved earlier than expected or vice versa.
Conclusion
Familiar with market volatilities, todays investors intend to secure their future and meet their financial aspirations through prudent long-term planning. Scientific financial planning is an upcoming and highly advantageous tool for investors to have a holistic view of the past and future finances with embedded goals. Financial institutions such as large banks and financial companies have realised this shift and developed customised financial tools to meet investors requirements. The challenge is to make th is service available for investors of all financial classes and across geographies. Here, it is apt to say if one fails to plan, one plans to fail.
27
28
Start Date End Date Years Start Date end date Funds Funds Funds Debt Funds Rates (%) 1-Apr-00 30-Apr-04 4.08 4.25 11.1 5.19 9.54 5.32 8.45 5.19 9.54 5.32 8.45 7.87 6.97 6.45 9.17 6.49 9.06 11.89 3.69 34.61 4.74 10.91 16.15 3.32 60.12 1.93 11.99 12.17 5.86 17.81 6.54 9.48 10.50 5.38 7.88* 9.88 9.04*
Conclusion
Historically, long-term debt funds have given superior returns in a falling interest rate scenario. Assuming interest rates are cut, returns from long-term debt funds are expected to increase during the current falling interest rate cycle too. However, the quantum of returns will depend on the pace and degree of rate cuts. It has been observed that those who invested early in the interest rate cycle gained more than those who invested later as the cycle matured. Investors can refer to the quarterly CRISIL Mutual Fund Ranking available on www.crisil.com to choose superior performing funds in these categories.
29
Liquid funds High 7.11 - 10.00%** 1 day No guarantee Medium No@@ No 25%^^ in dividend option 0-30%^ in growth option (<1 year investment) 10 or 20%@ in growth option (>1 year investment)
* The interest rate varies with the tenor of the deposit, source: SBI **1-year returns as on February 28, 2013 of CRISIL Mutual Fund Ranked schemes (for quarter ended December 2012) ^ depending upon tax bracket of the investor, plus 3% cess ^^ plus 10% surcharge and 3% cess @ 10% without indexation or 20% with indexation whichever is lower plus 3% cess #some banks offer more than 4% but with a higher minimum balance requirement @@Most liquid funds do not charge any exit load
Liquid funds, although not backed by any principal guarantee, are relatively safe instruments as the portfolios of liquid funds mostly comprise A1+ rated CPs and CDs (highest rating for these types of securities) with a maximum maturity of 91 days. CRISILs rating of A1+f signifies very strong protection against losses from credit defaults.
These charges vary across banks. For term deposits with SBI, the depositor would receive 0.5% less for any premature withdrawal provided the
30
However, the marginally higher risk in liquid funds as compared to a savings deposit is compensated by superior returns of liquid funds especially post tax (see Table 10)
Table 10: 1-year returns across investment types (as of February 28, 2013)
Investment type Savings account Fixed deposits Liquid fund Dividend Liquid fund Growth 500,000 Investment amount (Rs) Indicative yield 4.00%# 6.50%* 9.29%^ 9.29%^ Pre-tax returns (Rs) 20,000 32,500 46,450 46,450 Tax rate (highest) 30.900% 30.900% 28.325% 10.300%** Post-tax returns (Rs) 16,910 22,458 36,197 41,805 Post tax yield 3.38% 4.49% 7.24% 8.36%@
#some banks offer more than 4% but with a higher minimum balance requirement *State Bank of India fixed deposit rate for 241 days to less than 1 year ^ 1-year returns of CRISIL Fund Rank 1 Liquid Funds (ranks as of December 2012) ** Tax rate without indexation, assuming an investment of 1 year and 1 day @yields could be higher if indexation benefits are availed
Conclusion
Liquid fund is an alternate investment avenue for individuals to park their short term surplus funds. While bank deposits (fixed and savings) are easier to access and offer some degree of principal protection, the higher yield combined with the liquidity and taxation benefits make liquid funds an attractive option. However, liquid funds are not completely risk-free, and an investor must carry out basic checks before investing. Further, investors must spread their savings across fixed deposits, savings bank account and liquid funds, thereby enjoying the benefits each of these avenues have to offer.
31
Calendar year point to point returns Gold returns calculated from LBMA prices converted to Indian Rupees Equity returns calculated for CNX Nifty index Debt returns calculated for CRISIL Gilt index Columns highlighted in green indicates bearish phase in equity market Returns in 2004 were flat
32
In another analysis, Table 12 shows seven scenarios of investing across asset classes, i.e., equity, debt and gold over a 10-year period. The table looks at investing in one, two or all three asset classes over this time frame. While a singular investment in equity (Portfolio G) or gold (Portfolio F) has given the highest returns of 18% in the 10-year period, it goes against the thumb rule of portfolio diversification. In the composite portfolios, the highest returns of 18% were delivered by a combination of equity and gold (Portfolio D). Further, the most diversified Portfolio C (equity + debt + gold) performed better (14% vs 12%) than Portfolio E (equity + debt), which highlights that adding gold to ones portfolio helps investors not only earn better returns but also reduce the downside risk.
E F Aggressive G
Gold - prices from LBMA prices converted into Indian Rupees Equity represented by CNX Nifty index Debt represented by CRISIL Gilt index Returns calculated from February 2003 to February 2013
Conclusion
Gold as an asset class plays a very important role in an investors portfolio as it not only provides stability to returns but also gi ves an opportunity to maximise wealth over a longer time frame. Further, moving from purchasing physical gold to buying gold in paper form through mutual funds has its own advantages of transparency in pricing, purity, liquidity, convenience as well as no storage risk. Paper gold is also advantageous from a tax perspective vis--vis physical gold or e-gold. However, in the short term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer time frames of five years and beyond. The percentage allocation to gold will depend on an investors risk and return objectives.
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CPOFs: A walk-through
CPOFs are close-ended hybrid schemes offered by domestic mutual funds. They invest 75-80% of the corpus in debt and the balance in equity assets; for instance, from a principal of, say, Rs 100, Rs 80 is allocated to debt and Rs 20 to equities. The debt component is invested in highest rated securities or government bonds such that it grows to Rs 100 over the period of the CPOF. At the end of the tenure, besides having their principal protected, investors can earn returns largely based on the equity market movement. Investors need not worry about any downside in the equity market as the debt component protects the principal even in a worst case scenario (if the equity component gets completely wiped out). Investors must, however, note that the capital protection offered is not a guarantee but only assured by the schemes portfolio characteristics (structure). The capital protection is assured only at the time of maturity and not during the tenure of the fund. SEBI guidelines stipulate that the structure must be rated by a credit rating agency from the view point of assessing the degree of certainty for achieving the objective of capital protection. Further, the rating should be reviewed on a quarterly basis. The highest rating for a CPOF is AAA(so), which indicates the highest degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme. CPOFs have a lock-in period of one, two, three or five years and are listed on the stock exchanges for liquidity purposes. However, trading is thin as most investors tend to stay invested over the lock-in-period. These funds mostly use the CRISIL MIPEX as their benchmark index in line with their asset allocation.
Taxation
CPOFs are taxed similar to debt funds where short-term gains (units held for less than 12 months) are taxed as per the individual tax bracket (maximum 30% plus cess) and long-term capital gains (units held for more than 12 months) are taxable at 10% (plus cess) without indexation and 20% (plus cess) with indexation (considers the impact of inflation over the holding period). The lesser of the two outcomes is considered for tax purposes.
Risks
Credit risk is the biggest risk to CPOF; it is the risk of default of the debt instruments held in the portfolio. Credit risks may be mitigated by ensuring that the debt instruments in the scheme are always of a very high credit quality. Current SEBI regulations restrict CPOFs from investing in debt instruments rated below AAA.
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On the performance front, CRISILs analysis reveals that capital protection funds that have matured have not only given positive returns but most have also outperformed the CNX Nifty (see Table 13). Most CPOFs that matured returned 5-9% annualized gains over their tenure while the equity market performance (CNX Nifty) ranged from marginally negative to 10% positive. However, the same (outperformance vis--vis the CNX Nifty) may not be necessarily repeated in future. CPOF returns could vary in a broad range (see Table 14) depending on the equity market (bullish or bearish) as well as the tenure of the CPOF.
Table 14: Sensitivity Analysis of CPOF Performance in Bull and Bear Markets
Period Principal Starting Debt Starting Equity Final Equity Component Component component Final Debt Component Final Redemption Amount Pre-tax Returns p.a. Post tax Returns p.a.*
Bull Market - Case 1 - If equity grows by 15% and debt grows by 9% (annualised) 3 years 5 years 100 100 77 65 23 35 35 70 100 100 135 170 10.42% 11.25% 9.47% 10.31%
Bear Market - Case 2 - If equity declines by 15% and debt grows by 9% (annualised) 3 years 5 years 100 100 77 65 23 35 14 16 100 100 114 116 4.46% 2.93% 4.03% 2.65%
Summing up
CPOFs are an attractive option for investors keen on investing in equities but wary of the downside risks. The uncertainty on the direction of the equity markets has enhanced the attraction for this category of funds. This can be seen from the rise in assets under management (AUM) of the category by over three times in the last two years from Rs 18.29 bn in December 2010 (12 schemes) to Rs 60.25 bn in December 2012 (58 schemes). Risk-averse investors can, thus, move beyond fixed deposits and take exposure to equities without worrying about negative returns or erosion of their capital. However, decisions must be based on ones risk profile, goals, liquidity requirements and scheme due diligence.
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Factsheets
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this condition was not satisfied, funds with the highest number of CRISIL Fund Rank 1s in 2012 have been included. Only select categories of the mutual fund ranking have been included. Ranks in the factsheet are as of December 2012.
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Annexures
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II - AUM Trends
1. AUM by Fund House (Quarterly Average AUM in Rs bn)
AMC
HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund Birla Sun Life Mutual Fund UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund Kotak Mahindra Mutual Fund DSP BlackRock Mutual Fund IDFC Mutual Fund Tata Mutual Fund Deutsche Mutual Fund Sundaram Mutual Fund Religare Mutual Fund JPMorgan Mutual Fund L&T Mutual Fund Axis Mutual Fund Canara Robeco Mutual Fund JM Financial Mutual Fund LIC Nomura Mutual Fund IDBI Mutual Fund Baroda Pioneer Mutual Fund HSBC Mutual Fund Principal Mutual Fund Goldman Sachs Mutual Fund Peerless Mutual Fund Taurus Mutual Fund BNP Paribas Mutual Fund Union KBC Mutual Fund Indiabulls Mutual Fund Morgan Stanley Mutual Fund Pramerica Mutual Fund ING Mutual Fund PineBridge Mutual Fund BOI AXA Mutual Fund Motilal Oswal Mutual Fund Daiwa Mutual Fund Mirae Asset Mutual Fund Sahara Mutual Fund Quantum Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund IIFL Mutual Fund Fidelity Mutual Fund* Grand Total
Dec-12
1018 931 815 770 706 542 423 324 308 302 197 180 146 141 133 121 107 76 75 69 64 54 53 50 48 47 42 32 30 26 25 20 13 12 7 6 5 5 3 3 2 2 2 7933
Sep-12
981 886 765 730 708 517 405 309 302 282 202 168 137 127 90 39 106 74 56 64 55 57 50 48 43 48 36 38 23 22 24 20 14 10 3 5 8 5 2 2 3 2 2 71 7538
Jun-12
929 829 732 673 609 479 371 258 300 274 208 139 132 110 53 30 88 76 58 59 52 55 46 47 43 40 37 46 20 22 23 24 14 7 1 5 7 5 8 2 4 2 2 74 6990
Mar-12
901 802 688 612 589 427 361 262 293 258 198 121 141 105 64 39 89 77 59 58 55 42 49 41 43 38 37 44 14 19 21 19 15 7 2 4 8 4 9 2 4 2 1 88 6709
Dec-11
887 843 695 604 578 421 373 302 306 269 215 133 148 118 68 46 86 74 69 62 61 46 49 39 43 44 46 48 5 13 21 21 16 7 2 2 9 4 5 2 6 2 0 89 6876
Data sorted by December 2012 average AUM *merged with L&T Mutual Fund since December 2012 Source: AMFI
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10.37 184.37
1804.77 75.94
48.47 1716.96
Equity Oriented
Debt Oriented
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1
90 80 70 60 50 40 30 20 10
29
37
40
47
20
15
Fund of funds
0
Liquid/ money market Gilt Debt oriented Equity oriented
Institutional
Retail
HNI
Source: AMFI
Next 20 cities, 5%
Next 75 cities, 5%
Other cities, 2%
Source: AMFI
Source: AMFI
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Liquidity Analysis
It measures the ease with which the portfolio can be liquidated. In case of equities, liquidity is calculated by taking the weighted average impact cost of the past three months. Impact cost data used is as published by stock exchanges. Gilt liquidity is measured by analysing the market turnover, days traded and size of trade in any security for a three-month period for that security. Corporate debt liquidity is computed by classifying each security into three categories - liquid, semi liquid and illiquid - and then evaluating a schemes exposure to each category.
Asset Quality
Asset Quality measures the probability of default by the issuer of a debt security to honour the debt obligation in time.
Asset Size
It is considered only for ultra short-term debt and liquid categories to take into account the effect of large fund flows on a schemes performance and the ability of the scheme to manage such flows optimally. The higher the asset size, the better it is.
Tracking Error
This is used only for index schemes. The tracking error is an estimation of the variability in a schemes performance vis--vis the index that it tracks. The lower the tracking error, the better it is.
Interpretation Very good performance (top 10 percentile of the universe)* Good performance Average performance Below average performance Relatively weak performance
st th st th
*If the top 10 percentile figure is not an integer, the same is rounded off to the next integer. The same approach is adopted for CRISIL Fund Rank 2 (11 to 30 percentile), CRISIL Fund Rank 5 (last 91 to 100 percentile) and CRISIL Fund Rank 4 (71 to 90 percentile) clusters. The residual schemes in the universe are placed in the CRISIL Fund Rank 3 cluster.
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1. Equity Funds
Schemes that predominantly invest in equity instruments (excluding hybrid schemes) are considered. Schemes with the following features are excluded Schemes not open to investors at large and open only to a specific set of investors. Schemes whose scheme information document/statement of additional information permits dynamic asset allocations (both debt and equity could vary between 0 and 100%), except on receipt of an undertaking from the AMC, assuring predominant investment in equity. Schemes for which there is a delay in receipt of portfolios from the fund house. Schemes with a stated objective to predominantly invest in derivatives and /or overseas securities.
d) ELSS
Schemes that invest in equity and equity-related instruments, and are aimed to enable investors to avail tax deduction under Section 80 C of the Income Tax Act are considered.
f) Index funds
Schemes launched with an objective to generate returns that are commensurate with the performance of their benchmarks Total Return Index (TRI), subject to tracking errors are considered. Open-ended exchange traded funds (ETFs) are also included. The following will be excluded: Index schemes that allow the fund manager to take overweight or underwieght investment positions on stocks that comprise their benchmark index. Index schemes having sectoral indices as benchmarks. Index schemes that are benchmarked to indices other than S&P BSE Sensex and CNX Nifty.
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2. Hybrid Funds
a) Balanced funds
Schemes investing more than 65%, but less than 80%, of the AUM in equity securities, and 20-35% in debt securities are considered. Speciality schemes with the above asset allocation focusing on children, pension, unit-linked insurance, young citizens, charity, and retirement are not considered.
3) Debt Funds
a) Long term income funds
Schemes that predominantly invest in long-term corporate debt papers and government securities (G-Secs) are considered. These schemes also invest in short-term and money market securities.
c) Liquid funds
Schemes whose portfolio constitutes money market instruments and short-term debt instruments with a residual maturity of up to 91 days are considered. Only funds with minimum investment amount less than Rs. 1 million are considered.
4) Consistent Performers
Schemes that have rankings in all quarterly CRISIL Mutual Fund Ranking over a 5-year timeframe are considered. Note: While the above classification will be the guide in selection and creation of peers for the purpose of ranking, CRISIL will be free to take a subjective call on the inclusion/exclusion of a scheme from among the peers in a ranking category.
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Investment Style Box defines the placement of total portfolio of the scheme in the appropriate style. For debt fund, styles are defined on the basis of credit quality (high, medium and low) and interest rate sensitivity (high, medium and low). The combination of these two parameters gives nine styles of investment, e.g. high credit quality with low interest rate risk, low credit quality with medium interest rate risk etc.
Investment Style Box defines the placement of total portfolio of the scheme in the appropriate style. For equity fund, styles are defined on the basis of market capitalisation (large-cap, diversified and small and mid-cap) and investment style (growth, value and blend). The combination of these two parameters gives nine styles of investment, e.g. large-cap growth, mid and small-cap value, diversified blend etc. In growth style of investment, the fund manager invests in avenues where the growth rate is higher than the industry growth rate. In value style of investment, the fund manager invests in securities that are priced lower than their fair value
Treynor Ratio
A risk adjusted measure of return that considers beta as a measure of volatility. This ratio explains the returns earned in excess of risk-free return per unit of market risk. Higher the Treynor ratio, the better it is
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