Stock Market Analysis

‘Investors should look for growth stories in mid-caps’

Investors need to moderate their expectations on returns from equities, said Krishna Kumar Karwa (left) and Prakash Kacholia, managing directors, Emkay Share and Stockbrokers. Mr Karwa and Mr Kacholia spoke about various issues including their business prospects and plans for a strategic partner . Excerpts:

What has changed in the past four years of bull run in the equity market? What is in store for investors in the future?

The bull run in the past four years has captured the undervaluation of equities, which has resulted in exponential gains of 50% during this period. But, 2006-07 has not been a great year for investors, with Sensex returns at around 12-15%. There have been apprehensions about valuations running ahead of fundamentals, but that does not mean that the bull run has fizzled out. With markets at around 16-17 times forward earnings currently, investors need to moderate their expectations and be more realistic. Our market is more or less discovered now, so there is a need to tone down their returns expectations to around 15-20%. Investors need to be more choosy while selecting stocks and look for growth stories in the mid-cap segment. The future lies in mid-caps and this is indicative in the number of mid-cap (mutual) funds being launched.

The direct retail participation in equities has fallen in the past few months. How will this trend affect brokerages like yours?

Mutual funds (MFs) as a segment has evolved in the past 2-3 years, with more investors opting for this route. However, there is a class of investors that believes in active self-trading. Emkay currently has around 28,000 customers. Most of them will put only a small portion of their money in MFs, with most of their funds being diverted to active trading. Investing in MFs is prominent among the salaried or professional classes, while the business and trader class still prefers direct trading. If we look at the current market scenario, around 60-70% of the volumes do not result in deliveries, which shows the active participation of traders. There is no denying that there has been a small fall (in direct retail activity), but it must be understood that the growth in MFs is indirectly beneficial to us, as we derive business from MFs. In addition to our core activity, we are also focusing more on insurance and MF products distribution.

Are you worried about the underperfomance of Emkay’s stock price vis-a-vis its peers?
The answer is both yes and no! We feel the market has not valued us rightly. Last year, the number of branches and franchises has risen from 60 to 200, and we are in the process of consolidating operations. We have chosen to expand carefully, create a steady base and the benefits will emanate in the future. We hope investors take notice of these aspects. We will be in a different league once we are a Rs 100-crore company.

Do you have plans to induct a strategic partner into Emkay?

We have been approached by a few parties with such a proposal, but no concrete decision has been made on this. We believe the full business potential is yet to be explored, given that Indian markets are in the midst of a long bull run. However, we are not averse to this idea, if our growth potential is valued appropriately.Several financial bigwigs are entering the domestic brokerage industry.

Will you be able to withstand the competition?

The entry of such big players will certainly change the structure of the markets and will make it more customer oriented. These players will expand the market rather than take away existing clients from other brokerages. Though we do not totally rule out a small shift, we believe there is place for every one in this industry, provided they are able to offer something unique to their customers.

Insurance Analysis

Student insurance plans: A safe lesson

It was around midnight but the Verma family was awake. The rising tension and anticipation in the room was not because they were watching a movie but were waiting for the phone to ring. While, Mrs Verma almost appeared to be on the verge of tears, her husband stared in blank dismay. Six months ago, their only son, Anuj, had left for New York to pursue an MBA course.

The previous evening, news reached them that Anuj had met with an accident. Since then, the family had not slept. After a painful hour of waiting the phone rang. Anuj reassured his mother that it’s now all well and then had a long chat with his father. Later at night, when Mrs Verma finally slept, her husband took out a calculator and pondered over what Anuj had said.

Anuj had told his father about the medical expenses and how he had to pay them before being discharged. It was not until late afternoon, the next day when Mr Verma realised that in a hurry to leave the India, Anuj had completely missed on signing up for a student insurance policy. “This happens quite often,” says Ashish Kapur, CEO, Invest Shoppe India. “Nearly 100,000 students from India travel every year to study abroad, but less than 10 % of them buy an overseas travel insurance plan,” he adds.

Increasingly, with low interest rates on student loans, foreign education is no longer the privilege of just rich people. Last year, the US issued 26,000 student visas to Indians, showing an increase of 30 % over the number of visas issued in 2005.

Considering the increasing student out-bound traffic, several Indian insurance companies have come up with different student insurance plans. The insurance policies primarily cover students against any kind of accidents besides other benefits. But signing up for the policy is not enough, choosing the correct plan requires some assessment.

Today, there are policies such as student safety insurance, overseas mediclaim for students and even tailor-made cover for educational institutions offering package cover for students. “While opting for an insurance plan, students should check whether the insurance is valid in that particular university or not. Generally insurance from companies who have worldwide presence are valid at all universities,” says Shreeraj Deshpande, head, health and travel Insurance, Bajaj Allianz General Insurance.

Students when travelling overseas generally look for coverage of health, loss of passport and any other liability cover. They can also ask for cover for loss of books and clothing. “Besides checking the insurance company’s tie-up with hospitals near the student’s location and the reach of third party service providers, one should also keep in mind the different add-on covers that are available, such as coverage of attendant’s visit to the student in case of any medical emergency,“ says an official from New India.

A student insurance policy should cover the entire period of the study term and the coverage should be according to the risks they would undergo while at a foreign location. Students, however, have the option to choose the period and should opt for a plan according to their period of stay.

Some universities, however, insist that the students should opt for proper medical coverage through local agencies. Many universities also add insurance in their tuition fee, which includes drug addiction protection and pregnancy protection. “Taking insurance cover from an Indian company for a medical liability cover of $250k will be at a per month premium of $30. Similar insurance cover of $250k is typically available at higher premium of $45-60 abroad. Further there are other travel related benefits bundled into Indian policies such as passport loss and baggage loss,” reasons Sudipto Ghosh, manager, advisory services, KPMG.

To settle a claim is not difficult provided you have the right documents. Most of the insurance companies have tie-ups with international agencies/service providers who are involved in processing the claims. The insurance company pays a premium to these agencies for rendering these services.

When the policy is issued, the contact details of these agencies are mentioned which helps the students in case there is a need to raise a claim. “Not being aware of the policy terms and conditions, coverage, exclusions and ignorance about the details of the service provider often leads to students facing undue hassles,” says the official from New India.

All the necessary claim forms detailing the procedures are being given along with policy documents. Typically the necessary documents required are — Duly completed and signed claim form, policy copy and air ticket jacket / boarding pass.

At home, Mr Verma was pondering over discontinuing his fixed deposit account. This situation could have been avoided, if only Anuj was a bit more alert. After all insurance, at home or abroad, is not only a matter of choice but necessity as well.

How to trade an insurance policy

Got a life insurance policy you want to get rid of? Want to earn a little more than what the insurance company would pay you as surrender value? Go, trade in your insurance policy. Thanks to a recent Mumbai high court verdict, you can now trade in your life insurance policy. Especially, on policies you don’t want to continue paying the premium.

In fact, many people were already trading in their policies before the Life Insurance Corporation of India banned the process. Apart from Insure Policy Plus Services (India), a company that specialised in trading in lapsed insurance policies, few individuals were also purchasing lapsed insurance policies to trade in them, said an industry source.

Insure policy Plus Services is said to have bought crores of rupees worth polices and it was the one who approached the court against LIC circulars. However , attempts to contact the I company failed. How does it work? The company or individuals who want to purchase life insurance policies contact insurance agents for details of individuals who have bought insurance products with guaranteed returns, but failed to pay the premium on time.

The next step is to approach this individuals with a slightly better amount than the “surrender value” the insurance companies pay on lapsed policies. ‘‘Many times, the surrender value may be less than the total premiums paid. In such cases the policyholder would be too happy to sell the policy ,’’ said an insurance agent with LIC.

Now, the policyholder would have to assign the policy (the same process in which you transfer the rights to bank or housing finance company to avail loans) to the purchaser . The company or individual who bought the policy will renew the policy and pay the premium for the remaining term. On maturity of the policy, the new owner would get the insured amount plus bonus, all tax free.

An insurance agent offers a practical example : Jeevan Shree, a favourite insurance plan of traders from LIC meant for high networth individuals, used to offer around 9% returns (guaranteed addition plus loyalty addition , in insurance parlance).

Traders would approach individuals who haven’t paid premium for one or two years and offer them better deal than the surrender money offered by LIC. They would revive the policy and pay the remaining premium and pocket around 14-15 % returns (higher returns is because of the short time they have to wait for the money) on maturity of the policy or on death of the policyholder.

‘‘It was win-win situation for all. The policyholder is happy because he got a better deal. The new buyer is happy because he is getting good returns in short period of time. In fact, the shorter the remaining term of the policy, the higher the return one would make.

Agents are also happy because they will get renewal commission,’’ said an insurance agent. ‘‘ The only flip side was it defeats the true purpose of buying an insurance cover, which is to help your dependents financially on your death.’’

Up to 40% of Ulip funds allowed in money market

You needn’t fear anymore about declining returns from unit-linked insurance policies (Ulips) that you invested in, especially when stock markets start to slide or become excessively volatile. Life insurers will now have the option to withdraw funds from the equity market and invest to the extent of 40% of an individual policyholder’s fund in money market instruments that offer a relatively stable return on investments in the short term.

In order to enhance flexibility of operations of unit-linked policies, Insurance Regulatory and Development Authority (IRDA) has just allowed life insurers to invest 40% of an individual policyholder’s funds in money market instruments. Earlier, this was capped at 20%. Money market instruments refer to commercial paper, treasury bills, government of India securities with unexpired maturity up to one year, call money, certificates of deposit, subordinated bonds corporate deposits and any other short-term instruments specified by the Reserve Bank of India (RBI).

Analysts said that insurers could park their funds in the short run to hedge against downside risk in equity markets, or in case of falling bond prices. Insurers will, however, have to educate policyholders on the implications of parking funds in such instruments. Senior analysts with a private insurer said, “These instruments provide insurance companies with the option of shifting from government securities and bonds with a longer tenure to short-term ones if the interest rates start to climb. Bonds and government securities with long-term maturities tend to underperform when interest rates rise. Instruments with short term maturity in such scenarios tend to perform relatively better than the ones with longer maturity.”

IRDA chairman CS Rao said: “The insurers were asking for an enhancement in the limit because they wanted to park larger quantum of fund in case the stock market starts fluctuating. This was done with the view to offer policyholders the flexibility of investment and offer better returns on their Ulip policies.”

This option, incidentally, was already available when insurers were allowed 20% investment in money market instruments. Now, with the investment threshold getting doubled insurers will have a bigger play of such instruments.

“The recent policy will allow insurers to park funds in instruments with shorter term maturity of less than a year and hedge against falling stock markets so that insurers can offer better returns to their policyholders,” they said.

Officials from a large insurance company said: “Ulips that invest a large portion of its funds in debt may, however, not be able to gain from the new guidelines because such policies already have a high exposure.”

Insurance

MNC ally not part of Irda job portfolio

The Insurance Regulatory & Development Authority (Irda) has said it has no jurisdiction over private agreements signed between a foreign partner and a domestic shareholder, which may commit to sell its equity to the former once the FDI cap in insurance is relaxed beyond the current 26%.

The issue has come to fore in the wake of the Vodafone controversy, in which some domestic shareholders were said to be acting as fronts for the foreign partner.

It has been reported that the foreign partners in many insurance companies may have entered into agreements with the domestic partners keeping the option of buying out the latter’s shares at a pre-determined price once the FDI ceiling is relaxed.

Irda has clarified that individual agreements are not under the purview of the regulator if a company abides by the 26% FDI cap. “As far as the foreign holding in an insurance company does not exceed 26%, we cannot take any action against individual agreements,” a senior Irda member told ET.

Several agreements may exist between shareholders regarding buyback in a hypothetical condition, but Irda is not concerned with their individual understanding, the member added. Irda is empowered to take action only if the Indian partner or partners actually go ahead and flout FDI norms by bringing down their stake below 74%.

The issue gained prominence after FIPB noted that Analjit Singh’s 12% stake in Vodafone was backed by the foreign investor as the loan taken by the individual was guaranteed by Hutchison. The matter came to fore when Vodafone acquired 51.96% in Hutch Essar. Based on its findings, the FIPB has demanded clear FDI guidelines for similar situations.

Insurance brokers turn launderers

As the government enforces new measures to check money laundering, launderers are targeting insurance companies where large premium payments are split over several transactions to avoid suspicion. Brokerage commissions in cash amount to nearly Rs 900 crore in the non-life sector alone.

In the non-life business, insurance brokerage is the most popular mode to launder money. Typically, most traders who want to convert black money into white channelise their operations through a brokerage. The broker promises huge discounts to the client on behalf of the insurer and is also paid a hefty commission.

In non-life insurance, which is estimated to be worth Rs 22,000 crore, at least 60% of the business comes from the corporate sector. Of the Rs 12,000-crore business in the segment, Rs 6,000 crore is accounted for by the private sector.

With brokerage fees touching 30%, it is estimated that half of this is routed through cash, which amounts to Rs 900 crore. The figure is higher for life insurance companies, which handle business worth Rs 35,000 crore.

“Using false invoices and bills issued by a dummy of the brokerage company, the money is routed back to the broker,” an industry source said. In the life insurance business, agents are pivotal in laundering money, receiving commissions in cheques and paying clients in cash, he added.

“If an agent or a broker can ensure a cash-revenue stream, insurance is the only sector where a money launderer is paid to launder money,” said a risk management consultant, who pleaded anonymity.

Industry insiders say insurance companies are unwilling to crack down on money launderers as it will affect business. “There is no incentive for companies to implement anti-money laundering (AML) measures. They will only go so far as the law prescribes and will not do it of their own volition,” he added.

Most insurance companies have internal checks and balances that detect the errant cases and deal with them at their level, obviating the need for supervision by Irda. Insurers, on their part, swear by internal regulations and compliance with stringent AML guidelines.

Sources at the enforcement directorate feel this could be more of a I-T evasion measure as against a crime listed under the Anti-Money Laundering Act.

Life cos slug it out on pension turf

Competition in the insurance sector is proving to be a boon for retirees. The battle for providing higher fixed-income returns has moved to pensions in life insurance, with companies trying to outdo each other. After hiking returns on its immediate annuity plan five months ago, Life Insurance Corporation has again raised returns after ICICI Prudential outdid its earlier rates.

LIC is coming out with Jeevan Akshay V, replacing its earlier product Jeevan Akshay IV. The new scheme will offer a 60-year-old policyholder an annual income of Rs 95,600 on an investment of Rs 10 lakh as against Rs 90,000 under the earlier scheme. With this, the state-owned insurer has outdone ICICI Prudential, which has recently launched its annuity product, offering Rs 91,434 for a similar investor.

There are other companies also offering annuities — SBI Life and Bajaj Allianz have their immediate annuity products — however, they have not yet jumped into the rate war. SBI Life offers an annual return of Rs 68,983 but the company also offers a death benefit, where the policyholder is assured of getting back what he paid. Bajaj Allianz Life offers a return of Rs 85,469 to an annuity buyer. LIC’s Jeevan Akshay V will be launched in September.

The higher returns will be available to those who have purchased deferred pension policies and where the payments start after September. The corporation is already offering the higher returns on its group products. Whole-life annuities are the converse of life insurance in their objective. While life insurance protects families against the risk of the breadwinner dying early, whole-life annuities protect individuals against the risk of living too long without income after retirement.

Whole-life annuities offer policyholders the option of getting a fixed income as long as they live, in return for a lumpsum payment. Until now annuities have not taken off because of investor resistance to products to schemes where the capital is not returned. But when insurers incorporate a provision for return of premium on death of the policyholder, the returns compare unfavourably with most fixed-income savings.

Although interest rates on government bonds have risen, insurers do not see a resurgence of guaranteed-return products. Insurers say that interest rate cycles are highly volatile and there are not enough fixed-income instruments available for structuring a guaranteed-return product. In theory, a company can, for instance, offer a guaranteed return of 7.5% by investing in long-term government bonds but in practice this is not possible because there is a reinvestment risk.

MF Analysis

Fool-proof measure of a MF's growth

Net asset value (NAV) of a mutual fund is the market value of its assets minus its liabilities
This number is important to investors, because it is from NAV that the price per unit of a fund is calculated.

Funds usually wait until the end of each trading day to recalculate their NAV of each scheme
Simply analysing the NAV is not a fool-proof measure of the fund’s growth.

There are many websites which keep a record of the dividends a fund gives and do all the calculation for you

Be wary of distributors who try to sell you a mutual fund just because its NAV has bloated. He is driven by the greed to earn more commission

It is the oldest selling trick by MF distributors. They say that in the new fund offer, units would be available at Rs 10 and this is as cheap as you can get. Then there are some who ask you to sell off a fund citing that its NAV has become a giant figure and its time to book profits. Not only are both the statements meaningless – but nothing could be farther from the truth. The distributor is simply peddling away wrong information to sell you his funds.

What is NAV?

The net asset value (NAV) of a mutual fund is simply the market value of its assets minus its liabilities. In other words, NAV equals the fund’s worth. If a fund has assets worth Rs 150 crore and is obligated to pay Rs 50 crore for any particular reason (liabilities), it would have a NAV of Rs 100 crore.

This number is important to investors, because it is from NAV that the price per unit of a fund is calculated. The fund house calculates the NAV by dividing the NAV of a fund by the number of outstanding units. In our example, if the fund had one crore units outstanding, the price-per-unit value would be Rs 100 crore divided by one crore, which equals Rs 100.

Since the share prices of stocks in which a scheme has invested keeps changing, the NAVs of funds also constantly keep changing. Funds usually wait until the end of each trading day to recalculate their NAV of each scheme. Open ended funds NAV are published on Amfi (Association of Mutual Funds of India) website by 8 pm everyday. Newspapers publish the same data daily on the stock pages.

The common myths

It is meaningless to say that a mutual fund is cheaper just because it NAV is Rs 10 during the new fund offer. Mutual fund is not an IPO of a stock. A mutual fund is just a pooling of investments to buy a large bunch of shares.

Lets say a fund house collects Rs 100 crore in a new fund offering of a mid cap fund, through one crore investors. If it divides the corpus into 10 crore units then the NAV of the scheme will be Rs 10. But say if it distributes the corpus into 1 crore units – then the NAV will be Rs 100. As an investor whether if you had invested Rs 1000, it is immaterial whether you hold 10 units of Rs 100 or 100 units of Rs 10.

Besides there is nothing called a high NAV. It should be only used to measure returns on a point to point basis at the best. After all it is simply the net market value of your investments divided by the number of units. Fund schemes with low NAVs can give good returns and funds with high NAVs may deliver terrible returns.

Why is NAV useful?

The performance of fund manager can best be judged by calculating the percentage growth of the NAV as compared to a period, say a year, back. But we have to be careful in that simply analysing the NAV is not a good measure of the fund’s growth. Funds are constantly paying out distributions of both capital gains and dividends, which reduce the NAV of the fund and do not reflect any appreciation in the price per unit.

Say a fund’s NAV increased from Rs 10 to Rs 15, but the fund also distributed Rs 5 per unit to all unit holders. The fund hasn’t simply appreciated by 50%, as the NAV would suggest; it has actually appreciated 100% (since if the fund had not given a dividend the NAV would have been Rs 20). So do not mistake a fund’s per-share price based on NAV for the actual earnings of the fund. There are various websites which keep a record of the dividends a fund gives and do all the calculation for you.

Why do MF distributors mislead?

Every time you buy a fund, a distributor gets commission on it. Of course that’s his incentive to sell you funds. But the commission obtained in a new fund offer (NFO) is the highest. Hence he is more inclined to sell you an NFO saying that the units are available at Rs 10. As explained before, this theory is meaningless.

Sellers of funds also get a commission when you change a scheme. So they may tell you that like a share gets overpriced, the MF scheme is overpriced because its NAV has become bloated. The NAV is swelling is simply because the fund manager’s stock calls are in the right direction. When you have entrusted your money with him, leave the decision to book profits with him too.

So the next time, your friendly broker or the banker in a bank next door tells you to buy a mutual fund because its NAV is Rs 10 or sell one because it’s NAV is Rs 100 – you need not change the scheme you are already invested in. Just change the broker.

Mutual funds: Managing a portfolio

Stocks and mutual funds have given phenomenal returns over the past few years. For those who had chosen the right equity and balanced funds, returns to the tune of 40 to 60 percent were comfortably assured.

With their growing popularity and greater returns potential, many investors have included a wide array of mutual funds in their portfolio. New funds were often over-subscribed. Even in the intermittent dry spells, investor enthusiasm showed no signs of slowing down.

Randomly selecting funds, without a proper asset allocation strategy, can lead to inefficient diversification. Over-exposure to high risk funds can increase the volatility and affect your returns adversely. Investing in funds with similar objectives fails to diversify your basket. Further, investors must have a clear strategy for buy and sell.

Here are a few strategies to help you manage your funds:

Systematic investment plans

The key to portfolio management is to have a discipline that investors must adhere to. The most successful money managers in the world were successful because they employed a disciplined approach to manage their money. Buy low and sell high is the most common advice for investors. However, markets don't move in predictable patterns. Hence, getting stocks at rock bottom rates and selling at plump price is not as easy as it sounds.

For most new investors, the safest way out is to indulge in regular monthly or quarterly investing, through a systematic investment plan (SIP). A SIP, also called rupee cost averaging, allows investors to build a portfolio gradually even in volatile market conditions.

Selling right

Sometimes, you may need cash to meet other expenses. An investor nearing retirement years may want to shift his investments in equity to other debt instruments. Whatever be the reason, it is essential that you sell your funds at the right time. If the fund's performance is slipping down by the day or the service rendered by the fund house is poor, an investor may decide to opt out of the fund. If your investment goal has changed, it is advisable to sell your fund even if it were a worthy pick.

Buy and hold

The most popular strategy that most investors successfully employ is the buy and hold strategy. Here, the investor sticks to his investment and does not panic in bad times. After a low bearish trend, markets tend to bounce up. Bullish markets are often succeeded by dull patches. Simply buy and hold your investment. Sail through the ups and downs of the market. It is easy to make money when the tides turn upwards in this strategy.

Market timing

This strategy is better left to market experts. Timing the markets is extremely difficult. Though investors know that profits are made when you buy low and sell high, most end up doing just the opposite. This is because investors are emotional beings and panic.

Re-balancing
In simple words, re-balancing means selling some of the funds that did the best to buy some that did the worst. Though it seems to go against logic, proponents of this strategy feel otherwise. They argue that cyclic trend is not limited to markets alone but to individual funds as well.

If you've built a huge portfolio of mutual funds, it is time you manage it efficiently.

Big is bountiful in MF world

Size does matter. Mutual fund schemes with bigger sizes or higher assets under management have posted better returns as compared to those that are smaller in size. In general, there should not be any correlation between size and performance but data shows a different picture.

Equity diversified schemes that are in the range of Rs 1 crore and Rs 200 crore have an average annual return of 4.5% as compared to schemes that are bigger than Rs 1,600 crore, which have an average return of 11%. On a statistical basis, there is a positive correlation of 75% between size and performance. Higher the size, better the performance.

For smaller funds to last in the current market it is important for them to bring in innovative ideas or unique propositions to the customer. If that is not done there is a chance that these funds may face problems in growing their business and also could become takeover targets for some of the larger funds. Devendra Nevgi, CEO and CIO, Quantum Mutual Fund, agrees, “Getting a unique proposition is very important especially for smaller funds. We do not pay commissions to the distributors and prefer to sell our funds directly.

Thus, breaking even for our company is easier as compared to others. As far as size and performance goes, I don’t think that there is any relationship to the same.” The Quantum Long Term Equity has delivered a return of 16% over the past one year and has an asset size of Rs 30 crore.

For different sizes there are different strategies. Smaller funds do tend to take higher risks as compared to bigger funds as these funds are desperate for returns. The top 10 holdings of these funds are very concentrated making these funds more risky than funds that have higher AUMs.

On an average, this figure works out to 30% for small funds and 23% for large funds. Smaller funds tend to take higher risks to make it to the top 10 list in terms of returns. That is probably the reason why we find these small funds giving returns that have got very wide distributions from 26% to -18%.

With larger funds the distribution is between 19% and 2%. In fact, among the truly large funds only the Franklin Templeton India Pharma fund has managed to give negative returns at -3.2%.

Bigger MFs are also in a position to pay higher broking fees if they choose and thus keep on becoming bigger. With size, these funds are also in a position to hire the best talent in the industry and thus these funds perform well. Management fees for MFs is a function of the size of assets managed. Bigger size means higher management fees, thus the highest paid fund managers will always come from funds that have higher assets.

Though there are benefits in investing in large funds, many times the size itself becomes a restriction as these funds find it difficult to churn their portfolios. More than a year ago, a big mutual fund in India decided to close subscription for its open-ended scheme for a few months as the corpus was becoming very huge to manage.

Internationally, there are cases where funds gone in for redemption because it became difficult for them to manage the assets. Fidelity Magellan decided to temporarily close shop for new investors on September 1997 as assets touched $50 billion. Incidentally Peter Lynch had managed the same fund for 13 years.

Fund managers go in for the big churn
“Invest for the long term, don’t worry about short-term fluctuations,” is fund managers’ favourite advice to mutual fund (MF) investors who panic at the first signs of market downturn. But most fund managers do not practice what they preach. In other words you may have invested in an equity fund with a three-year investment horizon, only to find that your fund manager has a six-nine month view on the stocks in the portfolio.

According to ETIG estimates, MF manager are rapidly churning portfolios. On an average, they buy stocks and sell it within nine months. In technical terms, such churn is referred to as portfolio turnover ratio. Across the industry, the average turnover ratio of portfolios is around 135%.

What could be the reasons for such high-level portfolio churns?

“Changes in portfolios happen primarily due to target prices being met, relative valuations and change in fundamentals,” says Sivasubramanian KN, portfolio manager-equity, Franklin Templeton.

But that is not always the reason, say market watchers. Often fund managers churn portfolios in order to generate quick returns. And investors are partly to blame for this trend as many of them actively churn their own MF portfolios in favour of better performing schemes. Also a 100% portfolio turnover might not necessarily mean complete change of fund portfolio. It is also possible that fund managers keep a core portfolio that is intended for the long-haul, while he rapidly changes his trading portfolio to make quick bucks from market opportunities.

There is some relief for investors though; portfolio turnover ratios have been falling over the years. For instance, in the first four months of 2007, it was 110%. In 2006, it was higher at 124%. In 2005, it was even higher at 132%. 2004 saw one of the highest portfolio turnover of 160%. One reason for this falling trend could be ‘higher mid-cap’ exposure of equity funds that is yet to see a rally. It is believed that many equity funds with exposure to mid-cap stocks are holding on in the hope of a rally in the near future. In the past one year, mid-cap indices have underperformed large-cap indices.

As per latest portfolio disclosures, many top equity diversified funds had 100% plus portfolio turnover ratios. Reliance Equity had a portfolio turnover of 154%, ICICI Pru Growth —236%, HDFC Equity —158% and Franklin Bluechip — 93%. Sector funds resorted to lesser churn. For instance, for Franklin Pharma it was 32%, Reliance Pharma — 26% and ICICI Pru FMCG — 16%. These ratios were for the half-year ended March 2007.

Equity Portfolio turnover for the MF industry was calculated by taking the lower of 12-month gross purchase or sale divided by the trailing annual equity assets. While the gross purchase and sale figures of MF from capital market was taken from Sebi, equity-based asset figures were sourced from Association of Mutual Funds of India.

Mutual Funds

Gold traded MFs to pick up in 2-3 yrs'

Gold-traded mutual funds, though slow in taking-off, are expected to pick up in the next two-three years as the yellow metal has proved to be the only safe investment, offering a nine per cent return consistently in the long-term.

"Though the initial response to our gold traded exchange fund has been disappointing, we expect it to pick up in the coming months and years," UTI MF's Chairman and Managing Director, U K Sinha, told PTI here.

Globally, the response to gold traded funds has been lukewarm in the initial two years but then it perks up substantially, sometimes exponentially, Sinha said.

Contrary to belief, 35 per cent of gold in India is not for jewellery but procured for investment, he said, adding that "if gold traded funds cannot be successful in India, then where else can they be sucessful" as India is the largest consumer of gold."

Even in the US where gold traded funds were launched in March 2003, it took nearly two years for it to pick up after remaining "static" in 2004 before picking up in 2005, Sinha said.

"The growth became rapid from 2005 onwards and now nearly 600 tonnes of gold worth nearly USD 13-billion are with gold traded mutual funds globally of which the US market comprises of 450 tonnes (USD 9.5-billion)," he said.

In the first nine months, however, the quantum of gold traded was just around 10 tonnes. Attributing the lukewarm response for gold traded funds in India to poor media campaign and inadequate investor education, Sinha said that these needed to be stepped up for gold traded funds to pick up.

Highlighting the huge potential inherent in rural areas, Sinha said that big farmers, especially in the south and west, invest hugely in gold and if this could be tapped effectively, then it would go a long way in perking up the funds.

"Investor education needs to be undertaken by the industry," Sinha said, as people in rural areas were not familiar with the capital market nor with concepts like demat accounts. "We need to educate them about demat accounts and the advantages they offer such as enhanced liquidity," he said.

The greatest advantage of gold is that it is perhaps the safest investment option amongst all investment classes since historically it has always given a good return, including in adverse environments when other asset classes turn negative.

"The real estate and stockmarket segments go through periodic ups and downs but gold prices don't crash" Sinha said.

He also said that it was not correct to say that Indians were fond of keeping gold only in the form of jewellery as it accounted for only 22 per cent of the global jewellery demand but 35 per cent of global retail investment demand.

India holds about 10 per cent of the world's global stocks at around 15,000 tonnes.

Though jewellery accounted for 60 per cent of gold demand in India, gold coins and other forms accounted for 30-35 per cent of total demand in India.

Moreover, gold is an effective portfolio diversifier as also the best hedge against inflation, Sinha said, adding that there was also a possibility of gold prices increasing because of the demand-supply gap.

The UTI Gold Exchange Traded Fund provides both security and transparency and is, besides, cost effective as one can invest at the cheapest price replicating the international gold prices.

Besides, there are no making charges nor storage and insurance costs involved.

On the taxation front too, UTI Gold ETF offers many benefits with wealth tax and securities transaction tax (STT) not being applicable.

UTI MF declares tax-free dividend of 35 pc

UTI Banking Sector Fund from the UTI MF stable has declared a tax-free dividend of 35 per cent, Rs 3.50 on share of Rs 10 face value each.

Pursuant to the payment of dividend, the Net Asset Value (NAV) of the dividend option of the fund would fall to the extent of payout and statutory levy.

All unit holders registered under the dividend option of UTI Banking Sector Fund as on May 23, will be eligible for the dividend.

Besides, investors who join the dividend option of the fund on or before the record date will be eligible for the dividend. The NAV per unit as on May 17 was Rs 18.80 under the dividend option.

UTI Banking Sector Fund is an open-end equity fund and is one of the six funds launched under UTI-Thematic Fund.

UTI MF Fund Manager Gautami Desai said, "The fund is positioned to capitalise opportunities emerging in the banking sector...the economy is near the peak of interest rate cycle and hence the fund is positive on the banking stocks going forward."

UTI MF targets small investors, villages for big leap

Mutual funds major, UTI MF, plans a massive rural thrust and to tap small investors by cashing in on its extensive network to take on competitors and boosting its business.

"Our strategy is to tap Tier II and Tier III towns and small villages where we believe there is a tremendous potential for mutual funds to perform well. Our strategies are being geared up for this thrust," said, UTI MF Chairman and Managing Director U K Sinha.

The mutual funds industry is yet to mature in terms of reaching out to small investors in the smaller towns and villages. UTI MF plans to do just this, which, it hopes, will not only augment its customer base but also help enhance its business.

"It will be a long battle, but we have the network to win this battle," he said.

UTI MF has, in recent times, slipped in rankings to third place behind Reliance MF and Prudential ICICI, both of whose assets under management (AUM) are higher than that of UTI MF.

UTI MF's AUM as at end-April stood at Rs 36,000 crore putting it in third place behind the other leading private players.

UTI MF ahead on profit street even as AUM slips

Last year, the 43-year-old Unit Trust of India (UTI) went through a mid-life crisis. The state-owned mutual fund (MF) behemoth was struggling to retain its supremacy in the asset management game, something which it had done for decades. In terms of assets under management, it has ceded the top slot to ADAG-led Reliance MF. But UTI MF continues to hold a trump card. In absolute terms, it is the most profitable MF.

As per UTI officials, the asset management company has reported a profit after tax (PAT) of little less than Rs 150 crore for financial year 2007. Even last year, UTI was the only MF with a net profit of over Rs 100 crore. However, the growth in profits has slowed down to 12% in 2007, as compared with 30% in 2006.

Meanwhile, private sector MFs too have been growing at a brisk pace. HDFC AMC has reported a profit after tax of Rs 67.5 crore in 2007, up 47%, year-on-year while Reliance MF’s PAT was Rs 50.7 crore, up 74%, over the previous year. While HDFC continued to grow at last year’s levels, Reliance MF’s bottomline has more than doubled.

There is a high probability of a shuffle in the top three positions in terms of absolute profits. Reliance MF could edge past ICICI Prudential AMC to take the number three position. Last year, UTI remained the most profitable (Rs 133 crore), followed by HDFC (Rs 46 crore) and ICICI Pru (Rs 31 crore). Reliance’s profits last year was Rs 2 crore lesser than ICICI Pru at Rs 29 crore. But Reliance’s assets have grown at a faster pace (128%) in 2007 than ICICI Prudential (66%) and the former has a higher chunk of equity assets (which yield better fees). The other fast-growing fund houses include PruICICI (66.3%), HDFC (51.8%), SBI (58.2%), and DSPML (57.7%).

Even though assets have grown, overall profit growth could be slower. This is because in the past one year, a major part of the growth has taken place in debt assets, which yield lower fees to MFs. Fixed maturity plans (FMPs) have been the rage in the past six to eight months, thanks to rising interest rate scenario. While this has bolstered the AMCs’ assets, it is not very profitable proposition as these products earn management fees in the range of 0.04-0.07% per annum. Equity funds in contrast earn 0.65 to 0.95% on a net basis. These fees are generally charged to net asset value on a daily basis based on average fund assets.