Those who hold that three to five years is an apt period of time to judge mutual fund returns could do well to take a look at the three-year returns of Indian mutual fund schemes at this point in time.More than 65 per cent of the diversified equity schemes have underperformed their benchmark indices over the three years ended August 25, a compilation of annualised returns for the period by Value Research shows.

Around 30 per cent of these schemes have recorded returns that exceed their benchmark indices. The data for the rest were not available.

Benchmark track While the benchmark index of a scheme is a parameter against which fund houses measure the performance of their schemes, there is no mandate on the fund houses to deliver benchmark returns, said a mutual fund analyst.

However, the benchmark is important as it helps you track the return of a fund, said Mr. Apoorva Shah, Fund Manager, DSP Merrill Lynch, most of whose equity diversified schemes have outperformed their indices for the period.

“Also it should be a fund manager’s endeavour to beat the benchmark, otherwise the investor should put his money in benchmark stocks or an index fund, which will cost less too.”

According to analysts, one of the reasons for the schemes’ underperformance is that a major portion of their portfolios consists of mid-caps, which have suffered badly in the past year.

“The schemes do not have a hundred per cent linkage to their benchmark indices, which is one of the reasons they lag behind,” said Mr Vineet Potnis, Chief Marketing Officer, DBS Chola Mutual Fund, most of whose schemes have underperformed their indices.

“The portfolios of the mid-cap funds had to be changed as the market cap of mid-cap stocks kept on changing, and that was one of the reasons we missed out on opportunities,” he added.

Among the fund houses that had several of their schemes underperforming their indices are Birla Sun Life Mutual Fund, UTI Mutual Fund, ING Mutual Fund, Tata Mutual Fund, DBS Chola Mutual Fund and Kotak Mutual Fund.

The laggards Among the schemes that showed the widest margins of underperformance against their benchmarks were DBS Chola Global Advantage, JM Emerging Leaders, Franklin India Prima, Birla Sun Life Dividend Yield Plus, Birla Sun Life India Opportunities, Canara Robeco Emerging Equities, DBS Chola Multi Cap, Kotak MNC, LICMF Growth, Magnum Emerging Businesses, Principal Dividend Yield, Principal Junior Cap, Tata Midcap, Taurus Discovery Stock and UTI Mid Cap.

If the fund manager gets changed, then too the performance of the fund gets affected, said a fund manager with a top mutual fund house.

While in the US markets, the funds invest in “gigantic large caps” and it is difficult for them to outperform those stocks, in India there is scope for bettering the benchmark, provided the fund managers have the expertise, said another fund manager.

For the lay person, however, investing in mutual funds is still easier and simpler compared with investing directly in equity.

What about ETFs, then? 

The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Cross posted on Personal Finance Blog and Insurance Blog

JP Morgan India Alpha Fund  is an interval fund that seeks to generate a reasonable level of absolute returns, irrespective of stock market direction. The fund plans to do this through a strategy of making short-term ‘paired’ trades.

The fund plans to combine a long (buy) position on a stock or its future, with a short (sell) position on another stock or its future. The paired trades may be initiated on the basis of macro trends or relative valuations between stocks. Example: Expectations of rising oil prices may prompt a long position on Cairn India (a producer) and a short on Jet Airways (a consumer).

The trade will pay off as long as Cairn India outperforms Jet Airways; it will yield negative returns if both stocks move in the opposite direction to what is expected. As the portfolio is trading oriented, loss-making positions will be quickly reversed and replaced, containing downside.

Investment proposition: With the fund’s portfolio positioned on both sides of the market (buy and sell), it expects to deliver returns no matter how the overall stock market performs. While the performance of traditional equity funds depends on the number of successful ‘buy’ opportunities that they unearth, this fund will benefit both from successful “buy” and “sell” calls. This strategy may be well suited to present market conditions, where stocks are expected to be range-bound for a while, with the economic slowdown and earnings concerns surrounding several sectors.

Suitability: A paired strategy has the potential to deliver high returns. But this fund is benchmarked against the Crisil Liquid Fund index, suggesting that investors should conservatively set their return expectations in the 8-12 per cent range. While paired trades may make the fund ‘market-neutral’ in the short term, the trading-oriented mandate may also prevent it from effectively cashing in on any secular rally in stocks. Pros and cons: The fund helps you avoid a directional call on the markets, but all the risks associated with active investing apply to it. A wrong base assumption for the paired trade can lead to negative returns. Hence, the fund manager’s ability to get his calls on relative valuations or macro factors right will be crucial to how this fund performs. This fund may place even greater reliance on the fund managers’ skills than would be the case with a long-only fund.

In a secular bull market, even stocks that under-perform their peers or the markets tend to deliver a reasonable level of absolute return. Two, given the trading oriented portfolio, the fund manager will have to make many more calls than would be the case with the ‘buy-and-hold’ fund. In the absence of a sufficient number of attractive paired trades, the fund may carry a high cash component. Finally, this fund is targeted at informed investors, many of whom may be able to make trading calls in the markets on their own. In fact, an individual investor may have to unearth just one or two paired trades to generate good trading gains. But this fund will have to unearth a large number of such trades simultaneously, to remain diversified and to deploy its entire assets.

What to do: Equity funds currently available in the Indian market are all ‘long-only’ funds, dependent on a steadily rising stock market to deliver returns. In this respect, JP Morgan India Alpha Fund is a unique product, allowing investors to benefit both from a scenario of rising and declining stock prices. However, the fund places great reliance on the management skills of the fund house.

Given the relatively short track record that is available for JP Morgan as a retail asset manager in the Indian context and the fact that this strategy in untested in the mutual fund space, waiting for the fund to notch up a return track record before considering investments may be a good course to follow.

Offer details: The fund opened for subscription on July 31 and closes on August 29. The minimum application size is Rs 5,000. The fund will be managed by four managers — Harshad Patwardhan and Amit Gadgil (for the equity portion) and Nandkumar Surti and Namdev Chougule (debt portion).

With banks increasing their fixed deposit rates in the past couple of weeks, fixed maturity plans (FMPs) by mutual funds are also offering higher ‘indicative’ returns. FMPs can only indicate and not guarantee returns.

For instance, LIC Mutual Fund and Birla Sun Life Mutual Fund have offered 11 per cent returns for their 13-month FMPs that are closing on August 25.

Other fund houses such as Lotus Mutual Fund, ABN Amro Mutual Fund and Kotak Mutual Fund have indicated returns of 10.65 per cent for small investors.

Banks, on the other hand, are offering 7.5 to 10.5 per cent for fixed deposits of different tenures.

The rising yields in debt markets have resulted in FMPs (fixed maturity plans) emerging as attractive investment options for investors. Also, the testing conditions in equity markets have in no small measure, contributed to the allure of FMPs.

Simply put, FMPs are debt-oriented investment avenues from the mutual funds segment with a fixed investment tenure; also, they profess to offer a reasonably assured (predetermined) return. This is achieved by locking in a yield (return) at the time of getting invested. Hence an investor who is invested in the FMP until its maturity, is virtually assured of clocking the projected return.

However, it should be understood that FMPs are not the risk-free avenues they are made out to be. For instance, the possibility of the actual return varying from the indicated return cannot be ruled out. Market conditions, inappropriate investments (say a credit default in any of the underlying investments) or even a poor investment style (a mismatch between the maturity profile of the FMP and that of its underlying investments) can be responsible for the same.

In conclusion, while FMPs would qualify as low risk investment avenues, they are certainly not the risk-free avenues they are made out to be.

Ever since the markets turned volatile, SIPs (systematic investment plans) have emerged as a buzzword. Advisors, financial planners and fund managers are all exhorting investors to opt for SIPs. However, in all the SIP frenzy, investors seem to have been misled into believing that the SIP is an investment avenue.

SIP is simply a mode of investing in mutual funds, which permits investors to make staggered investments rather than a lump sum one. As a result, in volatile times, investors benefit by receiving a higher number of units and thereby lowering their average purchase cost.

In the world of investments, there is no such thing as a ‘best investment’; in other words, one size doesn’t fit all. An investment that is right for one investor can be grossly unsuitable for another. Hence the key lies in selecting an investment that’s right for the investor in question. And since there is no best investment, there is no best SIP either.

Investors need to first identify mutual funds that are right for them, and then consider investing in them via the SIP route.

The infrastructure theme in mutual funds has invited a lot of attention in the last 3-4 years. Companies in the sector have seen a phenomenal growth and UTI Infrastructure Fund took advantage by making an entry at the right time.

The fund entered the market with an objective to provide capital appreciation through investments in stocks of companies engaged in the sectors.

A jump by 245% in the assets under management (AUM) over the last two years itself is a proof of the growing popularity of the fund.

UTI Infrastructure has managed to grow by 27.68% compound annual growth rate (CAGR) since the past three years. It did outperform its benchmark BSE 100 by a greater margin across all timeframes, though the recent downturn in the market has dragged down the fund?s ranking over the past few months.

It crossed the Indian boundaries by delivering best performance in 2007 in the global category and was ranked numero uno globally by a reputed mutual funds rating company.
The past asset allocation for the fund has been very aggressive. The fund has been allocating about 91% of the corpus on an average in equities since the past two years, though the cash component has grown since January 2008 due to southward movement of infrastructure-related companies. The fund, which used to diversify the portfolio over all market-cap scrips, has gradually become more of a large-cap-oriented scheme over the last one year. It took all advantage of rally witnessed in small- and mid-cap stocks from time to time. Since the second half of 2007, the portfolio has developed a bias for large-cap stocks. Currently, 51.04% of the assets are invested in companies with market capitalisation of more than Rs 8,284 crore.

With rising AUM, UTI Infrastructure Fund increased the count of stocks in the portfolio. It operated a reasonably diversified portfolio of over 47 stocks on an average in the past one year.

The sector strategy for the fund has also been in line with the stated objectives. Sectors such as power, telecom, engineering, housing & construction and oil & gas have been the most favoured sectors since the past one year. The fund manager has followed buy and hold strategy for reaping good growth in stocks.

The fund’s performance history, compared with other infrastructure funds, is healthy and the fund has been one of the best-performing ones. Going forward, the thrust on infrastructure development is expected to continue and many more opportunities in the sector are expected to unfold. Although high in risk than diversified equity funds, infrastructure funds offers a good deal as we look at the current potential available. It will be wise to opt for a less volatile fund with well-diversified portfolio.

UTI Infrastructure fund certainly deserves to be a part of investment portfolio to gain from infrastructure investment potential.

Recommendations Mutual Funds

·  Sundaram BNP Select: Invest

·   Sundaram BNP Paribas India Leadership Fund: Hold

·  HSBC Equity Fund: Invest

·  Kotak 30: Invest

·  Principal Tax Savings Fund: Invest

·  Kotak Opportunities: Invest

·  Reliance Equity: Hold

There are five different Gold based ETF’s available for trading as well as investments on the NSE. Below, we list them one by one:

Benchmark Gold BeES:
Thiswas the first off the block Gold ETF available in India for trading and investment. This comes from the Mutual Fund house called “Benchmark Asset Management Company”, which is the primary front runner in the Indian Markets for introducing the ETF Funds trading in India. The Benchmark Gold BeES ETF has managed to give consistent returns to the investors and matches the returns of all the other Gold based ETFs. ICICIDirect Trading Symbol: GOLDEX

UTI-Gold Exchange Traded Fund:
Closely following Benchmark was the UTI-Gold ETF and is one of the best performers in the Gold based ETF segment. It has the long standing trusted name of UTI Asset Management Company and has been a hot favourite for investors looking for investing in Gold based ETF or Exchange Traded Funds. ICICIDirect Trading Symbol: UTGOLD

Kotak GOLD ETF:
It was in June 2007, when Kotak Mutual Fund house decided to launch the Kotak GOLD ETF, and this fund has also lived up to the investors expectations. ICICIDirect Trading Symbol: KOTGOL

Reliance Gold Exchange Traded Fund:
How can Reliance, which is a real big name in India, be left behind? Reliance Gold Exchange Traded Fund or ETF too have a Gold based ETF and this fund too has managed to live up to the expectations of the investors. The returns are similar to those of the other Gold based ETF available in India. ICICIDirect Trading Symbol: RELGOL

Quantum Gold Fund:
A new fund from the Quantum Fund house called the Quantum Gold Fund. Returns similar to the ones by the other Godl based ETFs. ICICIDirect Trading Symbol: QUGOLD

So now the investors looking for investing in Gold that too specifically in Gold based ETF now have a wide variety and choice. The interesting thing is that the returns on all these various Gold based ETF’s have been almost similar. The only thing an investor should be careful about is the expense ratio or fund management charges. Though the are ETF, so the only thing an investor needs to pay is the brokerage, but sometimes the ETF may also levy a fund management fee from the investors.

We never bother with the above precautionary statement, blurted out in fast-forward mode at the beginning and end of every communication emanating from various asset management companies (AMCs).

For most retail investors going alone in the surging equity markets, friends, associates and tele-channels, proved to be the first and last advice centres. And as the markets were running faster than a doped athlete (with mutual fund houses offering returns as high as 100%), investors threw caution to the winds.

But what goes up, comes down. Struck by incessant market volatility presently, mutual funds are no more the safe haven that they once were. Returns have fallen worse than a pack of cards over the last few months, and people like Anand are learning their lessons the hard way.

There are funds that have delivered an annual return of close to 50%. Reliance Diversified Power Sector Retail, the best in the country, has returned 49.82%, where as Taurus Libra TaxShield and DWS Investment Opportunity fund has given 42.52% and 40.34% returns respectively, to become the second and third best funds in the country.

On the other hand, UTI Growth Sector Fund-Software has left investors gasping for breath by giving a negative return of 23.43%. No doubt, it will go down in history as the worst fund between June 07’ to May 08’; this is closely followed by Kotak Tech Fund that gave an annual negative return of 22.15%.