Mutual Funds: Value averaging to be new investment strategy

A new investment theory is gaining favour with wealth managers and mutual funds, something that could soon replace the conventional systematic investment plans (SIP) strategy. Termed value averaging investment (VAI), the technique allows investors to determine the size of investment needed (at the time of investing) to get desired returns. Value averaging works much like rupee cost averaging, which forms the basis of systematic investment plans.

“While SIP investments are made on fixed dates, irrespective of market conditions, VA investments are made on dates when the markets look investible. The best aspect of VAI is that it enables investors to buy stocks at dips — a facility that is not really possible in SIPs,” said Nipun Mehta, head of Societe Generale Private Banking India.

In value averaging, the investor sets a target growth rate or amount for his portfolio each month, and then adjusts the next month’s contribution, according to the relative gain or shortfall made on the original asset base. To cite an example, investor A needs to invest Rs 1,000 (calculated using statistical formulae) every month to get 15% return (on his investments) over a time-frame of 10 years. A invests Rs 1,000 in the beginning of the month (usually when the market is trading lower); at the end of first month A’s investment has declined to Rs 800 as a result of the further fall in market. To correct the course to target growth rate, A invests Rs 1,200, marking net term investments to Rs 2,000. Conversely, had the markets gained and A’s investment surged in value by Rs 200 (taking the total value to Rs 1,200 at the end of the first month), he would only have to pay Rs 800 in the second month.

“Under VAI, investors contribute to their portfolios in such a way that the portfolio balance increases by an amount calculated by a formula-based technique, regardless of market fluctuations. As a result, when the market declines, the investor contributes more and when the market goes up, the investor contributes less,” said Anil Rego, CEO of Right Horizons — a wealth management firm.

Though VAI has no historical references, returns (asset growth) could well be very close (or a bit high) to those offered by investments through SIPs. While VAI enables flexible investing, there is a good possibility that the fund manager may not be holding cash at the time of a sudden dip in market value. Another negative aspect to VAI is the fact that as the investor’s asset base grows, shortfalls (in case of market slumps) become too large to replace (especially for retail investors). While several fund houses are planning to introduce VAI plans on existing MF schemes, the benchmark MF has attached value averaging transfer plan (VTP) in its derivative fund, equity fund and derivatives opportunities fund.

Source: The Economic Times (This article is written by Shailesh Menon)

Mutual Funds get step-motherly treatment from distributors

Distributors of mutual funds, are selling more of fixed income products, ever since SEBI (Securities & Exchange Board of India) introduced the abolition of entry load on mutual funds. Under the new norms investors must pay fees separately to the distributor as compared to the earlier practice where commission were paid out of entry loads charged by the mutual funds. If initial trends are anything to go by distributors are now earning more from selling fixed income products compared to mutual funds, in the changed environment .

In recent months banks have slashed interest rates on bank fixed deposits leading to a revival in interest in small savings, post offices and GOI (Government of India) bonds. Company fixed deposits which made a comeback due to reputed corporates like Tatas and Mahindras raising money, along with NCDs (non-convertible debentures) from Shriram Transport Finance and L&T Finance, have found favour with investors. As per distributors corporate fixed deposits worth Rs. 600 crore (Rs. 6 billion) per month are being sold. Shriram Transport Finance and L&T Finance both raised Rs. 1,000 crore (Rs. 10 billion) each, through NCD issues in August and September. Compared to this, fresh sales in mutual funds are down. For the month of August 2009, equity mutual funds registered fresh sales of Rs. 4,184 crore (Rs. 41.84 billion) against Rs. 8,885 crore (Rs. 88.85 billion) in July 2009, a drop of 52.9%. Contribution of fixed income products in our product mix has gone up from 10% to 20% year on year for the month of August 2009, says Rajiv Deep Bajaj, vice- chairman and managing director, Bajaj Capital.

On the other hand, contribution from mutual funds, which was 20% in 2008-09 , slipped to about 10% since the regulation was introduced on August 1, 2009. Distributors on an average would earn as much as 3% upfront commissions through entry load and trail fees from sales of mutual funds. This fee is now down to about 1%, including both upfront and trail, for smaller players, making selling of mutual funds unremunerative. On the other hand the company fixed deposits are assuring at least 1% upfront commissions. Sales of mutual funds are down by 40%, and investors are buying more of fixed deposits and non convertible debentures. As the equity valuations go up, investors are seeking fixed income products. This makes the product easy to sell for distributors in tough times.

Source: The Economic Times

Abolition of entry load hits mutual fund sales

Abolition of entry loads on equity mutual fund schemes has sharply hit sales of equity schemes in the very first month of the new rule coming into effect. Industry sources admit this is the fallout of the recent SEBI regulations scrapping entry loads completely and introducing a variable load structure for all mutual fund investments with effect from August 1, 2009.

Equity assets have recorded a net outflow to the tune of Rs. 142 crore (Rs. 1.42 billion) in August, despite a 5% increase in the overall industry’s assets under management (AUM) to Rs. 7,56,638 crore (Rs. 7566.38 billion). “Around 80-90% drop in the equity assets can be attributed to the scrapping of entry loads as independent financial advisors (IFAs) did not sell equity products in August, 2009,” said a senior official at a fund house. “Even banks have slowed down the sale of equity mutual products drastically, as their sales persons have also seen a sharp decline in their commission structure,” he added.

Thus, the share of equity assets in the total industry AUM has slipped further to just about 24%, including ELSS, from over 25% of assets until last month. ULIPs, on the other hand, are now expected to see aggressive push, both by distributors and producers of these products.

While the industry had been patting itself on the back for recording over Rs 7.5 lakh crore in AUM, the fact remains that it has been driven largely by inflows into debt schemes. Banks have been a major contributor to the rise in industry AUM. For the fortnight ended August 14, 2009, banks had deployed about Rs. 1,56,900 crore (Rs. 1569 billion) with mutual funds.

Source: The Economic Times

Indian Mutual Funds dominate world top-100 stock funds in Q2

Fifty one India-focused funds were among the world’s top 100 performing stock funds in the quarter to June as domestic shares leapt by nearly half, recording their biggest surge in 17 years, data from fund tracker Lipper showed. They are led by those investing in shares of infrastructure firms, a favoured theme in Asia’s third largest economy after the Congress-lead coalition won a strong mandate in April-May polls raising hopes for higher spending on roads, ports and bridges.

The Lipper’s list of 29,942 world stock funds with a track record of at least a quarter showed India funds recording an average 50.45 per cent jump in their net values in three months to June as compared to just over 18 per cent gain for the fund group. India funds were led by Naya Bharat Property Company fund, domiciled in the Isle of Man, which gave a return of nearly 135 per cent, followed by JM Core 11 Fund, a concentrated 11-stock portfolio, which rose more than 100 per cent.

“Stocks in India were spurred on by a steady diet of positive macro data and the strong victory of the incumbent Congress party in national elections mid-May” said Rajeev Baddepudi, a senior research analyst for ASEAN at Lipper.

Indian shares surged 49.3 per cent during April-June, the fastest in Asia after Vietnam, on signs of economic recovery and hopes for market-friendly policies by the re-elected Congress-lead government. The gain was the biggest rise for the benchmark in any quarter since it soared 124.5 per cent in January-March in 1992 when Manmohan Singh, the then finance minister, kicked off reforms to open up the economy.

Infrastructure: Hopes are high that Manmohan Singh, currently in his second-term as prime minister, would further open up the economy to foreign investment and remove policy bottlenecks. This has led to sharper surge in shares of infrastructure firms, with capital goods stocks rising nearly twice as fast as the benchmark index in June quarter, lifting portfolio gains for funds primarily investing in the sector. For instance, all top five Indian funds part of the Lipper’s top-100 list are infrastructure or property funds. Fund houses JM Financial Asset Management and Sundaram BNP Paribas Mutual Fund have four funds each in the list, while Benchmark, India’s passive fund manager, DBS Cholamandalam, SBI Funds Management and Taurus Mutual Fund had three schemes each.

Source: The Economic Times, July 3, 2009

Mutual Funds: Hassle-free option to invest in gold

Gold has suddenly become a preferred investment option thanks to economic turmoil. Not surprising, as it was always considered a safe hedge against such developments. However, it need not necessarily come into your investment radar only during uncertainty. According to investment experts, gold should always be part of the portfolio of a person who wants to preserve his wealth.

“Diversification is an important to tool to preserve one’s wealth over a long period. When we talk to our clients we tell them fixed deposits, corporate deposits, stocks, gold… all should be part of their portfolio,’’ says a wealth manager with a bank. “We explain to them that spreading their investments across asset classes will help them withstand the bad performance of a particular investment. For example, recently investments in gold fetched handsome returns when stocks were faring badly,’’ he adds. However, the new crops of investors have left financial advisors a worried lot. They say most new investors have unrealistic expectations from gold. “Most remember that gold had given very high returns a few months ago. They believe it would happen often,’ says the wealth manager.

Transcend Consulting director Kartik Jhaveri says, “Investors should not focus on such sporadic returns. It is mainly because of volatility. For example, the dollar’s weakness, crude prices going up, uncertainties in the global economy would have a positive impact on gold prices.’’ He says, “Over a long period gold would give around 6-8% returns. If you look at the returns in 10 years, it would just about beat inflation.’’ Another dilemma faced by investors, point out consultants, is that they don’t have a definitive idea about which is the ideal form of investing in gold. Many investors apparently would still prefer buying gold coins and bars sold by reputed banks (if not jewellery) and safe-keep them in their bank locker.

This method, according to investment experts, is the least preferred and inefficient option. This because most banks don’t buy back gold and the investor must then turn to retailers to strike a good deal. Meanwhile in the retail market, often jewellers prefer exchanging the coins or bars with ornaments itself rather than pay cash to such customers. So, if you are investing in physical gold, be prepared for some hiccups when it comes to liquidating it.

Jhaveri says it is better for investors to go for exchange-traded gold funds, especially if they are looking for a hassle-free investment option. These are mutual fund schemes investing in gold that you can buy and sell in a stock exchange. Since you don’t own gold in the physical form, you don’t have to worry about liquidating it. You can sell the units of the scheme in a stock exchange at prevailing prices. Though it may look the most convenient form of owning gold, the idea is yet to catch up with common investors, say financial consultants.

If you are a bit more adventurous, then you may consider directly owning stocks of some gold mining companies. Sure, they carry more risk, but they can also reward you, says Jhaveri. If you have even more appetite for risk, you may even consider trading in gold futures in the commodity market.

Source: The Economic Times, July 2, 2009