October 08, 2017

SEBI lays out 6 categories & 38 sub-categories for open ended MF schemes to classify into

Story on SEBI's circular of Oct 6, 2017, on categorisation of mutual fund schemes

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1030425

SEBI lays out 6 categories & 38 sub-categories for open ended MF schemes to classify into
    Securities and Exchange Board of India today laid out new
norms for categorization and rationalization of open ended mutual fund
schemes, following which the total number of schemes is likely come down.
    There are around 830 open ended schemes in operation at present as per
current classification by Association of Mutual Funds in India. Of these, 257 schemes are classified by AMFI as income, 316 as equity, 28 as balanced, 52 as liquid, 41 as gilt and 42 as tax-saving equity.
    These schemes will have to categorise themselves as per the new Sebi
norms which specify 11 categories for equity funds, 16 for debt funds, seven
for hybrid or balanced funds, two for solution-oriented funds and one each
for ETFs (exchange traded funds) and fund of funds.
    One only one scheme will be permitted per category for a fund house, SEBI
said.
    Further, after classifying a scheme in any one of these categories, the
fund house will to ensure a minimum threshold of investment in specific type
of securities or asset class.
    For instance, a mid cap--and a small cap--equity fund will have to
minimum 65% exposure to mid cap stocks and small cap stocks.
    Among debt funds, an ultra short duration fund will require its portfolio
duration to be between three months and six months, while a low duration
fund's portfolio duration will have to be in the 6-12 months range.

IMPACT
    With the latest move by SEBI, the number of mutual fund schemes is likely
to come down.
    A fund house having more than one schemes with similar investment
objectives and which can not be fit in more than one of the new specified
categories will have to merge these schemes into one category.
     According to LIC Mutual Fund's CEO, Raj Kumar, it was getting too
confusing for investors to navigate multiple schemes with similar investment
objectives.
    "The clear definition of the schemes will give clarity to the investors
where a scheme is investing," said Gopal Agrawal, chief investment
officer-equities at Tata Mutual Fund.
    SEBI said in today's circular that there was as need to bring in
uniformity in the characteristics of similar type of schemes launched by
different mutual funds.
    Going forward a fund house will be able to successfully get SEBI's
approval for a new scheme launch only if it does not already have a scheme in
the category under which the new scheme falls.
    For equity funds investing in large cap, mid cap and small cap stocks,
SEBI has simplified matters by laying out their definitions.
    Large cap companies will include the top 100 companies by market cap
while mid cap companies will include the next 150 companies by market cap.
Small cap companies are defined as those which fall beyond the top 250
companies by market cap.
    Based on current market cap levels, and using the new definitions, the
smallest large cap stock has a market cap of 260 bln rupees while the
smallest mid cap stock has a market cap of 76 bln rupees, according to
Agrawal.

TIME TO COMPLY
    SEBI has given fund houses time till Dec 6 to analyse each of their
existing schemes and revert to SEBI with the category classification of each
scheme and proposals, if any, to merge multiple schemes into one category.
    Within three months after SEBI reviews a fund house's proposals and issues its observations, the fund house will have to have ensure completion of all action to comply with the new scheme categorisation norms.  End

October 06, 2017

MF debt exposure to money mkt & short term paper rises in Jul-Aug

A story I wrote yesterday for the news organisation I work for currently:



MF debt exposure to money mkt & short term paper rises in Jul-Aug
     Debt funds chose to maintain a high investment presence at
the lower end of the yield curve for the second consecutive month in August,
an analysis of the latest mutual fund deployment data from Securities and
Exchange Board of India released on Wednesday showed.
    Investments by debt funds, gilt funds and balanced funds collectively
held 20.1% of their aggregate debt assets in money market securities at the
end of August. It followed a 22.8% exposure to money market securities as of
July-end and a 15.0% one as of end of June.
    The analysis excluded liquid funds since they have to mandatorily stay
invested in money market securities having maturity less than three months.
    Excluding the assets held by liquid funds, the total debt assets of
mutual fund schemes totalled 9.60 trln rupees as of August-end of which 1.93
trln rupees were invested in debt securities having maturity of less than 90
days, the data under review showed.
    From June-end to August-end the aggregate debt assets of the non-liquid
fund schemes clocked a growth by 16% while their exposure to money market
securities jumped higher by 55%.
    Liquidity is usually the main consideration behind a short-term, or
long-term, debt fund being invested in money market securities but that does
not explain the a higher level of above 20% exposure to these securities.
    "In addition to liquidity consideration, in the last couple of months
there has been a general rise in yield and fund managers have likely chosen
to reduce their longer-duration securities exposure and park it in money
market securities," said R. Sivakumar, head of fixed income at Axis Mutual
Fund.
    The shift from longer-duration debt to debt with shorter maturities is
also evident from the fact that mutual fund schemes have also increased their
exposure to debt market securities with maturity terms between 90 days and
one year.
    At the end of August, the investment in debt paper having 90-365 days
maturity was 2.03 trln rupees, or 21.1% of aggregate debt assets held by
funds other than liquid funds. This was higher than the exposure of 19.0% at
the end of the preceding month.
    With funds other than liquid funds jacking up their money market exposure
in the last two months, preference for some certain types of money market
instruments has also increased.
    In the combined holdings of liquid funds and other funds in money market
securities, the exposure to collateralised borrowing and lending obligations,
which are typically one-day instruments, has shot up by 76% to 808 bln rupees
as of August-end from 458 bln rupees at the end of June.
    This meant that of aggregate money market investments by all funds, these
CBLO instruments, accounted for 14.9% at the end of August, up from just 9.8%
at the end of June.
    The bulk of aggregate money market exposure of funds is in commercial
paper whose exposure has stayed consistent around the 49% level in the last
three months.  End

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1029705

October 05, 2017

Hybrid (balanced) funds recent performance

Story I did earlier this week analysing recent performance of hybrid (balanced funds)

http://www.cogencis.com/differentiators/ShareNews.aspx?newsId=1029274

Hybrid funds record fall in Aug-Sep returns as equity mkt declines
Oct 3
NEW DELHI - The hybrid schemes of mutual funds, which have seen assets
rise multi-fold in the last one year, are struggling to deliver alpha returns
in the last two months on the back of equity market indices falling by around
2% on month.
The average net asset value of 52 equity-oriented hybrid funds fell at
the end of August and September, an analysis of data from Value Research
showed. These funds recorded positive on-month returns or a rise in net asset
value in the rest of the calendar year.
The average on-month return was (-)0.2% for these funds at the end of
last month, following an average return of (-)0.3% at the end of August. The
analysis covered returns of the direct plans-growth option of the hybrid
funds.
This follows declines of 2% and 1.2% on month in the equity market
benchmark index of Nifty 100 Total Returns at the end of September and
August, respectively.
Many hybrid funds have been consistently having an exposure of 75-80% to
equities which suited them till recently when markets were doing well and
their performance was looking fantastic, according to Radhika Gupta, CEO of
Edelweiss Asset Management.
UNDERPERFORMANCE
The equity-oriented hybrid funds have also been underperforming in the
last two months, the analysis showed.
At the end of last month, the average one-year return of the funds under
review was 13.1%, which trailed a 13.5% one-year return a hybrid fund would
have got had it invested 70% in Nifty 100 Total Returns index and 30% in
10-year gilt paper.
As of the end of August, too, the average one-year return of
equity-oriented hybrid funds had trailed the derived benchmark. The preceding
two months, however, had seen these funds outperform (see table below).
According to Aashish Sommaiyaa, CEO of Motilal Oswal Asset Management,
hybrid funds were being promoted in the fund industry on the idea of
conservatism but many of these funds were taking aggressive bets in equities
with high-beta stocks in their portfolios.
"High-beta equity holdings can do enough damage to destroy whatever a
hybrid fund tries to cushion with debt," he said.
GROWTH DYNAMICS
Hybrid funds have seen net inflow of 389 bln rupees into them in Apr-Aug,
according to last available data from the Association from Mutual Funds in
India, 4.5 times more than in the same period a year ago.
This rate of growth is higher than 3.5 times on-year rise in net inflow
into equity funds to the tune of 581 bln rupees in Apr-Aug this financial
year. Debt funds, on the other hand, have seen net inflow fall 21% on year
for the same period.
Hybrid funds have become popular in the last one year among fixed income
investors who have been disappointed with declining interest rates from their
savings in banks.
As a part of their marketing drive on hybrid funds, many fund houses have
been promoting monthly dividend payout of hybrid funds in a big way,
according to Gupta.
But this has come with an underlying promise of monthly income and a
boost in returns from the equity exposure. But equity markets can fall
without notice, say mutual fund analysts, and expose the equity component of
hybrid funds to shocks.
"If you look at a month like September when a hybrid fund may be down
1-2% on month, the dividend payout may have to come from capital and not
reserves," said Gupta.
DEBT-ORIENTED HYBRID FUNDS
Other than equity-oriented hybrid funds, the mutual fund industry also
offers debt-oriented hybrid funds where the equity portion is sought to be
restricted to below 35%.
Among these funds, the ones with 30-40% exposure to equities have also
struggled to deliver alpha returns in the last couple of months.
The average returns of 19 debt-oriented hybrid funds with aggressive
equities component declined 0.1% on month as of the end of September, which
was the first time it recorded a fall as of any month-end in the current
calendar year, an analysis of the data under review showed.
However, on their one-year returns, these funds managed to offer an
average return which was higher than the benchmarks derived in the analysis.
At the end of last month, the average one-year return of the 19
debt-oriented hybrid funds was 10.8%. It was higher than what such a fund
would have got by investing 34% in Nifty 100 Total Returns index and 66% in
10-year gilt paper.
Going forward, if equity markets remain subdued and the performance of
hybrid funds suffers due to their equity exposure, the fund houses will find
it extremely difficult to position hybrid funds as an alternative to bank
deposits where a fixed rate of interest is assured and known upfront.
The table below lists one-year average returns of direct plans of
balanced funds and derived one-year returns of benchmarks.
As of end of:
----------------------------------
Sep       Aug        Jul       Jun
----      ----       ----      ----
Hybrid funds (equity oriented)    13.1      13.2       15.9      15.6
Derived hybrid benchmark*         13.5      13.3       15.8      15.2
Hybrid funds (debt oriented)      10.8      11.3       13.0      13.6
Derived hybrid benchmark**        10.1      10.1       11.4      11.2
*  Assuming 70% of equity (Nifty 100 Total Returns) and 30% of debt (gilts)
** Assuming 34% of equity (Nifty 100 TR) and 66% of debt (gilts)
End