ET Bureau; Nikhil Walavalkar & Prashant Mahesh

With yields on 10-year government bonds crossing the 8%-mark recently, investors are going in for a tactical shift in their fixed income portfolio. As against liquid plus and funds with tenure of less than a year, they are now choosing to park funds for the next couple of months in short-term funds.

Many are betting that yields will spike temporarily to the 8.25-8.35% range, which they feel is an ideal time to invest in gilt funds. Investing in gilt funds — if there is such a spike — provides an opportunity to earn a return of 10% per annum from gilt funds over a 2-year period, experts feel.

“An yield of 8.35-8.5% on a 10-year benchmark bond is a good entry point for aggressive fixed income investors to enter long-term gilt funds with a 2-year timeframe,” says Devendra Nevgi, founder & principal partner of Delta Global Partner.

MUMBAI: Even as gilt funds lose money when interest rates rise, those that invest in the money market gain. Money market is the shorter-term market where the tenure of instruments is less than one year.

Liquid funds are investors’ popular choice. They invest in very short-term securities such as commercial papers, short-term treasury papers and bank deposits. These instruments do not lose much value when rates rise. So, if one holds on till the maturity of the product, the investor stands to gain from a rising yield. So, while they are offering returns of around 4-5% currently, this number will rise when the Reserve Bank raises rates later in the year.

Floating rate funds are another good option when interest rates are expected to rise. A floating rate fund invests a major portion of its corpus in floating rate instruments. So, when rates rise, the coupons go up, fetching the investor better returns.

The merit of floaters is self-evident from the returns. Most floating funds have delivered a return of 4-4.5% for the past year, as per Valuereserach, whereas income funds have delivered just over 2%.

Liquid fund returns pale in comparison to floating rate funds, but this is because the the tenure of the investments is lower. Floaters comprise instruments for medium term and long term, so their returns are higher. (There are floater funds with both short and long tenures.) Another difference is that when rates rise, yields of floaters rise immediately. That of liquid funds happens with a lag.

Thus, both floating rate funds and liquid funds help guard capital. As a rule, floating rate fund would give better returns than a liquid fund, but holding period here is longer. Investment advisors say both the categories should be used as parking lots for those who are waiting for the right opportunity to get into bond funds.

Investors should also bear in mind that from April 1, interest rates on savings accounts will generate returns on a daily basis. So, for instance, if a depositor maintains proceeds from sale of real estate in his savings accounts for a few days, it will generate him annualized interest at the rate of 3.5%.

MUMBAI: An over-100% gain in returns on mutual funds is a good enough reason to recognise the top performers. ET NOW and mutual fund tracker Lipper will fête astute fund managers, the best-performing fund houses and top-quartile fund schemes at an event here on March 19. The past one year has been good for mutual fund investors. Investors who have parked their money in plain vanilla mutual funds have (on an average) gained in excess of 100%, if the category-return profile is considered. Though the market has helped (as it gained over 96% over the past one year), there are many fund managers who have outperformed key indices by a mile. ET Now-Lipper Mutual Fund Awards have been instituted to celebrate excellence in fund management.
ET Now-Lipper takes into consideration at least 36 months of fund performance to decide the winner. Fund groups with at least five equity, five bond, or three mixed-asset portfolios in the respective asset classes are eligible for a group award.
The lowest average decile rank of the three years ‘Consistent Return’ measure of the eligible funds per asset class and group will determine the ‘Asset Class Group Award winner’ over the three-year period.
In cases of identical results, the lower average percentile rank will determine the winner. ‘Asset Class Group Awards’ will be given to the best large and small groups separately. Small groups will need to have at least three distinct portfolios in one of the asset classes — equity, bond, or mixed-asset.
The event will feature a keynote address by Clark Winter, CIO of SK Capital Partners, and a well-known investment manager and author. It will be telecast on ET NOW on March 23.

On Monday, the Securities and Exchange Board of India (Sebi) took a number of steps to benefit mutual fund investors. These included reduction in the New Fund Offer (NFO) period and use of Application Supported by Blocked Amount (ASBA). We take a detailed look at these:
Reduction in NFO period: NFOs launched by mutual funds for open-ended and closed-ended schemes were earlier allowed to be open for 30 days and 45 days, respectively. This has been reduced to 15 days from July 1, except for equity-linked saving schemes.
Industry experts say this will hit them as MF schemes are “push-driven”, that is, they are marketed and sold. Now, fund houses might have to start marketing NFOs before launch, said fund managers.
The Sebi circular also said, “Mutual funds/asset management companies (AMCs) shall use the NFO proceeds only on or after the closure of the NFO period. The mutual fund shall allot units/refund money and dispatch statements of accounts within five business days from the closure of the NFO.”
Said Rajiv Anand, chief executive officer, Axis Mutual Fund, “These changes may impact collections in the short term. But, the challenge will be to put together account statements in five days.”
Asba as an additional way to pay: Asba was developed by Sebi for initial public offerings. Under ASBA, the applicant’s money is debited only on allotment of shares. This has been extended to mutual funds too, starting July 1.
While some experts say this will help investors earn more interest, fund houses disagree. A Balasubramanian, chief executive officer, Birla Sun Life Mutual Fund, said: “It will not make much of a difference. The amount is debited (even now) only on the last day of the NFO period.”
Anand said if the money was getting debited during the NFO period, it was being deployed by the fund to earn returns, which would not happen now.
“If it is used by the fund manager during the course of the NFO, it may earn more returns than what a bank will pay,” said a top executive of an AMC.
Dividends from realized gains: Mutual funds are supposed to pay dividends from actual or realized profits. However, some fund houses use the unit premium reserve (UPR), an unrealized profit, to lure investors.
For instance, if the net asset value of a scheme is Rs 15, one-third (Rs 5) is put away in UPR and the remaining Rs 10 is the unit capital or face value. However, if an investor enters at Rs 15, the fund house pays from UPR.
Sebi has come down hard on this practice. A fund house will now have to book profit to pay the investor. Experts said this would bring down the dividend payout significantly. Rajan Mehta, executive director, Benchmark Asset Management, said: “This will reduce dividend payouts by mutual funds.”
Earlier, fund houses were paying 25-30 per cent dividend, which would come down to 5-10 per cent, said an AMC executive.
No revenue-sharing between FoF and offshore funds: Fund of funds (FoF), which are primarily feeder funds that invest in schemes in other countries, have also come under Sebi’s scanner. The market watchdog has said that fund houses cannot enter into revenue-sharing arrangements with underlying funds (that is, funds in whose schemes the investment is being made).
This may not have much impact because FoFs have not taken off. But, it will benefit investors. “Till now, there was no mandate as to where the FoF would use the revenue earned. Hence, it was being used for marketing and paying commissions to agents. Now, it will be passed on to the scheme and, hence, to investors,” said Balasubramanian.

Our Bureau
Mumbai, March 18
India's first international exchange traded fund (ETF) in India, Benchmark Mutual Fund's “Hang Seng BeEs” listed on the National Stock Exchange (NSE) on Thursday.
On the first day of trading, the opening value of 1,430.90 per unit was higher than notional unit value of 1,251.73 arrived at on the basis of the previous day close of the Hang Seng index.
The daily net asset value (NAV) of a single unit of the fund is arrived at, by calculating the daily Hang Seng index close multiplied by the currency rate of Hong Kong dollar-Indian rupee and divided by 100, Mr Rajen Mehta, Executive Director at Benchmark MF, said.
Settled lower
However, after surging to the day's high of 1,435, the per unit value settled lower and closed at 1,246 per unit.
The Hang Seng index closed at 21,330.67, a fall by 0.25 per cent over its previous close.
On the first day of listing 26,686 units of Hang Seng ETF were traded on the NSE, marking a turnover of Rs 3.35 crore.
Benchmark's open-ended ETF tracks Hong Kong's Hang Seng index, one of the oldest and among the most popular indices on the Hong Kong stock exchange. The index currently comprises 42 stocks and can have a maximum of 50 stocks.
Prior to listing, and during the new fund offer period, Rs 55 crore worth of subscriptions were received for the Hang Seng ETF, Mr Mehta said.
Popular in India
The popularity of ETFs has surged in the Indian market in recent years.
According to the Association of Mutual Funds in India's (AMFI) February-end data, domestic mutual funds are managing assets worth Rs 1,925 crore across gold and index-based ETFs

Aegon Religare to roll out five insurance products
Aegon Religare Life Insurance Limited, a joint venture between Aegon, a Netherlands-based international insurance and pension firm and Religare Enterprises Limited, one of India's leading integrated financial services groups, plans to roll out 4-5 new products in 2010-11.
These products would be a mix of Unit-Linked Insurance Plans (ULIPs) and traditional insurance products.
Addressing the media here, Yateesh Srivastava, chief marketing officer of Aegon Religare Life Insurance said, “We will be coming out with 4-5 new products in 2010-11 and these would be a mix of ULIPs as well as traditional insurance products. Aegon Religare which recorded a premium collection of Rs 46 crore in 2008-09 expects to reach a premium collection of Rs 190 crore by the end of this fiscal.”
The company which has sold over 60,000 policies by the end of February this year has set a target of selling 150,000 policies by the end of 2010-11.
The company on Monday launched the 'Aegon Religare Money Back Plan' in the city.
This is a ten-year plan wherein the customers have to pay premium for a period of five years. Once the customers stop paying premium after five years, they will receive 10 per cent of the sum assured on the completion of the sixth year and 15 per cent of the sum assured on completion of the eighth year.
The policy matures on completion of ten years and the customers get a minimum benefit of 100 per cent of the sum assured depending on the sum assured. The maximum return is 110 per cent of the sum assured.
Talking on the launch of the new insurance plan, Srivastava said, “This plan is aimed at allowing the customers to make provisions for some intermittent financial needs with a certain amount of certainty as they know exactly what will be due both at the money back stage as well as at the maturity of the plan.”
The minimum entry age for this new policy is eight years with the maximum age being 60 years The minimum sum assured for the Aegon Religare Money Back Plan is Rs 60,000 and there is now limit on the maximum sum assured.
http://www.business-standard.com/india/news/aegon-religare-to-roll-out-five-insurance-products/389053/

Banks try to clean books through settlements, NPA sales
With the financial year coming to a close, commercial banks have hastened work on sprucing the health of balance sheets.
Many banks have floated one-time settlement (OTS) schemes for small and medium enterprises and tring to sell non-performing assets (NPAs).
State Bank of India, Corporation Bank, Karnataka Bank and Karur Vysya Bank have already floated an OTS each. Many others are in the process of doing so.
 

Bankers said while such efforts (OTS and NPA sale) are regular activity, the financial crisis and the recent regulatory fiat for increasing the provision coverage ratio are also driving them. The global financial crisis put a strain on corporate, small enterprises and retail borrowers, leading to substantial addition to gross NPAs. Plus, the Reserve Bank of India mandated banks to attain a 70 per cent loan loss coverage ratio by September 2010.
SBI chairman O P Bhatt said the bank would offer a settlement for bad loans to provide relief to small firms hit by the financial crisis. "We have got a large number of units which are stressed...We are trying to incentivise them with a one-time settlement," Bhatt said.
Karnataka Bank chief executive Jayarama Bhat said his bank did not intent to sell NPAs, but had floated a one-time settlement scheme from which it expects to recover substantial amounts. This would also help to reduce outstanding NPAs. Its gross NPAs rose to Rs 612.3 crore (4.5 per cent) in December 2009 from Rs 451.2 crore (3.7 per cent) a year earlier.
Chennai-based Indian Overseas Bank has commenced sale of NPAs for Rs 954 crore, involving 61 accounts. Its gross NPAs rose in the 12 months ended December 2009 to Rs 3,218.3 crore as against Rs 1,718.1 crore in December 2008.
IOB executive director Y L Madan said the due diligence by prospective buyers is through and bank hopes to strike a deal soon. It would help to manage provision coverage.
Similarly, Federal Bank is in the market for sale of assets of about Rs 80 crore. Its chairman M Venugopalan said, thebank was trying to sell some NPAs, “but is not in a hurry. It wants to get better value for assets put on the block”. The outstanding gross NPAs of the Kerala-based private bank stood at Rs 790.7 crore at the end of December 2009, up from Rs 625.7 crore a year earlier.
A Mumbai-based asset reconstruction company said many banks were in the market for a sale of NPAs, but there was a gap between what value banks expect and the price ARCs are ready to offer. Banks prefer cash deals, since the payments are immediate, which add to the revenues for the year, as against securities which could take time to realise gains, based on resolution of NPAs. An SBI official said his bank would not resort to large-scale sale of bad loans. Instead, it would do continuous follow-up with borrowers to ensure better recovery than the income that could be earned by offloading bad loans to other parties.
SBI, the country’s largest lender, saw a significant rise in its gross NPAs to Rs 18,861 crore at the end of December 2009 from Rs 12,723 crore a year earlier.
http://www.business-standard.com/india/news/banks-try-to-clean-books-through-settlements-npa-sales/388805/
SEBI

The Delhi Stock Exchange (DSE), which had postponed twice the launch of equity trading on its platform, is gearing up for a trial run. The Securities and Exchange Board of India (Sebi) has inspected the exchange and a regulatory nod to allow the bourse to trade is expected soon, said a top DSE official who did not want to be quoted.
According to sources in DSE, the exchange expects to begin trading in May. When contacted, DSE head H S Siddhu refused to give a specific date when they plan to begin trading. “We are awaiting an official nod from Sebi,” he said.
DSE has upgraded its central platform for electronic trading with the latest software called ‘Dome’ supplied by Financial Technologies, its business and technology partner.
DSE’s trading terminals will be known as Delhi Online Trading System (DOTS). The bourse has 2,800 listed companies, out of which 1,700 are exclusively listed on its platform. There has been no trading on DSE since 2003. It completed the de-mutualisation process in 2007 by selling 55 per cent stake to investors.

Tinkering with the code

The Securities and Exchange Board of India (Sebi) is reportedly considering two changes to the takeover code which, unfortunately, will not improve the lot of the independent or small investor. The first is to make it mandatory for the boards of target companies to advise shareholders on how to weigh competing bids. This happens in well-regulated markets but is not obligatory in India. Ideally, if a board, with its knowledge of the company it runs, offers impartial advice in a fiduciary capacity on which is the best suitor for the company, then that will indeed be helpful to small shareholders who have neither the acumen nor the resources to get expert advice. On the other hand, people who run a company cannot be impartial about it, particularly when the induction of a new shareholder will be of enormous significance to them. The Indian reality is that even independent directors are hardly ever so and the ability of controlling shareholders’ nominees to put on an independent hat is very uncertain. So, this is a good theoretical idea which, in reality, is unlikely to deliver much.
While independent board advice on competing bids may not actually be forthcoming, the attempt to mandate it is unlikely to do any harm. That cannot be said of the other proposal — to raise the trigger, form the present 15 per cent to 25 per cent, at which a substantial acquirer has to make an open offer to all shareholders. It is true that Indian promoters today have a much higher stake in the companies they control, compared to the situation that prevailed when the takeover code came into play. Therefore, it will be logical for Indian rules to move towards global practices where controlling stakes are higher. But two arguments militate against the proposal. The open offer is for the good of small shareholders — to ensure that they also get the control premium that an acquirer is willing to pay to those who control a target company. Any dilution of it, delaying its onset by as much as 10 percentge points on a base of 15, will go against the interest of the small shareholder and be helpful only to promoters. Though, typically, controlling stakes today exceed 25 per cent (every promoter tries to ensure a stake in excess of that to prevent a special resolution from being bulldozed through), in some cases they don’t. Thus, if the new trigger is introduced, there will be greater space for controlling interest to change hands and control premium to be paid without the small shareholder coming into the picture at all.
It is disingenuous to argue that the proposed change seeks to bring Indian regulations in line with global practices, because in this matter, there is no one global practice, with European and US rules differing widely. On the other hand, it is necessary for Sebi to live down its past record of tilting the takeover code heavily in favour of promoters and against independent shareholders. This was justified initially on the ground that past regulations prevented Indian promoters from building up large stakes and so they needed time to build stake and security without having to worry about takeover threats. It is high time the takeover code tilted in favour of the small shareholder. That will both boost the equity cult and create an efficient market for managements.

The headline inflation rate, as measured by the wholesale price index (WPI), touched a 16-month high of 9.89 per cent in February and is certain to be in double digits on a point-on-point basis in March.
The rise in inflation rate was primarily driven by fuel prices and the low base effect. The overall inflation is set to accelerate in the current month due to the increase in excise duty, which will push up the index in March.
With the prospect of double-digit inflation and with the growth in industrial output touching 16.7 per cent, analysts expect the Reserve Bank of India (RBI) to raise policy rates like repo and reverse repo by 25-50 basis points in the fourth-quarter monetary policy review on April 20. “Given such a high rate of inflation, it is quite possible that RBI would raise the rates in the fourth quarter policy review. Moreover, as the market has already factored in a 25-50-basis-point increase in rates, there might be a higher increase,” said Sumita Kale, chief economist, Indicus Analytics.
Finance Minister Pranab Mukherjee had said after the Budget that the increase in duty rates would lead to about 0.41 per cent rise in the overall inflation rate.
According to Chief Statistician Pronab Sen, the inflation rate, at 8.56 per cent in January, had breached RBI’s projection of point-on-point inflation rate of 8.5 per cent by March. During the corresponding period in 2009, it was 3.50 per cent. For December, the final rate was revised to 8.1 per cent from an earlier provisional estimate 7.31 per cent.
“I would expect another month of inflation roughly like this because the base effect is going to be very strong... after that, inflation should begin to die down,” said Chief Economic Advisor Kaushik Basu.
With the inflation spreading to fuel and manufactured category and structural problems playing a greater role in creating inflationary pressures, analysts say inflation in 2010-11 will come down from double-digit levels, but will continue to be at a high single-digit level.
“While rising prices are partly driven by cyclical factors, they have also been further augmented by structural distortions. Assuming normal monsoons, fading base effect, and a healthy winter harvest, we expect the inflation rate to come off from double-digit levels. However, given the growing influence of structural factors, WPI would likely remain in high single digits rather than the preferred range of 5 per cent. This, in turn, could potentially keep the rate structure higher,” said Rohini Malkani, economist, Citigroup India.
The Inflation rate for primary articles stood at 15.54 per cent in February, as against 6.85 per cent during the corresponding month in 2009. However, on a month-on-month basis, the prices of primary articles registered a decline of 0.88 per cent. Fuel prices showed significant increase and registered an inflation rate of 10.19 per cent, against a decline of 3.40 per cent last year. Prices of high-speed diesel oil grew at the fastest rate, of 8.85 per cent, in the fuel category. On a monthly basis, fuel prices rose at the rate of 1.54 per cent in February.
The Inflation rate for manufactured products stood at 7.42 per cent in the month under consideration, against 4.78 per cent in the corresponding period last year. On a month-on-month basis, prices of manufactured products increased at the rate of 0.61 per cent.
Inflation for cereals and pulses on a year-on-year basis stood at 11.69 per cent and 35.58 per cent, respectively, against 12.66 per cent and 16.88 per cent in the corresponding period last year. Price of food articles on a month-on-month basis showed a marginal decline of 0.41 per cent in February. Sugar prices continue to be high, with a year-on-year inflation rate of 55.47 per cent.

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