Close ended funds

Close ended funds

Close ended equity funds have caught frenzy due to the current market euphoria. Over 27 schemes were launched in the last 9 months mobilizing Rs 4400 crores. By definition, a close ended fund can be bought ONLY during the NFO (New Fund Offer) period. Post; the unit gets listed on the stock exchanges for the purpose of liquidity. 

Unlike an open ended fund, the fund house do not provide window for on- going sale and re purchase of units. Ideal, if you’re willing to commit your money for a defined period.

What is the justification for close ended funds? The proponents point to the following:

• Brings a forced discipline
• Need for funds with a longer horizon, free from the worry of sudden inflow - outflow
• Fund manager shall take concentrated positions in stocks / sectors without pressure on short term performance
• Availability of good quality companies with sustainable business models & proven track record
• Larger bias towards midcap stocks

 Let’s take a look at the performance of ELSS (Equity Linked Tax Saving Schemes) that has similar characteristics (3 year lock in ) visa vie the open ended small & mid cap schemes:

Small & Mid cap Funds	3 Year Return	ELSS Category	3 Year Return	Performance diff
Reliance small cap	27.50%	Reliance Tax saver	24.40%	-3.10%
Birla pure value	25.40%	Birla Tax plan	17.90%	-7.50%
I Pru mid cap	23%	I Pru tax plan	22%	-1.00%
UTI Midcap	25.20%	UTI L.T Adv	16%	-9.20%
DSP Microcap	23.10%	DSP elss	20.50%	-2.60%
Franklin small cos	29.80%	Franklin elss	19.10%	-10.70%
I Pru discovery	27.50%	I Pru tax plan	22%	-5.50%
Religare Mid cap	21.80%	Religare elss	18.60%	-3.20%
HDFC Midcap opp	22.80%	HDFC  Elss	17.40%	-5.40%
L&T Midcap	21.80%	L&T elss	13.90%	-7.90%
Axis Midcap	25.20%	Axis elss	25.20%	0.00%
Kotak midcap	17.90%	Kotak elss	13.50%	-4.40%
SBI Magnum midcap	24.80%	SBI elss	20.20%	-4.60%
Source : Moneycontrol
CAGR returns as on 14th august 2014

It is ironical to note that most of them have underperformed their own open ended schemes for a similar period. In the absence of any distinct advantage, Investors are better off in an open ended fund that provides stable & consistent performance, liquidity accompanied by low volatility.

Happy investing!

Disclaimer: Views are personal.No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Bonus Stripping

I understand from the media that the mutual fund industry body AMFI (Association of mutual funds of India) last week communicated to all its members refraining against prior information regarding Bonus declaration, indirectly turning the spotlight on JM Financial’s Arbitrage Fund.  It is widely believed that this scheme has mobilized over Rs 5000 Crore in the month of July 2014 under its bonus plan.

Bonus/Dividend stripping provide investors opportunity to set off their short capital gain tax otherwise, ends up paying tax @ the marginal rate. This involves buying the mutual fund units three months prior to the record date of the dividend/bonus declaration. Upon declaration of the same, NAV (Net Asset Value) of the scheme falls correspondingly leading to a notional capital loss. Unlike dividend plan, Bonus option does not attract dividend distribution tax making it more lucrative.

In the past, one of the larger fund houses too followed this path, declared a stupendous 86% dividend in their LIQUID FUND during the year 2007. I suspect, even the best performing equity fund in their history would have done this. Again in the year 2009, the same fund house declared 30% dividend in their Liquid scheme. Last year, one of the Income Funds declared bonus and raised a huge sum. It is an open secret that dividend/bonus stripping are done to appease certain class of investors for their tax planning, which is against the spirit of the law.

Just to remind readers, as per the mutual fund structure, the role of a Trustee is to protect the interests of the unit holders and ensure full compliance with regulatory guidelines in letter and spirit.

I fail to understand why media, AMFI and all the stake holders were oblivious to such incidents in the past. Irrespective of the stature of the fund house, these acts deserve strong condemnation. It would be an ethical gesture, if Fund houses voluntarily withdraw bonus option in their schemes to avoid such recurrences in future.

Mutual Funds have a bigger role in the financial inclusion. As we stand, 70% of the industry aum (assets under management) is controlled by the top 5 cities.

Happy investing!

Disclaimer: Views are personal.No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Market Bubble

Nifty rose to an all time high at 7929 on 22^nd august 2014. Unlike last year, the Jackson Hole meeting held between 21- 23^rd August 2014 proved to be a non-event from India’s stand point. US continues to be plagued with challenges of the aftermath of the 2008 recession. As it appears, interest rate shall remain near zero for the foreseeable future due to myriad macro - economic challenges.

In the recent market rally, quite a number of stocks have run up sharply disproportionate to their earnings/fundamentals. The Q1 earnings result for the FY 2014 – 15 is just a case in point. Let’s look at the sample of few companies, their quarterly year on year profit growth and their appreciation in the stock prices. (Appreciation from 3/3/14 to 31/7/14)

Co_Name	Y_o_Y_PAT_Growth	Sh Price Growth
NHPC Ltd	-14.35	27.30%
JP Associates	-124.1	44.32%
Sesa Sterlite	-188.7	66.38%
Tata Motors	-44.02	8.78%
Reliance Power	-83.77	52.77%
Ashok Leyland	-66.17	119.61%
Adani Power	-80.44	57.88%
H P C L	-103.15	47.86%
Adani Enterp.	-100.76	64.38%
B H E L	-58.43	40.35%
DLF	-51.62	42.47%
IDBI Bank	-65.85	58.63%
I O C L	-181.56	32.16%
Cairn India	-67.63	-3.53%

There are at least a dozen more companies that can be added to this catalogue. The objective is not to put these companies in poor light but, to caution investors against falling prey to the current market euphoria.

Whether you’re a direct equity or a Mutual Fund investor, the focal point should be the quality of the stocks.

Happy investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Arbitrage funds

Arbitrage fund, the lesser known product category has suddenly come to the limelight after the changes in the taxation structure of the debt oriented mutual funds. Recently, a mid-sized mutual fund galloping INR 5400 crores in a span of 2 – 3 weeks in their arbitrage fund has raised the eye brows of the industry players.

By definition, arbitrage is a financial transaction that has no or minimal risk.Arbitrage equity funds employ such strategies to take advantage of the price differential of a security between the exchanges, cash and the derivatives segment.

These funds simultaneously buy shares in the cash segment and sell futures (derivatives segment) of the same company as long as the futures are trading at a reasonable premium. On expiry, the cash and futures price coincide thus leading to positive returns for the investor. Such funds do not take a naked exposure to equities as each buy transaction in the cash market has a corresponding sell transaction in the futures market. Hence, the portfolio is generally neutral unlike a long only equity fund. This strategy helps the scheme generate almost risk free equity return in line with the liquid fund/ money market mutual funds.

The shortcomings in this product are manifold. At the outset, the arbitrage opportunities are far and few. In the absence, the fund would mimic the portfolio of a liquid/money market mutual fund. Here lies the trick; As per the provision of Sec. 10(38),  an equity oriented fund is defined  that which not only invests in equity shares of the domestic companies to the extent of more than 65% and suchpercentage to be computed with reference to the annual average of the monthly averages of the opening and closing figures.  Hence, the tax treatment of an arbitrage fund could vary subject to the fund fulfilling the aforesaid criteria due to market considerations.

1.       In case the allocation to equity is above 65%&above : the tax treatment will be similar to that of Equity Scheme 

2.       In case the allocation to equity is 65% or below:the tax treatment will be similar to that of Debt Scheme.

If you’re investing in these funds to take advantage of the equity taxation,(ieno long-term capital gain tax if held for more than a year and no dividend distribution tax) you need to re think. In addition, some of the arbitrage funds have mandate to invest a small portion of the portfolio in buybacks, open offers, delisting, takeover bids, mergers and IPOs. This could add to the volatility of returns from these funds.As the devil lies in the detail, Investors should read the fine print before investing.

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments

Good time to invest

Indian stock market witnessed somewhat a steep correction in the last 2 trading sessions due to US President Barack Obama’s decision to authorize air strikes against militants fighting in Iraq. Consequently, INR came down to 6 months low at 61.74 to the dollar in the intraday and recovered a bit due to exporters selling dollars and closed at 61.14. Brent crude oil was 1% higher at 106 dollar per barrel in the futures market.

Market is abuzz with speculations of a further correction. I felt it would be appropriate to look at some key data points before arriving at any conclusion. Reserve Bank of India in the third quarter review of monetary policy has indicated a GDP growth in the range of 5 -6 percent in the year 2014 -15. The recent World Bank report also points India’s growth at 5.5 percent for the fiscal 2014 -15, accelerating to 6.3 percent in 2015-16.

On a year-to-date basis (till July end) India received $11.8 billion in equities, which is similar to the $12.2 billion received in the corresponding period last year and remains the highest among key emerging market peers. Country’s foreign exchange kitty zoomed to $320.564 billion from $243 billion in the month of July – august 2013 on a healthy increase in the core currency assets. With this jump, the total reserves are shy of the all-time high of $321 billion achieved in late 2011.

Indian Markets as measured by BSE SENSEX on a YTD basis has generated an absolute return of 22.1% in dollar terms (7^th August 2014) compared to most of the emerging market peers even as global markets have faced headwinds from the Ukraine crisis, militant attacks in Iraq and Argentina debt crisis during this period.  

During the April-May period of the current fiscal, the IIP recorded a growth of 4 percent, as against contraction of 0.5 percent in the first two months of 2013-14. Manufacturing, which constitutes over 75 percent of the index, grew 4.8 percent in May, compared to decline in output by 3.2 percent a year ago. For April-May, the sector recorded a growth of 3.7 percent, compared to a contraction of 0.7 percent in the year-ago period.

I believe, Indian Markets are driven by bottoming out of growth, improving risk appetite accompanied by a decisive government at the centre. The current fall in the market is a knee jerk reaction and can be used as an opportunity to increase exposure to equities/Equity mutual fund, especially those missed out the recent rally. Risk aversion investors may stagger their investment through systematic investment plan.

Happy Investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.