CRISIL Mutual Fund Year Book

Transcription

1 April 2013 CRISIL Mutual Fund Year Book Mutual Funds - The right road to diversification

2 CRISIL Mutual Fund Year Book About CRISIL Limited CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. About CRISIL Research CRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,500 primary sources, including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macro economy and our extensive sector coverage to provide unique insights on micromacro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts, and information management specialists. CRISIL Privacy CRISIL respects your privacy. We use your contact information, such as your name, address, and id, to fulfill your request and service your account and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit You can view McGraw-Hill s Customer Privacy Policy at Last updated: March 7, 2013 Disclaimer CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL s prior written approval.

3 Table of contents Foreword... 3 Overview... 5 I - Mutual fund industry reports double digit growth... 7 II - Way forward for the mutual fund industry III - Equity market up 28% in IV - Gilt prices surge as RBI cuts Repo rate Category wise mutual fund performance I - Category wise risk / return trade-off & indicative investment horizons II - Equity & Hybrid Equity - Small & Midcap Funds outperform III - Sector / Thematic - Banking Funds dominate 2012, Gold Funds lose lustre IV- Debt & Hybrid Debt - Gilt Funds outperform on softening interest rates Articles I - The Science of Financial Planning - Next Frontier for Investment Advisors II - Declining interest rate scenario - Long-term debt funds to benefit III - Liquid funds - An alternative to savings bank deposits IV - Go for paper gold V - Protect the downside in equities through capital protection oriented funds Factsheets Annexures I - Fund House Wise Ranks (December 2012) II - AUM Trends III - CRISIL Mutual Fund Ranking Methodology IV - CRISIL Mutual Fund Ranking Category Definitions Glossary of terms used in the factsheets List of Abbreviations used in the Year Book

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5 Foreword We are pleased to release the third edition of The CRISIL Mutual Fund Year Book, a one-stop insight on the mutual fund industry. This is in line with our objective of making markets function better and improving connect with retail investors was a turnaround year for the Indian capital markets. Equities emerged as the star performer with the benchmark CNX Nifty gaining 28%. The debt market too performed well with long-term debt funds gaining prominence due to some easing of monetary stance by the Reserve Bank of India (RBI) and expectations of further easing by the central bank to pump prime the economy. The central bank announced a 25 basis points (bps) repo rate cut on January 29, The mutual fund industry s average assets under management (AUM) grew by 15% in 2012 to Rs 7.87 trillion in December 2012; debt funds AUM rose by over 26% to Rs 5.34 trillion and equity funds AUM by 19% to Rs 1.92 trillion. This trend continued even in 2013 when industry AUM touched an all-time high of Rs 8.26 trillion in January Assets of gold exchange traded funds (ETFs) climbed to Rs 11.7 billion (bn) in December 2012 as domestic gold prices increased by 12% over the year. The focus on retail investors and improving the penetration of mutual funds continued through the year with Securities and Exchange Board of India (SEBI) announcing various guidelines to promote investor education, reduce operational bottlenecks and costs. The regulator directed fund houses to allocate 2 basis points of their AUM towards investor education initiatives. Meanwhile, 29 asset management companies (AMCs) conducted over ten thousand investor education programs in 200 cities covering nearly two lakh participants during April 2012 to January Measures to improve mutual fund penetration included launch of the Rajiv Gandhi Equity Savings Scheme (RGESS), which provides tax incentives to first-time equity investors. Further, SEBI doled out incentives to fund houses that distribute their products beyond the top 15 cities. Single plan structures and introduction of direct plans were other investor friendly measures introduced by the regulator. It has always been CRISIL s endeavour to help investors take better informed investment decisions. As part of our refreshed content, the Year Book contains articles on select themes which were very pertinent in the year gone by and continue to hold relevance. It also covers market and industry overview, key industry statistics, way forward and one-page factsheets on schemes which were CRISIL Fund Rank 1 in all four quarters of The CRISIL Mutual Fund Year Book is also available on free of cost. We hope you find the coverage informative. Sandeep Sabharwal Senior Director Capital Markets CRISIL Research 3

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7 Overview 5

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9 I - Mutual fund industry reports double digit growth The domestic mutual fund industry s average AUM rose by 15% Year-on-Year (y-o-y) to Rs 7.87 trillion in December 2012 while month-end AUM rose by over 24% to Rs 7.60 trillion. In comparison, the industry had recorded a flat growth in The mutual fund industry continued its positive AUM trend into 2013 and touched Rs 8.13 trillion in February, slightly lower than its all time high of Rs 8.26 trillion achieved in January Inflows into income and gilt funds led to asset growth in 2012 Inflows of Rs 613 bn into income funds (long-term debt funds, Fixed Maturity Plans (FMPs), short term and ultra-short term debt funds) and gilt funds - on expectations of a fall in interest rates following slowing domestic growth - and easing inflation (see Figure 1) resulted in asset growth. Bond prices (Net Asset Value or NAVs) and interest rates (yields) move in opposite directions. Further, funds with longer average portfolio maturities benefit more in a falling interest rate environment. Accordingly, long term debt oriented funds benefit from a fall in interest rates and attract more AUM. The RBI lowered its key interest rate (Repo rate) by 0.50% (50 bps) first in April 2012 and later by 25 bps in January 2013 to 7.75%. AUM of long term bond funds and gilt funds rose by over 317% (YoY) in 2012 to Rs 680 bn while that of short maturity debt funds (including liquid funds) rose by over 22% to Rs 2.31 trillion. The debt category continued to corner a major share of mutual fund assets with 70% in Figure 1: Year-wise mutual funds AUM and inflow/ outflows (Rs in bn) 2,000 (Rs in bn) 8,000 1,500 1,000 7, ,000 5,000-1,000-1, ,000 * Month-end AUM as of December every year Source: AMFI Inflows/ Outflows AUM* (RHS) Equity funds see profit booking though AUM grows with markets AUM of equity funds rose by nearly 19% (y-o-y) to Rs 1.92 trillion as of December Equity funds rose on account of mark to market gains - the benchmark CNX Nifty was up by 28% in 2012 mainly on reform measures announced by the Indian government and inflows from foreign institutional investors (FIIs). Investors, however, booked profits in equity funds and the category witnessed net outflows of Rs 156 bn during 2012 compared with inflows of Rs 77 bn in The CNX Nifty had fallen by over 24% in Top 10 AMCs control 77% of AUM The industry - consisting of 44 fund houses - continued to remain top heavy; as of December 2012, top five fund houses comprised 54% of AUM while the top 10 fund houses comprised 77% of AUM. The bottom 10 fund houses contributed less than 1% of the AUM. HDFC Mutual Fund retained its top AUM position at Rs 1.02 trillion ( up Rs 130 bn y-o-y) as of December 2012 followed by Reliance Mutual Fund at Rs 931 bn ( up Rs 87 bn y-o-y) and ICICI Prudential Mutual Fund at Rs 815 bn (up Rs 121 bn y-o-y). Birla Sun Life Mutual Fund recorded the highest average growth in AUM, increasing by Rs 166 bn to Rs 770 bn during the year. Tata Mutual Fund reported the highest decline in AUM in absolute terms, declining by Rs 17 bn to Rs 197 bn. 7

10 The industry also saw some consolidation with L&T Mutual Fund buying the assets of Fidelity Mutual Fund. AIG Mutual Fund changed its name to PineBridge Mutual Fund. Srei Infrastructure and Parag Parikh Financial Advisory Services received SEBI s approval to start mutual fund business in India. Industry players who sold some of their stake to foreign / domestic players were as follows - Axis Bank inked an agreement with Schroder Singapore Holdings (wholly owned subsidiary of global AMC major Schroders) to sell Axis Asset Management Company s 25% share for an undisclosed amount. Religare Enterprises Ltd sold 49% of its stake in Religare Asset Management Ltd to the US-based Invesco Ltd. Bank of India acquired 51% stake in Bharti AXA Mutual Fund for an undisclosed amount. Nippon Life Insurance bought a 26% stake in Reliance Capital Asset Management for close to Rs bn. Mutual funds lose around 24 lakh folios in 2012 While the industry s assets increased, its investor base decreased over the 1-year period ended September 2012, according to the Association of Mutual Funds in India (AMFI). The industry lost around 24 lakh folios i.e. investor accounts during the said period. Most of the decline was seen in retail folios (especially in the equity category) as investors booked profits and exited the market following the gains in underlying market during the calendar year. Debt mutual fund schemes however gained over 8 lakh folios during the same period. This can be attributed to investors looking at relatively safer investment options post the volatility in the domestic equity markets in This also indicates that retail investors are finding debt mutual funds increasingly attractive. Corporates continued to dominate the mutual fund AUM with 46% share followed by high net-worth individuals (HNIs) with 25% share and retail investors with 23% share as per the September 2012 folio data. Corporates had 60% share in the AUM of debt oriented funds A year of regulations to improve mutual fund penetration 2012 was a watershed year for the mutual fund industry in terms of regulations / initiatives taken to improve penetration, promote investor education, reduce complexities and provide direct access for informed investors. Following were the key regulations announced during the year. SEBI allowed AMCs to charge additional expenses, up to 30 bps, proportionate to the inflows from locations beyond the top 15 cities to improve the geographical penetration of mutual funds. However, the expenses will be reversed if the inflows are redeemed within one year. AMCs allowed fungibility across various expense heads in total expense ratio. This provides them increased flexibility to allocate costs. AMCs can annually set aside at least 2 bps of AUM for investor education initiatives. To avoid differential treatment across investor classes, SEBI has directed all AMCs to follow a single expense structure across plans from October 1, 2012 instead of plans based on the minimum investment amount (for instance institutional and superinstitutional plans). All funds now have only one plan across investor classes. SEBI introduced Direct Plans from January 1, 2013 through which investors can apply directly to the AMC instead of through distributors. Such plans will have a lower expense ratio as these will not charge distribution expenses. The government introduced the RGESS for first time equity investors with an annual income less than or equal to Rs 1 million. They will be eligible for a 50% tax deduction under Section 80CCG (new section) on investments up to Rs 50,000 in predefined stocks, close-ended mutual fund schemes (listed) and ETFs besides public offerings from select government companies. The latest Union Budget proposed that the deduction will be allowed for three consecutive financial years while the income limit was increased to Rs 1.2 mn. SEBI allowed cash transactions in mutual fund schemes to the extent of Rs 20,000 to enhance the reach to small investors. Mutual funds allowed to participate in repos in corporate debt securities with some riders. SEBI stipulated a ceiling of 0.12% for cash market transactions and 0.05% for derivatives dealings with respect to brokerage and transaction costs to investors. 8

11 Mark-to-market valuation component in debt securities applicable to those securities with a residual maturity of more than 60 days from September 30, 2012 compared to 91-days-and-beyond earlier. Overseas individual investors allowed to invest up to US$1 bn in corporate bonds and debt schemes of mutual funds without any lock-in period. SEBI allowed postal agents, retired officials from government, banks, retired teachers, etc. to distribute simple mutual fund products, to spread out mutual fund distribution. AMFI issuing mutual fund Common Account Statement (CAS) in an electronic form, called ecas ; this will replace paper statements. Important Regulations Pertaining to Mutual Funds in the Union Budget 1. Securities Transaction Tax (STT) reduced for equity futures and mutual funds/ ETF redemptions. Further, only the seller of units will need to pay STT. This will be effective from June 1, Increased the rate of tax on distributed income (dividends) from 12.5% to 25% for all types of funds, other than equity oriented funds, in all cases where distribution is made to an individual or a Hindu undivided family (HUF). This amendment will take effect from June 1, Introduction of a special taxation regime in respect of taxation of income of securitisation entities, wherein no additional income tax shall be payable, if the income distributed by the securitisation trust is received by a person who is exempt from tax under the Income Tax Act. 4. ETFs, debt mutual funds and asset-backed securities allowed as investments for provident and pension funds. 5. Mutual fund distributors can become members in the mutual fund segment of stock exchanges to leverage the stock exchange s network to improve their reach and distribution. 9

12 II - Way forward for the mutual fund industry The Indian mutual fund industry has come a long way since entry loads were banned in 2009; when many stakeholders were skeptical on the way forward. The industry has matured by introducing best practices, increasing the transparency levels and raising the bar on investor friendliness. Exogenous factors such as regulatory changes, increased consolidation, market volatility and varying risk appetite amongst investors have all contributed to its metamorphosis. The way ahead clearly involves steps to making mutual funds a part of the common man s portfolio. In this piece we have detailed a five-pronged strategy to do so. 1. Clarity in Product Positioning Mutual funds AUM so far has been mainly dominated by institutional investors and HNIs. Retail investors have been largely conspicuous by their meager presence as the share of mutual funds in household savings continues to be less than 5%. Only the knowledgeable or qualified investors know what to choose from. For example, corporates go for liquid and ultra short term funds. HNIs, on the other hand, have used debt-oriented funds such as FMPs, long term income funds, gilt funds to their advantage. In contrast, retail investors have mostly invested in equity funds, but have done so intermittently and not in a secular manner. Except for the equity linked saving schemes (ELSS) category which is utilized for tax benefits under section 80C (includes a 3-year lock-in period), retail investors largely exited equity funds in a bear phase (outflows) and entered in a bull phase (inflows) instead of the other way round. The only category where retail interest has grown exponentially is in gold ETFs, mainly due to the long bull-run in gold prices and general awareness about gold as an asset class. AMCs thus need to sharpen and focus their product positioning for retail investors but at the same time keep it simple. Products must be positioned clearly based on risk-reward potential. Investors, in turn, should take the help of financial planning specialists or refer to independent rankings to select the right funds as well as periodically monitor their performance. In this direction, SEBI has allowed allocation of 2 bps of AUM for investor education. 2. Consolidation of funds need of the hour The Indian mutual fund industry has about 1,250 unique funds across 44 AMCs, which further have around 8,000 options (growth, dividend, re-investment with multiple frequencies - daily, monthly, quarterly, etc). In a country where financial literacy is low, choosing among the vast expanse of funds is a major challenge. Investors need to choose from funds with similar or slight variation in investment objective and funds whose names do not indicate much about their characteristic. The need of the hour for AMCs is to consolidate funds with similar objectives as well as provide fund names that are simple to understand and give some indication of the risk return trade-off and investment horizon. SEBI s latest initiative on product labeling that directs AMCs to colour code all funds based on risk and return measures besides its guidelines on single-plan structures in October 2012 are key initiatives in this direction. 3. Innovation Steve Jobs once said: Innovation distinguishes between a leader and a follower. It is true for any industry. Over the years, different mutual fund products and services have caught investors attention such as gold fund of funds / gold ETFs and systematic investment plans (SIPs). Mutual funds in developed markets have a higher penetration through innovative products which offer long-term wealth creation options such as lifecycle and target maturity funds. In the US retirement industry, close to US$1 trillion or one-fifth of the total US$4.7 trillion as of 2011 is invested in hybrid funds (a bulk of target date and lifestyle funds is counted in this category). The nature of these products is such that the asset allocation between equity and fixed income is adjusted based on the investor s time horizon. Additionally, there are annuity products which provide regular income in the post-employment years. India too needs many more innovations in the retirement space. According to the United Nations population statistics, India s share of people aged 65 and older is expected to increase from 5% to 14% between 2010 and 2050, while the share of the oldest age 10

13 group (80 years and older) is expected to triple from 1% to 3%. With only 12% of India s current population under pension coverage, the need for innovation in this space is very high. Many simple innovations could be looked at like fixed income ETFs, real estate ETFs, strategy-based ETFs among others. Besides innovative products, out-of-the-box thinking is also required on the distribution side especially to target more new investors. 4. Technology - a key driver Investors must be aware that information on funds such as portfolio composition, return comparison with the stated benchmark and fund management details are available on AMC sites. Transparency and easy access to funds will increase investor confidence. With more than half the country owning mobile phones, the latter will clearly emerge as the communication medium in the years ahead. Language barriers and financial illiteracy can be reduced with multi-lingual applications that can be accessed through handheld devices and on social media. Technology will also help in straight-through processing of trades through the remotest corner of the country, besides collation and analysis of customer behaviour so as to help sell mutual funds in an effective manner. Fund houses can assist clients in tracking their portfolios through intermediary platforms and wrap services (consolidates and manages an investor s portfolio or financial plans through a single window). Investors can thus view their entire portfolio at a single click, enabling them to track their current financial position on a daily basis as well as receive alerts. They can also understand their total tax liability and maintain documentation of all purchases, sales, deposits and withdrawals in one repository. 5. Banks to play a bigger role The first point of contact for the common man with the financial world is the local bank branch. With more than 80,000 bank branches spread across India, mutual fund penetration can significantly improve even if 50% of these branches are trained to sell mutual funds. With majority of AUM concentrated in the metros, the banking network can help expand the reach of mutual funds across the length and breadth of the country. SEBI s recent regulation which allows AMCs to charge an additional 0.30% on inflows coming from beyond the top 15 towns is a welcome step towards ensuring larger and diverse retail participation. It is encouraging to note that the data on commissions published by AMFI indicates that the banking sector is the largest distributor segment, accounting for 42% of the total commissions paid in The following steps can be considered to increase mutual fund penetration through banks: Dedicate efforts towards training of banks staff. Invest in financial planning tools to facilitate customers. Use the ATM network to enable customers to buy and sell mutual fund units. Mutual funds and banks could jointly work on investor awareness programmes along with independent industry experts. Have a bank-like experience while investing in mutual funds such as updating performance of funds in a mutual fund passbook through any bank branch. Summing up The future of the mutual fund industry rests in the twin-power of increasing financial literacy and showcasing the suitability of mutual funds in an investor s portfolio. AMCs and product distributors need to work closely to achieve the target of higher penetration of mutual funds in household savings. The launch of RGESS is a step in the right direction to encourage the first-time investor to look at mutual funds for tax and investment planning. Quintessentially, a more investor-friendly approach in product development, communication and distribution would go a long way in making mutual funds a pull product. 11

14 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 III - Equity market up 28% in 2012 The Indian equity market improved significantly in 2012 with the benchmark index CNX Nifty rising around 28% to recover most losses witnessed in the previous calendar year when the index was down by 24%. The sharp gains were led by a mix of positive domestic and global news. A strong reform stance taken by the Indian government - the much-awaited foreign direct investment (FDI) in retail, airlines, trading exchanges, raising FDI cap in broadcast services, restructuring state-owned power distribution companies and fuel price hike to address the burgeoning fiscal deficit - helped market sentiments. Further, the government s strong resolve to curtail fiscal deficit and promote growth followed by liquidity-infusing measures and interest rate cuts announced by the RBI along with strong quarterly earnings from index majors added to the gains. The central bank cut the cash reserve ratio (CRR) by a total of 1.75% over the year and the repo rate by 0.5% in April 2012 and by another 0.25% in January Near-record buying by FIIs during the year was also an important factor in propelling the markets. FIIs were net buyers of equities aggregating Rs 1.29 trillion in 2012, the second highest on record after Rs 1.33 trillion of buying seen in 2010 and compared with net selling of Rs 34 bn in Figure 2: FII inflows vs CNX Nifty Movement (CNX Nifty) 6,000 (FII Inv Rs bn) 260 5, , , , , Source: SEBI, NSE FII monthly net investment (Rs Bn) CNX Nifty Value Strong global cues included global central banks liquidity easing stance as well as some signs of easing of the European debt crisis amidst approval of bailout funds for the critically impacted countries. The US Federal Reserve proposed to enhance its bondbuying (stimulus) program by $85 bn per month and resolved to keep interest rates at record lows until mid The European Central Bank (ECB) too unveiled a new bond-buying programme aimed at containing the region's debt crisis. Market gains were capped amid signs of economic weakness in the domestic and global economies. The Indian economic growth is expected to slide to 5% in as per the latest Economic Survey, the lowest growth rate in almost 10 years. The global economy too has shown deceleration with the International Monetary Fund (IMF) calculating growth at 3.2% for the calendar year 2012, down from 3.9% seen in the previous year. Worries on the fiscal cliff in the US and lack of any final resolution for the euro zone debt crisis later in the year also capped gains for the Indian equity market. 12

15 Table 1: Movement of Key Equity Market Indices Index 31-Dec Dec-11 Absolute Change % change CNX Nifty CNX CNX Bank CNX Realty CNX FMCG CNX Auto CNX Mid Cap CNX Small Cap CNX Pharma CNX Infra CNX Commodities CNX Metal CNX Energy CNX IT *Sectors sorted by highest to lowest in terms of % change Source: NSE All sectoral indices ended higher in 2012 barring the CNX IT Index (down 1.86%) (see Table 1). Interest rate-sensitive sectors such as CNX Bank and CNX Realty were up 56.5% and 52.7%, respectively, on strong buying following expectations of more interest rate cuts by the RBI. CNX FMCG soared 48.5% as investors followed defensive sectors amidst the volatility seen in the market. The sector benefitted from strong earnings reports from index majors such as Hindustan Unilever (HUL). CNX IT was the only laggard, as the export-oriented sector was impacted by signs of a slowdown in the global economy, especially the US. Weak earnings report from index major Infosys also brought down the index in the year. Table 2: Movement of Key Global Equity Market Indices Indices 31-Dec Dec-11 Absolute Change % Change Dow Jones Industrial Average Nasdaq Composite FTSE 100 (London) Nikkei 225 (Japan) * Straits Times (Singapore) Hang Seng (Hong Kong) *Data as of December 28, 2012 Global equity markets too reported a positive trend; key global equity indices analysed closed positive in 2012 (see Table 2). The positive growth for global equities was led by the US markets which rose on hopes of domestic economic recovery, especially after the US Federal Reserve enhanced its bond-buying program in the year. Re-election of Barack Obama as the US President and abatement of the US fiscal crisis also aided the US markets. Global equities were supported by measures taken in Europe to ease the debt crisis in the form of easy monetary stance adopted by major central banks and approval of bailout to highly fiscal debtridden countries in the region. Japan s Nikkei was the biggest index gainer, up around 23% as the export-oriented index was helped by weakening of yen throughout the year. The index was also helped by stimulus measures both fiscal and monetary-induced in the country during the year. Hong Kong s Hang Seng came a close second, helped by the positive global cues and hopes of revival in growth in the domestic economy. Meanwhile, Britain s FTSE gained the least, up around 6% as gains for the index were capped by weak domestic economic indicators and worries about the European debt crisis. 13

16 31-Dec Jan Feb Mar Apr May Jun Jun Jul Aug Sep Oct Nov Dec Dec-12 IV - Gilt prices surge as RBI cuts Repo rate Inter-bank call money rates ranged mostly near the repo rate during the year amid strong demand from banks. Spike in call rates was seen during periods of higher demand such as quarter-ends due to advance tax outflows, fiscal year end on March 31, 2012 and reporting fortnights. Widening of the liquidity deficit in the banking system due to higher withdrawals and rise in credit disbursement during the festival season also put pressure on call rates during November. The RBI tried to cap any major spike in call rates through its liquidity infusing measures mainly a 175 bps (1.75%) cut in the CRR over the year at regular intervals and open market operations (OMOs) to buy back gilts. A cut in the key interest rate viz., the repo rate by 50 bps (0.50%) to 8.00% in April 2012 also helped reduce call money rates. The RBI announced two more 25 bps repo rate cuts in its January and March policy review in Figure 3: Movement of MIBOR vis-à-vis Repo and LAF (% yield) 13% 12% 11% 10% 9% 8% 7% (Rs Trillion) Mibor Repo LAF (RHS) Source: NSE, RBI Gilt prices rose in the calendar year especially in the second half driven by expectations of monetary easing by the RBI following signs of slowing gross domestic product (GDP) growth and fall in the inflation rate (wholesale price index or WPI). India s GDP is expected to slow down to 5% growth rate in as per the Central Statistical Office (CSO) compared with 6.2% seen in the previous fiscal. CRISIL Research also expects that growth in the Indian economy is likely to fall below the 5% mark in the second half of the current financial year. The WPI inflation rate fell to 7.18% in December 2012 compared with 7.74% in the year ago period. This fell further to 6.84% in February 2013, however higher compared to a three year low of 6.62% in January The repo rate cut coupled with other liquidity infusing measures by the RBI also augured well for gilts. Sentiments for gilts improved due to strong measures by the central government to reduce fiscal deficit pressures and raising of FIIs limits in gilts by $5bn to $15bn. The yield on the 10-year benchmark paper 8.15%, 2022 fell to 8.05% as of December 31, 2012, down 51 bps from 8.56% in the year ago period. The yield sharply declined further to 7.87% as of February 28, 2013 on expectations of more repo rate cuts ahead. 14

17 31-Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec-12 Figure 4: Movement of the 10-year G-Sec yield 8.8% 8.6% 8.4% 8.2% 8.0% Source: CRISIL Fixed Income Database 10 Yr G-Sec Yield Table 3: Key Debt Market Indicators / Yield 31-Dec Dec Dec Dec-11 Call 9.50% 8.55% 10 year AAA 8.92% 9.41% CBLO 8.66% 7.45% Cash Reserve Ratio (CRR) Repo Rate 8.00% 8.50% Statutory Liquidity Ratio (SLR) month CP 8.99% 9.65% Government Bonds Outstanding (Rs. Bn) month CD 8.44% 9.37% Corporate Bonds Outstanding (Rs. Bn) day T Bill 8.16% 8.58% Primary Issuances during the year (Rs.Bn) day T Bill 8.00% 8.28% Bank Credit (Rs Bn) year AAA 8.85% 9.69% Bank Deposits (Rs Bn) Year CP 9.45% 10.10% Credit Deposit Ratio Year CD 8.75% 9.67% FII Debt Yearly Net Investments (Rs Bn) year G-Sec 8.03% 8.43% WPI Inflation 7.18% 7.74% 10-year G-Sec 8.05% 8.56% CPI Inflation 11.17% 6.49% Source: CRISIL Fixed Income Database 15

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19 Category wise mutual fund performance 17

20 I - Category wise risk / return trade-off & indicative investment horizons S No Fund Type 1 Large Cap Equity 2 Diversified Equity 3 Small and Midcap Equity Investment Category Equity Oriented Funds Equity Oriented Funds Equity Oriented Funds 4 ELSS Equity Oriented Funds 5 Index Equity Oriented Funds 6 Arbitrage Equity Oriented Funds 7 Thematic Equity 8 Capital Protected Equity Oriented Sector Funds Equity Oriented Hybrid Funds 9 Balanced Equity Oriented Hybrid Funds 10 FMPs Debt Oriented Funds Investment Universe Funds that invest predominantly in large cap stocks Funds that invest in stocks across market capitalisation and sectors Funds that invest predominantly in small and mid-cap stocks Diversified equity funds that have a 3 year lock - in period and provide income tax exemption under section 80 C upto Rs 1 lakh Funds that track an index and invest into companies in the same proportion as that index. These funds seek to provide returns (pre-expenses) in line with the index. Exchange traded index funds can be traded on an exchange Funds that buy equity securities in the cash market and sell them in the futures market. These funds seek to generate returns through the mispricing that exists between the cash and futures markets. In these funds all the stocks are completely hedged Sector funds that invest in companies from a specified sector. Most common sector themes are infrastructure and banking Funds that follow an investment structure which seeks to protect the initial investment from capital erosion Funds that invest at least 65% of the corpus into equity stocks and the remainder into debt securities Closed ended mutual fund schemes with predefined maturities (30 days to 5 years) that invest predominantly in CDs, CPs and debentures whose maturity or tenure matches with that of the scheme. The basic objective of FMPs is to generate steady returns over a fixed tenure Benchmark Index Expected Returns Risk Indicative Investment Horizon CNX Nifty High High More than 5 years CNX 500 High High More than 5 years CNX Midcap Very High Very High More than 5 years CNX 500 High High More than 5 years The index that is tracked by the fund. CRISIL Liquid Funds index Relevant sectoral indices CRISIL Monthly Income Plans Index / CRISIL Balanced Funds Index CRISIL Balanced Fund Index Usually compared with FD rates High High 5 years Low Low More than 1 year Very High Very High More than 5 years Low Low 3-5 years Moderate Moderate 5 Years Moderate Moderate 30 days to 5 years 18

21 S No Fund Type Investment Category 11 Liquid Debt Oriented Funds 12 Ultra Short Term 13 Short-term Income 14 Long-term Income Debt Oriented Funds Debt Oriented Funds Debt Oriented Funds 15 Gilt Debt Oriented Funds 16 Monthly Income Plans Debt Oriented Hybrid Funds Investment Universe Funds that invest into short term corporate debt papers, CDs and money market instruments with a residual maturity of up to 91 days Funds that invest into short term corporate debt papers, CDs, money market instruments and government securities but whose maturity profile is upto 1 year. It lies between liquid funds and short term income funds Funds that invest into short term corporate debt papers, CDs, money market instruments and government securities and whose maturities are beyond that of ultra short debt funds and upto 3 years. Funds that invest in long-term corporate debt papers and government securities and whose maturities range between few months and can go even beyond 25 years depending on the prevalent interest rate scenario Funds that invest in securities issued by the central and state governments and whose maturities range between few months and can go even beyond 25 years depending on the prevalent interest rate scenario Hybrid funds that invest a small portion (15-30%) in equity stocks and seek to declare monthly dividends based on cash flows 17 Gold ETFs Gold Funds that invest in physical gold and seek to track the domestic spot price of gold. These funds are traded on an exchange Benchmark Index CRISIL Liquid Funds index CRISIL Liquid Funds index CRISIL Short Term Bond Funds index CRISIL Composite Bond Funds index CRISL Gilt Index CRISIL Monthly Income Plans Index CRISIL Gold Index Expected Returns Risk Indicative Investment Horizon Very Low Very Low Less than 90 days Low Very Low Less than 1 year Moderate Low More than 1 year Moderate Moderate 3 years Moderate Moderate 3 years Moderate Moderate 3 Years Moderate Moderate 5 years 19

22 II - Equity & Hybrid Equity - Small & Midcap Funds outperform Category Average Returns % 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years Large Cap Equity Funds Diversified Equity Funds Small & Midcap Funds ELSS Index Funds International Equity Funds NA Hybrid Equity (Balanced Funds) Benchmark Indices CNX Nifty CNX CNX Smallcap NA CNX Midcap S&P 500 International CRISIL Balanced Funds index Point-to-Point returns as of December 31, 2012 Categories as per CRISIL Mutual Fund Ranking of December 2012 except International Funds Returns are annualised for a period of more than 1-year Highlighted cells denote the maximum returns in that time period Analysis All equity oriented categories ended in the positive in 2012 due to upbeat domestic equity markets. The small and midcap category was the biggest gainer in the year, up nearly 42% mainly on the back of a rally in mid-cap stocks. The CNX Midcap index was also up by 39% in This category also outperformed other categories in the 3 and 10 year period. Diversified equity funds were the topmost gainers in the 7 year period. The equity oriented hybrid category, represented by balanced funds, performed strongly in the year 2012, with returns of 27% marginally lower than those of the CNX Nifty index. These funds mainly benefitted due to their dynamic allocation to equities, which rose during the year in a bullish market. A reduction in key interest rates also benefited the debt component of these funds as interest rates and bond prices move in opposite directions. Thus bonds benefit when interest rates fall. These funds also outperformed other equity categories in 2 and 5 year period. 20

23 III - Sector / Thematic - Banking Funds dominate 2012, Gold Funds lose lustre Category Average Returns % 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years Sector Funds - FMCG Sector Funds - Pharma & Healthcare NA Sector Funds - Banking & Finance NA Sector Funds - IT Thematic - Infra Gold Funds* NA NA Benchmark Indices CNX FMCG CNX Pharma CNX Bank CNX IT CNX Infrastructure NA CRISIL Gold Index NA NA Point-to-Point returns as of December 31, 2012 Returns are annualised for a period of more than 1-year Thematic Infrastructure category based on CRISIL Mutual Fund Ranking for December 2012 *includes ETFs and Fund of Funds Highlighted cells denote the maximum returns in that time period Analysis In the sector and thematic funds category, Banking & Finance dominated in 2012 and were up by 56% on expectations of interest rate cuts by the RBI thus reducing the cost of funds for the sector. The RBI cut the key repo rate by 0.50% in April 2012 and by 0.25% in January Defensive sectors like FMCG, Pharma & Healthcare were the next best performers as volatile markets prompted investors to go for stocks of these sectors as well. IT sector funds were the worst performers in 2012 as the export oriented sector was plagued by worries of slowdown in the global economy and weak earnings report from index majors. FMCG sector funds dominated the performance of longer periods like 2, 3, 7 and 10 years. Gold funds, especially Gold ETFs, which have seen huge demand in the past two years, posted lacklustre performance in 2012 due to range bound gold prices. However, these funds have given nearly 22% annualised returns in the 5-year period of their existence. 21

24 IV- Debt & Hybrid Debt - Gilt Funds outperform on softening interest rates Category Average Returns % 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years Long Term Income Funds Short Term Income Funds Liquid Funds Ultra ShortTerm Funds Gilt Funds Benchmark Indices CRISIL Composite Bond Funds index CRISIL Short Term Bond Funds index CRISIL Liquid Funds index CRISIL Gilt Index Hybrid - Debt Category Average Returns % 1 Year 2 Years 3 Years Monthly Income Plans - Aggressive Monthly Income Plans - Conservative Benchmark Indices CRISIL Monthly Income Plans Index Point-to-Point returns as of December 31, 2012 Categories as per CRISIL Mutual Fund Ranking of December 2012 except International Funds Returns beyond one year are annualised CRISIL Composite Bond Funds Index (CompBex) is the benchmark index for Long Term Bond Funds Highlighted cells denote the maximum returns in that time period Analysis All debt oriented categories ended positive across time periods as on December 31, Gilt Funds outperformed in 2012 on expectations of monetary easing by the RBI. The central bank cut the repo rate by 0.50% in April 2012 and by 0.25% in January Interest rates and bond prices move in opposite directions and long tenure bonds benefit more than short tenure bonds when interest rates fall. Thus, a fall in interest rates contributed to higher NAVs for long-term income funds. Short-term income funds outperformed over the 2 and 3-year periods in line with the high interest rate scenario in the earlier periods. The debt hybrid category, viz., Monthly Income Plans (MIPs), notched up strong gains in 2012 helped by a strong performance in both the equity and the debt component. The CNX Nifty was up by 28% in 2012 while a softening interest rate stance by the RBI benefited the debt component. MIP Aggressive funds performed better compared to MIP Conservative funds as the former has a higher exposure (15-30%) to equities compared with the latter (0-15%). 22

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27 I - The Science of Financial Planning - Next Frontier for Investment Advisors The Indian cricket team made history by winning the recent Border-Gavaskar Trophy 4-0 against Australia, the first clean sweep four test match series for the Indian cricket team in its history of 80 years. Was Indian skipper Mahendra Singh Dhoni merely lucky or was it hard-work, planning, perseverance and the team work that led to the win? As all of us would agree - it was clearly the latter. The same traits matter even while planning for one s finances. It is important to plan right from the time we receive our first pay-cheque so that we can achieve our various financial goals the idea is to sow now to reap later. Most of us usually negate the need for an expert to guide us in planning investments for the future. This may have been acceptable in the 90s when the domestic financial markets were still under developed. Today, after witnessing a 180-degree shift, we have a plethora of financial products across asset classes to choose from. Thus, by only investing in traditional financial products like bank fixed deposits, postal savings and money back insurance policies, we are missing out on a big opportunity to achieve our goals faster. Today, to know the best possible way to achieve the financial goals, one has to engage in a more detailed exercise a.k.a. financial plan - to ensure our goals are achieved with greater confidence. Financial planning is the process of meeting lifetime goals through proper management of finances. Lifetime goals may include buying a house, saving for children s education or planning for retirement. With the advancement of technology and availability of financial tools, financial planning has evolved and become more scientific. Table 4 denotes the difference between traditional and scientific financial planning. Table 4: Scientific Financial Planning versus Non-Scientific (Traditional) Financial Planning Scientific Financial Planning Looks at a more holistic picture of assets and liabilities, income, expenses and goals Considers every goal and maps products to each goal separately Plan prepared by specialists like certified financial planners These are strategic long-term plans and are only monitored for product performance; rebalancing is done to maintain asset allocation Products recommended based on an individual s risk profile across asset classes like equity, debt and gold There is a complete audit trail of all recommendations and changes proposed in the plan at any time Insurance is planned to support exigencies of an individual and are largely term policies Medical insurance is part of the financial planning process Process involves regular interactions with the financial planner Non-Scientific Financial Planning Uses a macro view of an individual s finances and looks only at surplus after expenses Only looks at major financial goals Plan prepared by the next door financial advisor with an objective of selling the product rather than meeting the specific needs Plans are not sacrosanct but change at short notice One size fits all traditional product portfolio and includes bank fixed deposits, postal deposits and traditional insurance policies; largely debt focused There is no audit trail of recommendations Insurance is looked upon as an investment (money back policies) and not as a support for extreme exigencies Most individuals are not covered under medical insurance Process is mostly a one-time exercise 25

28 Scientific financial planning - the process Scientific financial planning is a five-step process: (i) data gathering and risk profiling through a questionnaire, (ii) analysing needs/ goals, (iii) asset allocation, (iv) product recommendation (including insurance), and (v) portfolio monitoring. 1. Data gathering and risk profiling: Involves analysing information about the person s financial situation (details of assets, liabilities, income, expenses and investments) and administering a questionnaire to assess one s risk appetite. Based on the answers (which are scored), the final score is mapped to a risk profile from low risk appetite to high risk appetite viz., conservative, moderate, moderately aggressive, aggressive and very aggressive. 2. Needs analysis: Involves a discussion on an individual s financial needs such as debt repayment obligations, funds required for children s education/marriage, leisure and travel as well as charity if needed. A financial planner then prepares a cash flow statement based on the current state of finances and investments to check whether all goals can be met in the desired time. Table 5: A Typical Cash flow Statement Lifestyle Disposable Value of Goals Goal Status Income Calendar (growing by Liabilities like EMI Expenses (growing by Income that flows into Investments (growing by year 10% p.a.) etc 10% p.a.) investments (g) 12% p.a.) a b c d=a-b-c g h Year 1 500, , , , Year 2 550, , , , ,000 - Year 3 605, , , , ,800 - Year 4 665, , , , ,576 - Year 5 732, , , , , ,000 Bought a Car - Goal Met Year 6 805, , , , ,245 - Year 7 885, , , ,890 1,068, ,000 Marriage Expenses-Goal Met Year 8 974, , , , ,575 - Year 9 1,071, , , ,897 1,517,324 - Year 10 1,178, , , ,487 2,159,608 1,000,000 Down payment for a second home - Goal Met Goals are subtracted partly from disposable income and partly from investment value Table 5 shows a typical cash flow based on annual income, expenses, liabilities like EMI, net disposable income after subtracting income from expenses / liabilities. The investor s three goals, i.e., car, marriage and down-payment of second home are met through disposable income and partial withdrawal of investments. It is possible to improve these cash flows and meet additional goals through scientific financial planning wherein investments would be optimally deployed based on risk profile and asset allocation. 3. Asset allocation: This basically maps an investor s risk appetite to a portfolio which contains a mix of asset classes (say equity, debt and gold). The portfolio is allocated across these asset classes in an optimal manner based on a mathematical model. Accordingly, an investor with a lower risk appetite (conservative) will have a higher allocation to debt while an investor with a higher risk appetite (very aggressive) will have higher allocation to equity. 26

29 A typical asset allocation chart is shown in Table 6. If one observes, the allocation towards gold and equity increases as the portfolio becomes aggressive (higher risk appetite). Further, as gold and equity have a higher risk and return profile, returns are commensurate with higher risks. Table 6: Typical Asset Allocation by Risk Profiles Customer Profile Asset Classes Conservative Moderate Moderately Aggressive Aggressive Very Aggressive Gold 5% 5% 10% 10% 15% Equity 5% 20% 40% 60% 75% Long-Term Debt 10% 15% 20% 20% 5% Short-Term Debt 80% 60% 30% 10% 5% Initial Investment of Rs 1 mn after 10 years till Feb 28, 2013* Rs 2.48 mn Rs 3.74 mn Rs 5.56 mn Rs 7.24 mn Rs 8.61 mn Annualised Returns* 9.50% 14.10% 18.70% 21.90% 24.00% *Data represented for equity by CRISIL Fund Rank 1 Equity Funds, for long-term debt by CRISIL Fund Rank 1 Debt Long Term Funds, for short-term debt by CRISIL Fund Rank 1 Liquid Funds and for gold by returns of LBMA gold prices converted to Indian Rupees (does not consider duties and other aspects of landing costs). 4. Product recommendation: The aforesaid asset allocation is mapped to products across mutual funds, ULIPs, direct equity, insurance and fixed deposits, among others. 5. Monitoring the financial plan: A financial plan needs regular monitoring and alterations depending upon a change in the client s financial position and needs. This may include exiting from underperforming products and switching to better products. Further, a reallocation of funds needs to be done if goals are achieved earlier than expected or vice versa. Conclusion Familiar with market volatilities, today s investors intend to secure their future and meet their financial aspirations through prudent long-term planning. Scientific financial planning is an upcoming and highly advantageous tool for investors to have a holistic view of the past and future finances with embedded goals. Financial institutions such as large banks and financial companies have realised this shift and developed customised financial tools to meet investors requirements. The challenge is to make this service available for investors of all financial classes and across geographies. Here, it is apt to say if one fails to plan, one plans to fail. 27

30 II - Declining interest rate scenario - Long-term debt funds to benefit After a strict interest rate regime through 2010 and 2011, the RBI eased its monetary stance in April It cut its benchmark lending rate - the repo rate - by a total of 100 bps (1%) between April 2012 and now; 7.5% as of March In such a scenario, long-term debt funds emerge as an appropriate tool of investment. This category typically generates superior returns in a falling interest rate environment. Interest rate cuts are an upshot of slowing domestic growth rate and fall in inflation. As per the Economic Survey released in February 2013, India s GDP is expected to grow at 5% in compared with 6.2% and 9.3% growth in and , respectively. Inflation measured by the Wholesale Price Index (WPI) was 6.84% in February 2013, down from 7.56% a year ago, but higher compared to the three-year low of 6.62% in January The RBI has warned that high current account deficit (CAD) and inflationary expectations limit the possibility of further rate cuts. CRISIL Centre for Economic Research (CCER) expects the RBI to reduce policy rates by at most bps during Why will long-term debt funds benefit? Long-term debt funds include income funds (which invest a majority of their corpus in long tenure debt instruments issued by corporates) and gilt funds (which invest in bonds issued by the central or state governments). The value of the underlying debt instruments in a fund s portfolio fluctuates on a daily basis (known as market risk) due to factors such as interest rate movement and the liquidity situation. The price of a debt instrument and interest rates (yields) move in opposite directions, i.e., price of the bond rises when interest rates fall and vice versa. The net asset value (NAV) of a debt fund scheme replicates the prices of the underlying securities. Hence, if interest rates fall, the NAV of debt funds rises. In a declining interest rate scenario, long-term debt funds would benefit more than short-term debt funds due to the longer maturity of the underlying securities held by the former. Short-term funds, whose portfolio contains securities with a shorter maturity, would see a lower price change as they mature faster and the new securities purchased lock into a lower yield in a falling interest rate scenario. Gilt funds carry lower credit risk than income funds Though both gilt and income funds carry a market risk owing to interest rate movements, gilt funds have a lower credit risk as they invest only in government securities. Income funds, on the other hand, invest in both government securities and corporate bonds. Table 7: Investing in Debt Funds Salient Features 1. Professional Management - Investors get fund managers to make and monitor investments based on the interest rate outlook. 2. Diversification Invested across securities - issuers and sectors - which lowers the risk. 3. Regular income - As dividends (subject to investor choosing this option). 4. Liquidity Open-ended debt funds can be bought and sold on any business day. 5. Tax benefits - Investments for a period of more than 12 months qualify for long-term capital gains tax at 20% with indexation and 10% without indexation. Watch Out For 1. Interest rate risk Investors should look at the underlying interest rate cycle before investing. Long-term debt funds benefit in a falling interest rate regime while it is vice versa for short-term funds. 2. Credit risk Investors can gauge the credit risk of a debt fund by the security-wise rating profile disclosed in its portfolio. Investors may also refer to the Credit Quality Rating (CQR) of the fund. Gilt funds do not carry a credit risk to the extent of the gilt component. 3. Concentration risk Funds that have a diversified portfolio of debt instruments but do not majorly concentrate on a few sectors or issuers are ideal for investments. 4. Lock-in period Close-ended funds or FMPs have a lock-in period. 5. Exit loads Investors must check whether any exit load is applicable for early withdrawal from an open ended debt fund. 28

31 Market cycle case study is intuitive CRISIL has performed a market cycle case study (see Table 8) to analyse returns from income and gilt funds over the past 10 years. As seen in the following table, gilt funds followed by income funds have generated superior returns in the market cycles where interest rates had fallen. In the three periods , 2008 and post April when interest rates declined, returns from gilt funds were the highest across debt fund categories followed by income funds. The returns were higher than the corresponding bank fixed deposit rates available during these periods. This indicates that if RBI cuts interest rates in the coming year, gilt funds and income funds are likely to outperform other categories of debt funds. Table 8: Market Cycle Case Study Period 10 Year Government Bond Yields (%) Annualized Returns (%) No of As on As on Liquid Income Gilt Short Term 3 Year FD Market Cycles Start Date End Date Years Start Date end date Funds Funds Funds Debt Funds Rates (%) Secular decline in yields in Apr Apr Flat to high interest rate period of Apr Jul Sharp correction in yields in Jul Dec * Flat to high interest rate period of Dec Apr Post RBI's repo rate cut in April 16-Apr Feb * *One-year FD rate Note - FD rates at the start of the period. Annualised returns based on average of CRISIL Mutual Fund Ranking category as of December 2012 Conclusion Historically, long-term debt funds have given superior returns in a falling interest rate scenario. Assuming interest rates are cut, returns from long-term debt funds are expected to increase during the current falling interest rate cycle too. However, the quantum of returns will depend on the pace and degree of rate cuts. It has been observed that those who invested early in the interest rate cycle gained more than those who invested later as the cycle matured. Investors can refer to the quarterly CRISIL Mutual Fund Ranking available on to choose superior performing funds in these categories. 29

32 III - Liquid funds - An alternative to savings bank deposits Provides higher returns with a reasonable degree of safety Liquid funds are mutual funds that, by way of their investments into debt market securities, offer higher post-tax returns vis-à-vis savings bank accounts. Besides this, they also offer a reasonable degree of safety in terms of the principal invested and most importantly offer high liquidity. Retail investors who park their short term surplus funds in savings bank accounts for liquidity should be aware of the existence of this remunerative option. According to AMFI, of the Rs 2.04 trillion AUM in liquid funds as on February 2013, retail investors constituted less than a 1% share while the rest was held by high net-worth individuals, corporates, banks and financial institutions. On the other hand, the size of savings bank deposits has continued to grow despite yielding only a nominal rate of return. The quantum of money in savings bank accounts in scheduled commercial banks was over Rs 15 trillion as on March 31, 2012 (Source RBI). Liquid funds vs similar options available from banks Liquid funds are mutual fund schemes where the primary objective is to invest in debt instruments with maturities of less than 91 days, generating optimal returns while maintaining safety and high liquidity. Liquid funds primarily invest in money market instruments such as certificates of deposits (CDs), commercial papers (CPs) and government treasury bills. Such a portfolio helps liquid funds provide high liquidity to investors. Accordingly, redemption requests are processed within 24 hours. Table 9: Comparison of savings deposit, fixed deposit and liquid funds Savings deposit Fixed deposit Liquid funds Liquidity High Medium High Annualised returns 4%# %* %** Minimum lock-in No Yes 1 day Principal guarantee Government-backed Government-backed No guarantee guarantee of up to Rs 1 lakh guarantee of up to Rs 1 lakh Safety (to the principal amount) High High Medium Penalty (on early withdrawals) No Yes 1 No@@ Availability of cheque facility Yes No No Tax 0-30%^ 0-30%^ 25%^^ in dividend option 0-30%^ in growth option (<1 year investment) 10 or 20%@ in growth option (>1 year investment) * The interest rate varies with the tenor of the deposit, source: SBI **1-year returns as on February 28, 2013 of CRISIL Mutual Fund Ranked schemes (for quarter ended December 2012) ^ depending upon tax bracket of the investor, plus 3% cess ^^ plus 10% surcharge and 3% 10% without indexation or 20% with indexation whichever is lower plus 3% cess #some banks offer more than 4% but with a higher minimum balance liquid funds do not charge any exit load Liquid funds, although not backed by any principal guarantee, are relatively safe instruments as the portfolios of liquid funds mostly comprise A1+ rated CPs and CDs (highest rating for these types of securities) with a maximum maturity of 91 days. CRISIL s rating of A1+f signifies very strong protection against losses from credit defaults. 1 These charges vary across banks. For term deposits with SBI, the depositor would receive 0.5% less for any premature withdrawal provided the deposit remains with the bank for more than 7 days. 30

33 However, the marginally higher risk in liquid funds as compared to a savings deposit is compensated by superior returns of liquid funds especially post tax (see Table 10) The tax advantage There are two options of investing in a liquid fund: i) growth option and ii) dividend option. In the case of growth option, returns from liquid funds would attract short term capital gains if redeemed within a year (as per the investor s income tax bracket) and long term capital gains if redeemed after a year (10% without indexation and 20% with indexation plus cess). In the case of a dividend option, although dividends are tax-free in the hands of the investor, there is a dividend distribution tax (DDT) which is paid by the mutual fund house before the dividend is distributed to unit holders. Post tax, liquid funds yield better returns vis-à-vis savings deposits, where the interest earned on the latter would be taxed based on an individual s tax slab. Investment in a fixed deposit would also attract tax on returns as per the investor s tax-bracket (maximum of 30% plus cess). Table 10: 1-year returns across investment types (as of February 28, 2013) Investment amount Investment type (Rs) Savings account Indicative Pre-tax returns Tax rate Post-tax returns yield (Rs) (highest) (Rs) Post tax yield 4.00%# 20, % 16, % Fixed deposits 6.50%* 32, % 22, % 500,000 Liquid fund Dividend 9.29%^ 46, % 36, % Liquid fund Growth 9.29%^ 46, %** 41, %@ #some banks offer more than 4% but with a higher minimum balance requirement *State Bank of India fixed deposit rate for 241 days to less than 1 year ^ 1-year returns of CRISIL Fund Rank 1 Liquid Funds (ranks as of December 2012) ** Tax rate without indexation, assuming an investment of 1 year and 1 could be higher if indexation benefits are availed Choosing a liquid fund Choosing an appropriate liquid fund can be a challenge as there are about 60 funds offered by various fund houses. Further, most liquid funds have very little differentiation. The variation in returns between the best performing and worst performing scheme is almost 3% for the 1-year period ended February 28, Hence, it is important for investors to assess the various schemes before investing. Alternatively, investors may refer to CRISIL s quarterly Mutual Fund Ranking which uses various NAV and portfolio attributes to rank liquid funds. Conclusion Liquid fund is an alternate investment avenue for individuals to park their short term surplus funds. While bank deposits (fixed and savings) are easier to access and offer some degree of principal protection, the higher yield combined with the liquidity and taxation benefits make liquid funds an attractive option. However, liquid funds are not completely risk-free, and an investor must carry out basic checks before investing. Further, investors must spread their savings across fixed deposits, savings bank account and liquid funds, thereby enjoying the benefits each of these avenues have to offer. 31

34 IV - Go for paper gold Gold has been treasured as a valuable commodity for as long as one can remember. With the shifting sands of time, it has evolved as an important asset class. From barter trade to jewellery investment and now paper gold, the sheen continues and its universal appeal is intact. Gold has proven to be a safe-haven investment option as well as a good diversifier due to its low correlation with other asset classes such as equity and debt. In recent times, gold has given almost similar returns (18% annualised) as provided by equities (CNX Nifty index) over the past 10 years till February 28, It has also given positive returns for every calendar year for over a decade. In India, where gold buying is an integral part of social and religious customs, investors now have the option of buying gold in dematerialised or paper form. Paper gold not only offers the convenience of holding the yellow metal in an electronic form with greater price transparency but also negates the risk of storage and theft. Further, with the launch of the CRISIL Gold Index, investors now have a standard benchmark for gold prices in India. The index is freely available on give exact link. Three paper gold options in India Gold ETFs These are passively managed mutual funds that invest money in standard gold bullion (99.5% purity). In India, assets managed under gold ETFs have increased nearly 15-fold in the past four years from Rs 7.80 bn in February 2009 to Rs bn in February 2013 (this also includes mark-to-market gains of 90% shown by the CRISIL Gold Index during the period). Since they are traded on exchanges, gold ETFs provide high liquidity and transparency in prices. Investment in gold ETFs requires opening demat account with broker registered with National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Gold mutual funds These are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund which is the mother fund. Gold mutual funds provide investors the facility of systematic investment plans (SIP) wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. Currently, Indian fund houses offer 13 gold FoFs (including two foreign FoFs), managing average assets of Rs bn as of December 2012 (includes average AUM of Rs 9.22 bn by foreign FoFs). It also gives retail investors an opportunity to invest in paper gold in amounts as small as Rs 500 (via SIPs) and without having to open a demat account (unlike gold ETFs). E-gold Investors can purchase gold in electronic form via E-gold a product launched by the National Spot Exchange Limited (NSEL). Investors in E-gold can buy and sell gold in denominations as small as 1 gram. A major advantage of E-gold is the investor gets an option to convert paper gold into physical gold in addition to all the perks of investing in gold in the paper form. Gold offers risk diversification Gold as an asset class offers twin benefits: diversifies an investor s portfolio and limits the downside risk in times of uncertainty owing to its low to negative correlation with other asset classes. As seen in Table 11, gold has provided the highest returns in four out of the five years in the bear phase, clearly indicating the superiority of the asset class in times of equity market turmoil. Table 11: Performance of gold, equity and debt Asset Class Gold Equity Debt Calendar year point to point returns Gold returns calculated from LBMA prices converted to Indian Rupees Equity returns calculated for CNX Nifty index Debt returns calculated for CRISIL Gilt index Columns highlighted in green indicates bearish phase in equity market Returns in 2004 were flat 32

35 In another analysis, Table 12 shows seven scenarios of investing across asset classes, i.e., equity, debt and gold over a 10-year period. The table looks at investing in one, two or all three asset classes over this time frame. While a singular investment in equity (Portfolio G) or gold (Portfolio F) has given the highest returns of 18% in the 10-year period, it goes against the thumb rule of portfolio diversification. In the composite portfolios, the highest returns of 18% were delivered by a combination of equity and gold (Portfolio D). Further, the most diversified Portfolio C (equity + debt + gold) performed better (14% vs 12%) than Portfolio E (equity + debt), which highlights that adding gold to one s portfolio helps investors not only earn better returns but also reduce the downside risk. Table 12: Equal weighted asset allocation scenario analysis Conservative Aggressive Portfolio A B C D E F G Gold - prices from LBMA prices converted into Indian Rupees Equity represented by CNX Nifty index Debt represented by CRISIL Gilt index Returns calculated from February 2003 to February 2013 Tax implication on various forms of gold investment Asset class Amount invested in year Annualised Returns Profit earned Total value of Investment in 2013 Debt 30,000 7% 26,683 56,683 Total 30,000 7% 26,683 56,683 Debt 15,000 7% 13,341 28,341 Gold 15,000 18% 63,280 78,280 Total 30,000 12% 65,427 95,427 Equity 10,000 18% 43,536 53,536 Debt 10,000 7% 8,894 18,894 Gold 10,000 18% 42,187 52,187 Total 30,000 14% 83, ,855 Equity 15,000 18% 65,304 80,304 Gold 15,000 18% 63,280 78,280 Total 30,000 18% 128, ,573 Equity 15,000 18% 65,304 80,304 Debt 15,000 7% 13,341 28,341 Total 30,000 12% 66,716 96,716 Gold 30,000 18% 126, ,561 Total 30,000 18% 126, ,561 Equity 30,000 18% 130, ,609 Total 30,000 18% 130, ,609 Gold ETFs and gold FoFs are subject to long-term capital gain (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same else STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding Rs 3 mn is charged on investment of physical gold and E-gold (not paper gold). Conclusion Gold as an asset class plays a very important role in an investor s portfolio as it not only provides stability to returns but also gives an opportunity to maximise wealth over a longer time frame. Further, moving from purchasing physical gold to buying gold in paper form through mutual funds has its own advantages of transparency in pricing, purity, liquidity, convenience as well as no storage risk. Paper gold is also advantageous from a tax perspective vis-à-vis physical gold or e-gold. However, in the short term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer time frames of five years and beyond. The percentage allocation to gold will depend on an investor s risk and return objectives. 33

36 V - Protect the downside in equities through capital protection oriented funds In the recent past, the mutual fund industry has doled out various schemes for the investor community to cater to different risk profiles. Some asset classes (debt-oriented) provide fixed returns, though relatively low, while others (equity and gold) give higher inflation-adjusted returns but are riskier and carry a downside risk (erosion of capital). Capital protection oriented fund (CPOF), as the name suggests, protect the capital of risk-averse investors who wish to participate only in the equity market upside without any erosion in the value of the invested amount. CPOFs offer only zero to positive returns on maturity. CPOFs: A walk-through CPOFs are close-ended hybrid schemes offered by domestic mutual funds. They invest 75-80% of the corpus in debt and the balance in equity assets; for instance, from a principal of, say, Rs 100, Rs 80 is allocated to debt and Rs 20 to equities. The debt component is invested in highest rated securities or government bonds such that it grows to Rs 100 over the period of the CPOF. At the end of the tenure, besides having their principal protected, investors can earn returns largely based on the equity market movement. Investors need not worry about any downside in the equity market as the debt component protects the principal even in a worst case scenario (if the equity component gets completely wiped out). Investors must, however, note that the capital protection offered is not a guarantee but only assured by the scheme s portfolio characteristics (structure). The capital protection is assured only at the time of maturity and not during the tenure of the fund. SEBI guidelines stipulate that the structure must be rated by a credit rating agency from the view point of assessing the degree of certainty for achieving the objective of capital protection. Further, the rating should be reviewed on a quarterly basis. The highest rating for a CPOF is AAA(so), which indicates the highest degree of certainty regarding timely payment of the face value of the units to unit holders on maturity of the scheme. CPOFs have a lock-in period of one, two, three or five years and are listed on the stock exchanges for liquidity purposes. However, trading is thin as most investors tend to stay invested over the lock-in-period. These funds mostly use the CRISIL MIPEX as their benchmark index in line with their asset allocation. Who should invest? Risk-averse investors who want to enjoy only the upside of equities and protect their capital on maturity can invest in CPOFs. However, investors must be willing to hold till maturity as well as bear the risk of lower positive returns in a bear run. Taxation CPOFs are taxed similar to debt funds where short-term gains (units held for less than 12 months) are taxed as per the individual tax bracket (maximum 30% plus cess) and long-term capital gains (units held for more than 12 months) are taxable at 10% (plus cess) without indexation and 20% (plus cess) with indexation (considers the impact of inflation over the holding period). The lesser of the two outcomes is considered for tax purposes. Risks Credit risk is the biggest risk to CPOF; it is the risk of default of the debt instruments held in the portfolio. Credit risks may be mitigated by ensuring that the debt instruments in the scheme are always of a very high credit quality. Current SEBI regulations restrict CPOFs from investing in debt instruments rated below AAA. Choice of CPOFs and performance While one may invest only in top rated CPOFs, the choice of the fund house could be made based on their equity fund management skills. This is because returns would be higher if equity markets are bullish. 34

37 On the performance front, CRISIL s analysis reveals that capital protection funds that have matured have not only given positive returns but most have also outperformed the CNX Nifty (see Table 13). Most CPOFs that matured returned 5-9% annualized gains over their tenure while the equity market performance (CNX Nifty) ranged from marginally negative to 10% positive. However, the same (outperformance vis-à-vis the CNX Nifty) may not be necessarily repeated in future. CPOF returns could vary in a broad range (see Table 14) depending on the equity market (bullish or bearish) as well as the tenure of the CPOF. Table 13: Performance of CPOFs that have matured Scheme Term Maturity Date Annualised returns Scheme CNX Nifty Birla Sun Life Capital Protection Oriented Fund - 5 Year Plan 5-years 2-Aug % 3.50% Franklin Templeton Capital Protection Oriented Fund - 5 Year Plan 5-years 14-Jun % 3.90% SBI Capital Protection Oriented Fund - Series I 5-years 20-Dec % 0.51% Sundaram Capital Protection Oriented Fund - Series 1-5 Year Plan 5-years 23-Aug % 5.26% UTI Capital Protection Oriented Scheme - Series I - 5 Year Plan 5-years 22-Mar % 4.90% Birla Sun Life Capital Protection Oriented Fund - 3 Year Plan - Growth 3 years 3-Aug % 7.26% DWS Capital Protection Oriented Fund 3 years 1-Jun % 4.97% Franklin Templeton Capital Protection Oriented Fund - 3 Year Plan 3 years 14-Jun % 7.60% Sundaram Capital Protection Oriented Fund - Series 1-3 Year Plan 3 years 23-Aug % 9.78% UTI Capital Protection Oriented Scheme - Series I - 3 Year Plan 3 years 22-Feb % 5.83% Birla Sun Life Capital Protection Oriented Fund - Series 1 27 months 29-Jun % -0.20% Data updated as of February 28, 2013 Source CRISIL Mutual Fund Database Table 14: Sensitivity Analysis of CPOF Performance in Bull and Bear Markets Period Principal Starting Debt Component Starting Equity Component Final Equity component Final Debt Component Final Redemption Amount Pre-tax Returns p.a. Post tax Returns p.a.* Bull Market - Case 1 - If equity grows by 15% and debt grows by 9% (annualised) 3 years % 9.47% 5 years % 10.31% Bear Market - Case 2 - If equity declines by 15% and debt grows by 9% (annualised) 3 years % 4.03% 5 years % 2.65% * Long-term capital gains without using indexation Summing up CPOFs are an attractive option for investors keen on investing in equities but wary of the downside risks. The uncertainty on the direction of the equity markets has enhanced the attraction for this category of funds. This can be seen from the rise in assets under management (AUM) of the category by over three times in the last two years from Rs bn in December 2010 (12 schemes) to Rs bn in December 2012 (58 schemes). Risk-averse investors can, thus, move beyond fixed deposits and take exposure to equities without worrying about negative returns or erosion of their capital. However, decisions must be based on one s risk profile, goals, liquidity requirements and scheme due diligence. 35

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41 Scheme list of factsheets covered* S.No Category Scheme Name 1 Large Cap oriented Equity funds ICICI Prudential Focused Bluechip Equity Fund 2 Large Cap oriented Equity funds UTI Opportunities Fund 3 Diversified Equity funds Mirae Asset India Opportunities Fund 4 Diversified Equity funds Reliance Equity Opportunities Fund 5 Diversified Equity funds UTI MNC Fund 6 Small and Mid-cap Equity funds Birla Sun Life MNC Fund 7 Small and Mid-cap Equity funds HDFC Mid-Cap Opportunities Fund 8 Equity Linked Savings Scheme Canara Robeco Equity Tax Saver 9 Equity Linked Savings Scheme Franklin Taxshield Fund 10 Index funds Kotak Nifty ETF 11 Consistent Performers - Equity funds ICICI Prudential Discovery Fund 12 Consistent Performers - Equity funds Tata Dividend Yield Fund 13 Consistent Performers - Balanced funds HDFC Balanced Fund 14 Consistent Performers - Balanced funds HDFC Prudence Fund 15 Monthly Income Plan - Aggressive HDFC Monthly Income Plan LTP 16 Gilt funds Kotak Gilt - Investment 17 Long Term Income funds SBI Dynamic Bond Fund 18 Consistent Performers - Debt funds Kotak Bond Plan 19 Short Term Income Funds HDFC Short Term Opportunities Fund 20 Ultra Short-term Debt funds HDFC Cash Management Fund - Treasury Advantage Plan 21 Ultra Short-term Debt funds ICICI Prudential Flexible Income Plan 22 Liquid funds UTI Liquid Cash Plan *Schemes with CRISIL Fund Rank 1 across all four quarters in the respective categories for the year 2012 are covered in the above list. Wherever this condition was not satisfied, funds with the highest number of CRISIL Fund Rank 1s in 2012 have been included. Only select categories of the mutual fund ranking have been included. Ranks in the factsheet are as of December

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65 Annexures 63

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67 I - Fund House Wise Ranks (December 2012) Fund House Fund Rank 1 Fund Rank 2 Fund Rank 3 Fund Rank 4 Fund Rank 5 Grand Total Axis Mutual Fund Baroda Pioneer Mutual Fund Birla Sun Life Mutual Fund BNP Paribas Mutual Fund BOI AXA Mutual Fund Canara Robeco Mutual Fund Daiwa Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Franklin Templeton Mutual Fund Goldman Sachs Mutual Fund 1 1 HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund IIFL Mutual Fund 1 1 Indiabulls Mutual Fund 1 1 ING Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC Nomura Mutual Fund Mirae Asset Mutual Fund 1 1 Morgan Stanley Mutual Fund Peerless Mutual Fund PineBridge Mutual Fund Pramerica Mutual Fund Principal Mutual Fund Quantum Mutual Fund 1 1 Reliance Mutual Fund Religare Mutual Fund Sahara Mutual Fund 1 1 SBI Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Union KBC Mutual Fund 1 1 UTI Mutual Fund Grand Total

68 II - AUM Trends 1. AUM by Fund House (Quarterly Average AUM in Rs bn) AMC Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 YoY Change in AUM HDFC Mutual Fund Reliance Mutual Fund ICICI Prudential Mutual Fund Birla Sun Life Mutual Fund UTI Mutual Fund SBI Mutual Fund Franklin Templeton Mutual Fund Kotak Mahindra Mutual Fund DSP BlackRock Mutual Fund IDFC Mutual Fund Tata Mutual Fund Deutsche Mutual Fund Sundaram Mutual Fund Religare Mutual Fund JPMorgan Mutual Fund L&T Mutual Fund Axis Mutual Fund Canara Robeco Mutual Fund JM Financial Mutual Fund LIC Nomura Mutual Fund IDBI Mutual Fund Baroda Pioneer Mutual Fund HSBC Mutual Fund Principal Mutual Fund Goldman Sachs Mutual Fund Peerless Mutual Fund Taurus Mutual Fund BNP Paribas Mutual Fund Union KBC Mutual Fund Indiabulls Mutual Fund Morgan Stanley Mutual Fund Pramerica Mutual Fund ING Mutual Fund PineBridge Mutual Fund BOI AXA Mutual Fund Motilal Oswal Mutual Fund Daiwa Mutual Fund Mirae Asset Mutual Fund Sahara Mutual Fund Quantum Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund IIFL Mutual Fund Fidelity Mutual Fund* Grand Total Data sorted by December 2012 average AUM *merged with L&T Mutual Fund since December 2012 Source: AMFI 66

69 2. AUM by Category (Quarterly Average AUM in Rs bn) AMC General Equity Sector Balanced Index Gold ETF Category General Debt FMP Ultra Short Term Debt Gilt Money Market Fund of Axis Mutual Fund Baroda Pioneer Mutual Fund Birla Sun Life Mutual Fund BNP Paribas Mutual Fund BOI AXA Mutual Fund Canara Robeco Mutual Fund Daiwa Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund Franklin Templeton Mutual Fund Goldman Sachs Mutual Fund Funds and others Grand Total (Rs bn) HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund IIFL Mutual Fund Indiabulls Mutual Fund ING Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC Nomura Mutual Fund Mirae Asset Mutual Fund Morgan Stanley Mutual Fund Motilal Oswal Mutual Fund Peerless Mutual Fund PineBridge Mutual Fund Pramerica Mutual Fund Principal Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Religare Mutual Fund Sahara Mutual Fund SBI Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Union KBC Mutual Fund UTI Mutual Fund Grand Total (Rs bn) Grand Total (%) 23% 1% 3% 0.3% 1% 20% 14% 14% 1% 22% 1% Data as of December 2012 Source: AMFI Equity Oriented Others Debt Oriented Others 67

70 3. AUM by Investor type (%) Liquid/ money market Data as of September 2012 Source: AMFI Gilt Debt oriented Equity oriented 15 Balanced Gold ETF Other ETF Fund of funds Institutional Retail HNI 4. AUM by Geography (%) Figure 5: By Geography Next 10 cities, 14% Next 20 cities, 5% Top 5 cities, 74% Next 75 cities, 5% Other cities, 2% Data as of December 2012 Source: AMFI 5. Category wise fund flows Year Income Funds Equity Funds Balanced Funds Mutual fund inflows / outflows (Rs Bn) Liquid / Money Market Funds Gilt Funds Gold ETFs Other ETFs Fund of Funds Investing Overseas Total (Rs bn) Source: AMFI 68

71 III - CRISIL Mutual Fund Ranking Methodology CRISIL Mutual Fund Ranking is the relative performance ranking of mutual fund schemes within the peer group. The basic eligibility criteria for inclusion in the ranking universe are the three-year NAV history (one-year for liquid, ultra short-term debt, index and short term income funds and five years for consistent performers), assets under management in excess of category cut-off limits and complete portfolio disclosure. The ranking is done based on the following parameters: Category wise average AUM cut-offs Assets under management (AUM), on quarterly average basis for the last quarter of the period for which ranking is done, should be in excess of the cut off limits as under: 1. Large Cap Oriented Equity Funds Rs 500 mn 2. Diversified Equity Funds Rs 500 mn 3. Small and Mid-cap Equity funds Rs 500 mn 4. ELSS Rs 250 mn 5. Thematic Infrastructure Funds Rs 500 mn 6. Index Funds Rs 100 mn 7. Balanced Funds Rs 150 mn 8. Monthly Income Plan - Aggressive Rs 250 mn 9. Monthly Income Plan Conservative Rs 250 mn 10. Long Term Income funds Rs 250 mn 11. Short Term Income funds Rs 250 mn 12. Liquid Funds Rs 500 mn 13. Ultra Short-term Debt funds Rs 500 mn 14. Long Term Gilt funds Rs 250 mn Superior Return Score The superior return score (SRS) is the relative measure of the schemes returns and the risk (volatility) compared to their peer group. It is computed for equity oriented categories, ELSS, long term income, balanced, monthly income plan (aggressive & conservative) and long term gilt category for a three-year period broken into four quartiles. Each nine-month quartile has a progressive weighting starting from the latest period: 32.5%, 27.5%, 22.5% and 17.5%, respectively. In case of consistent performers (for equity, balanced and debt categories), the SRS is calculated for a period of five years, with each of the one year period being weighted progressively with the most recent period having the highest weightage. Mean Return, Volatility and Downside Risk Probability (DRP) Mean return and Volatility are considered as separate parameters in case of liquid, ultra short-term debt and short term income funds while they are combined under SRS for the rest of the categories. Mean return is the average of daily returns based on the scheme s NAV and the volatility is the standard deviation of these returns. DRP measures the probability of the investment getting lower returns than short tenor risk free securities. It is measured by assessing the number of times a scheme s return falls below the risk free return during the period of analysis. The risk free return is taken as the 91-day T-Bill yield over the period. DRP is considered for liquid and ultra-short term debt categories. The above are computed for the latest one year period and broken into four quarterly periods. Each period is assigned a progressive weight starting from the latest period as follows: 32.5%, 27.5%, 22.5% and 17.5%, respectively. Mean return, Volatility and DRP are measured using asset weighted returns of a scheme across plans until September 30, The performance of the surviving plan is considered for all periods of performance analysis post this period. 69

72 Portfolio Concentration Analysis Concentration measures the risk arising out of improper diversification. Diversity score is used as the parameter to measure industry concentration and company concentration for equity schemes. In case of debt schemes, the industry concentration is analysed for any exposure to sensitive sectors which are arrived at based on CRISIL s assessment of the prospects for various sectors and the company concentration is analysed at an individual issuer specific limit of 10%. Liquidity Analysis It measures the ease with which the portfolio can be liquidated. In case of equities, liquidity is calculated by taking the weighted average impact cost of the past three months. Impact cost data used is as published by stock exchanges. Gilt liquidity is measured by analysing the market turnover, days traded and size of trade in any security for a three-month period for that security. Corporate debt liquidity is computed by classifying each security into three categories - liquid, semi liquid and illiquid - and then evaluating a scheme s exposure to each category. Asset Quality Asset Quality measures the probability of default by the issuer of a debt security to honour the debt obligation in time. Modified Duration /Average Maturity Modified duration /Average maturity is considered across all debt categories except liquid to capture the interest rate risk of the portfolio. The lower the value, the better it is. Asset Size It is considered only for ultra short-term debt and liquid categories to take into account the effect of large fund flows on a schemes performance and the ability of the scheme to manage such flows optimally. The higher the asset size, the better it is. Tracking Error This is used only for index schemes. The tracking error is an estimation of the variability in a scheme s performance vis-à-vis the index that it tracks. The lower the tracking error, the better it is. Historic CRISIL Mutual Fund Ranking Performance Historic CRISIL Mutual Fund Ranking performance is considered only for the consistent category. Quarterly mutual fund rankings during the five year period of analysis are broken into five blocks of one year each. Each block is differentially weighted with the most recent period having the highest weightage. CRISIL Mutual Fund Ranking Interpretation Rankings category Interpretation CRISIL Fund Rank 1 Very good performance (top 10 percentile of the universe)* CRISIL Fund Rank 2 Good performance CRISIL Fund Rank 3 Average performance CRISIL Fund Rank 4 Below average performance CRISIL Fund Rank 5 Relatively weak performance *If the top 10 percentile figure is not an integer, the same is rounded off to the next integer. The same approach is adopted for CRISIL Fund Rank 2 (11 th to 30 th percentile), CRISIL Fund Rank 5 (last 91 st to 100 th percentile) and CRISIL Fund Rank 4 (71 st to 90 th percentile) clusters. The residual schemes in the universe are placed in the CRISIL Fund Rank 3 cluster. 70

73 IV - CRISIL Mutual Fund Ranking Category Definitions Only open-ended schemes that are open for subscription are eligible for the selection criteria under the following categories: 1. Equity Funds Schemes that predominantly invest in equity instruments (excluding hybrid schemes) are considered. Schemes with the following features are excluded - Schemes not open to investors at large and open only to a specific set of investors. Schemes whose scheme information document/statement of additional information permits dynamic asset allocations (both debt and equity could vary between 0 and 100%), except on receipt of an undertaking from the AMC, assuring predominant investment in equity. Schemes for which there is a delay in receipt of portfolios from the fund house. Schemes with a stated objective to predominantly invest in derivatives and /or overseas securities. Eligible schemes are classified into the following sub-categories - a) Large cap-oriented equity funds Schemes that have at least 75% exposure in CRISIL-defined large cap stocks (top 100 stocks based on 9-month daily average market capitalisation on the National Stock Exchange) in the preceding 36 months split into four blocks of nine months each. The 75% exposure in these stocks must be available for a minimum of six out of nine months in each block. Exposure to Nifty futures is considered as large cap exposure. b) Small and mid-cap-oriented equity funds Schemes that have less than 45% exposure in CRISIL-defined large cap stocks for the preceding 36 months. c) Thematic Infrastructure funds Schemes that follow an investment objective to invest in infrastructure related sectors. CRISIL defined infrastructure sectors are - Energy, Construction, Industrial Capital Goods, Industrial Manufacturing, Metals, Cement & Cement Products, Services and Telecom. d) ELSS Schemes that invest in equity and equity-related instruments, and are aimed to enable investors to avail tax deduction under Section 80 C of the Income Tax Act are considered. e) Diversified equity funds All remaining eligible equity schemes are ranked under this category. f) Index funds Schemes launched with an objective to generate returns that are commensurate with the performance of their benchmark s Total Return Index (TRI), subject to tracking errors are considered. Open-ended exchange traded funds (ETFs) are also included. The following will be excluded: Index schemes that allow the fund manager to take overweight or underwieght investment positions on stocks that comprise their benchmark index. Index schemes having sectoral indices as benchmarks. Index schemes that are benchmarked to indices other than S&P BSE Sensex and CNX Nifty. 71

74 2. Hybrid Funds a) Balanced funds Schemes investing more than 65%, but less than 80%, of the AUM in equity securities, and 20-35% in debt securities are considered. Speciality schemes with the above asset allocation focusing on children, pension, unit-linked insurance, young citizens, charity, and retirement are not considered. b) Monthly Income Plan (MIP) Schemes, where investment into equity is restricted to a maximum of 30% and generally declare monthly dividends are considered as - MIP - Aggressive: where the objective limits investment in equity securities to 15-30% of the corpus. MIP - Conservative: where the objective limits investment in equity securities to 15% of the corpus. 3) Debt Funds a) Long term income funds Schemes that predominantly invest in long-term corporate debt papers and government securities (G-Secs) are considered. These schemes also invest in short-term and money market securities. b) Short term income funds Schemes that predominantly invest in short term corporate debt papers, Certificates of Deposit (CDs), money market instruments and G-Secs are considered. Only funds with minimum investment amount less than Rs. 1 million are considered. c) Liquid funds Schemes whose portfolio constitutes money market instruments and short-term debt instruments with a residual maturity of up to 91 days are considered. Only funds with minimum investment amount less than Rs. 1 million are considered. d) Ultra short term debt funds Schemes named as ultra short term debt schemes are considered. Those without such nomenclature will be considered only if the AMC assures their positioning as an ultra short term debt scheme and also their risk-return characteristics needs to be in line with category peers. Only funds with minimum investment amount of less than Rs. 1 million are considered. e) Long term gilt funds Schemes that predominantly invest in long-term securities issued by the central and the state governments, including government securities and T-bills, of varying maturities are considered. 4) Consistent Performers Schemes that have rankings in all quarterly CRISIL Mutual Fund Ranking over a 5-year timeframe are considered. Note: While the above classification will be the guide in selection and creation of peers for the purpose of ranking, CRISIL will be free to take a subjective call on the inclusion/exclusion of a scheme from among the peers in a ranking category. 72

75 Glossary of terms used in the factsheets Average Maturity Dividend Yield (%) Expense Ratio (%) Jenson's Alpha Modified Duration Portfolio Beta Portfolio P/B Portfolio P/E Trailing R Squared Sharpe Ratio Sortino Ratio Standard Deviation This measure applies to debt mutual fund schemes. A debt fund portfolio comprises of a large number of debt securities with different maturities. Therefore, weighted average maturity is calculated to disclose the average maturity of all debt securities in the portfolio. This explains the sensitivity of a debt fund to the market interest rate changes This measure is used to know how much dividend has been paid by a scheme in a year for the price an investor has paid for buying its units. Any investor whose investment objective is capital consumption may choose to invest in a scheme with high dividend yield A measure to determine the cost incurred by a mutual fund company to manage the respective mutual fund scheme. Expenses such as fund manager's fee, custodial charges, taxes, legal fees etc are considered to derive the expense ratio. A higher expense ratio may eat into the returns delivered by the scheme. Therefore, expense caps have been decided by the regulator for respective mutual fund categories A measure to judge the fund manager's capacity to generate excess returns. This ratio enables an investor to choose a portfolio that can deliver better returns at a given level of risk This measure helps in determining the effect of 1% interest rate change on the bond prices. Any change in the performance of the scheme due to interest rate change is explained by the modified duration Beta is a measure of volatility of the portfolio with respect to the market, also known as systematic risk. A beta measure of 1 indicates that the portfolio volatility will be same as that of the index/market. Any value greater than 1 indicates that the portfolio is more volatile than the index and vice versa Price to Book Value ratio (P/B) is calculated by dividing the current share price by the book value per share. The portfolio P/B ratio is arrived at by adding the weighted average P/B ratios of all securities in the portfolio Price Earnings ratio (P/E) is defined as the price paid for a share relative to the profit/income earned per share. Trailing P/E is based on the past earnings i.e the actual earnings of a company. A portfolio's trailing P/E ratio is compared with the average P/E for the respective mutual fund category in order to identify whether the portfolio is wisely priced or not A measure that explains the correlation between the scheme portfolio and the benchmark index. The percentage indicates the dependence of portfolio movement on benchmark movement. A higher R Square value assures a healthy relationship between the scheme portfolio and benchmark index, and therefore, a more useful beta value. On the other hand, a lower R Square value indicates that there is no significant relation between the scheme portfolio and benchmark index Sharpe ratio is arrived at by dividing the returns in excess of risk-free return with the standard deviation of portfolio returns and is also explained as the risk adjusted return measure. This ratio helps in identifying whether the fund returns are the result of good investment decisions or greater risk taken by the fund manager. Higher the Sharpe ratio, the better it is A refined version of Sharpe ratio, this is a risk adjusted measure of return that considers the downside deviation of portfolio returns as denominator. This ratio penalizes only those returns that are less than the required rate of return A statistical measure that defines the expected volatility and the risk associated with a portfolio. This explains the variation/deviation from the average returns delivered by the scheme. A higher standard deviation means higher volatility and a lower standard deviation means lower volatility 73

76 Style Box - Debt Style Box - Equity Treynor Ratio Investment Style Box defines the placement of total portfolio of the scheme in the appropriate style. For debt fund, styles are defined on the basis of credit quality (high, medium and low) and interest rate sensitivity (high, medium and low). The combination of these two parameters gives nine styles of investment, e.g. high credit quality with low interest rate risk, low credit quality with medium interest rate risk etc. Investment Style Box defines the placement of total portfolio of the scheme in the appropriate style. For equity fund, styles are defined on the basis of market capitalisation (large-cap, diversified and small and mid-cap) and investment style (growth, value and blend). The combination of these two parameters gives nine styles of investment, e.g. large-cap growth, mid and small-cap value, diversified blend etc. In growth style of investment, the fund manager invests in avenues where the growth rate is higher than the industry growth rate. In value style of investment, the fund manager invests in securities that are priced lower than their fair value A risk adjusted measure of return that considers beta as a measure of volatility. This ratio explains the returns earned in excess of risk-free return per unit of market risk. Higher the Treynor ratio, the better it is 74

77 List of Abbreviations used in the Year Book AMCs - Asset Management Companies AMFI - Association of Mutual Funds in India AUM - Assets Under Management Bn - Billion Bps - Basis Points BSE - Bombay Stock Exchange CAD - Current Account Deficit CAS - Common Account Statement CBLO - Collateralized Borrowing And Lending Obligation CD - Certificates of Deposit CP - Commercial Paper CPI Consumer Price Index CPOF - Capital Protection Oriented Fund CQR - Credit Quality Rating CRR - Cash Reserve Ratio CSO - Central Statistical Office DDT - Dividend Distribution Tax DRP - Downside Risk Probability ECB - European Central Bank ELSS - Equity Linked Savings Scheme EMI - Equated Monthly Installment ETFs - Exchange Traded Funds FD - Fixed Deposit FDI - Foreign direct investment FII - Foreign Institutional Investors FMCG - Fast-Moving Consumer Goods FMPs - Fixed Maturity Plans FoF - Fund of Fund GDP - Gross Domestic Product G-Sec - Government Securities HFCs - Housing Finance Companies HNI - High Net-worth Individual HUF - Hindu Undivided Family HUL - Hindustan Unilever Ltd. IDF - Infrastructure Debt Fund IMF - International Monetary Fund IT - Information Technology LBMA - London Bullion Market Association LTCG - Long-term Capital Gain MIP - Monthly Income Plans Mn - Million NAV - Net Asset Value NBFC - Non-Banking Financial Company NRI - Non-Resident Indian NSE - National Stock Exchange NSEL - National Spot Exchange Ltd. OMO - Open Market Operation RBI - Reserve Bank of India RGESS - Rajiv Gandhi Equity Savings Scheme SEBI - Securities and Exchange Board of India SIP - Systematic Investment Plan SLR - Statutory Liquidity Ratio SRS - Superior Return Score STCG - Short-term Capital Gains STT - Securities Transaction Tax T-bill - Treasury Bill WPI - Wholesale Price Index Y-o-Y - Year on Year 75