CRISIL mutual fund index returns

CRISIL Fund Monitor Mutual fund asset growth slows to 5 percent in June CRISIL mutual fund index returns Analytical contact: Krishnan Sitaraman Director CRISIL FundServices Email ksitaraman@crisil.com Satish Prabhu Senior Manager CRISIL FundServices Email sprabhu@crisil.com Chart 1 - Mutual fund industry average assets under management Source: AMFI 1 lakh cr == 1 trillion

The growth in average assets under management (AAUM) was only 5 percent in June, as compared to 16 percent witnessed in May. Nevertheless the average AUM rose by Rs.319 billion to an all time high of Rs.6.7 trillion (including fund of funds) driven by inflows into equity funds. At the same time debt fund outflows towards the end of the month saw the industry s month-end AUM drop by 12 percent to Rs.5.8 trillion. Despite seeing net outflows of over Rs.850 billion in the month, debt funds continued to dominate the AUM spectrum with an almost 70 percent industry asset share. The debt fund outflows were mainly on two counts, one being advance tax outflows (of about Rs.200-300 billion) and the second were banks pruning mutual fund investments to meet their quarter end balance sheet requirements on capital adequacy. The latter has begun to have a material impact on the industry AUM because of the significant investments by banks in mutual funds. As per latest RBI data, banks investment in mutual funds were Rs.1.23 trillion as of June 19, which is expected to have reduced towards the end of the month due to redemptions by banks to meet their capital adequacy needs. Equity oriented funds witnessed mark to market losses as their gain in AUM was only Rs.8 billion, almost half the net cash inflows of Rs.15 billion. As per SEBI data, mutual funds were net buyers of secondary market equities to the extent of Rs.8.39 billion in June compared to Rs.23 billion in May. Table 1 - Trend of fund flows and AUM category-wise Source - AMFI Continued retail interest in equity markets saw equity oriented funds witnessing net inflows of Rs.15 billion in June, on the back of Indian equity markets best quarterly performance in 17 years with the S&P CNX Nifty gaining 42 percent. June saw the index up by almost 70 percent from its 52-week low. Despite the best quarterly performance for the June ended quarter, equities saw a reversal of the uptrend seen in April and May with the S&P CNX Nifty down 3.6 percent in June. Profit-taking, slowing FII purchases (net buying of Rs.32 billion as against Rs.206 billion in May), negative global cues and an apprehension of the Union Budget, were some of the reasons behind the reversal. Sector wise IT, FMCG,

capital goods and consumer durables stocks performed the best in June with the respective indices returning 10, 7.9, 7.4 and 7.3 percent gains. Key losers were realty and oil & gas sectors with the respective indices ending 16 and 9.9 percent in the red. IT shares rose on the back of a depreciating rupee, hopes of revival in the global economy and the government s plan to spend Rs.400 billion on IT in the coming years (including the recently announced Unique Identification Authority of India). FMCG shares rose on defensive buying while capital goods shares gained on views that the government will boost infrastructure investments in the budget. Mutual Funds see net inflows of over Rs.1 trillion in H1 2009 For the first half of 2009 (H1 2009), Indian mutual funds attracted net inflows of over Rs.1 trillion, primarily in debt funds (including income, liquid and gilt funds). Equity oriented funds had a share of only Rs.41 billion (4 percent) of these inflows. Assets under management saw a 41 percent growth (about Rs.1700 billion) during this period with over two thirds of this growth (absolute) being contributed by debt funds. However, AUM of equity oriented funds grew at a faster pace of 45 percent in H1 2009 (Rs.547 billion) compared to 40 percent in the case of debt funds (Rs.1153 billion) because of the base effect. The growth in AUM of equity oriented funds was mainly on account of mark to market gains as the S&P CNX Nifty and the BSE Sensex were up by 45 percent and 50 percent over this period. Reliance Mutual Fund remains top assets grosser Reliance Mutual Fund continued to dominate the asset tally with average assets of Rs.1.08 trillion in June (up by 5.5 percent). Reliance Mutual Fund garnered nearly Rs.24 billion from its recently concluded NFO (New Fund Offer) of Reliance Infrastructure Fund. HDFC Mutual Fund retained its second position, its AAUM witnessed a growth of 3.7 percent to Rs.782 billion. ICICI Prudential Mutual Fund occupied third spot, its AAUM rose by 7 percent to Rs.702 billion in June. UTI Mutual Fund and Birla Sun Life Mutual Fund followed with an AAUM of Rs.680 billion and Rs.563 billion, up 7 percent and down 0.5 percent respectively. The month saw 26 out of 35 fund houses registering growth in average AUM. Reliance Mutual Fund topped average AUM growth for the third straight month with a rise of Rs.56 billion followed by ICICI Prudential Mutual Fund whose average AUM rose by Rs.46 billion in June. UTI Mutual Fund closely followed with a growth of Rs.45 billion in average assets. In percentage terms, Edelweiss Mutual Fund recorded the highest growth in average AUM which more than doubled from Rs.200 million in May to Rs.450 million in June. Morgan Stanley Mutual Fund witnessed the second highest growth in AAUM of around 20 percent to Rs.22 billion in June. Among key laggards, Bharti AXA Mutual Fund saw a decline of around 11 percent in AAUM to Rs.2.43 billion followed by Taurus Mutual Fund down 6 percent to Rs.5.61 billion as of end June. CRISIL Fund~eX gains close to 50 percent over the quarter, the highest since inception

The CRISIL Fund~eX (tracks diversified equity funds) returned 48 percent during the quarter (highest quarterly gains since inception) higher than the 42 percent of the S&P CNX Nifty. On a monthly basis, however, CRISIL Fund~eX lost 1% in June 2009 as against a 3.6% loss in S&P CNX Nifty. The CRISIL Fund~bx (tracks balanced funds) gave 40 percent returns in the quarter, the second best among CRISIL indices. It gained 0.5% in June. Among debt-oriented indices, the CRISIL MIPEX (benchmark for monthly income plans) gained 8% in the quarter but lost 0.11% in June. The CRISIL Fund-dX (tracks long-term bond funds) saw the highest monthly gains among CRISIL indices of 0.72% in June. Among the other debt indices, CRISIL STBEX (benchmark for short-term bond funds) gave 0.45% monthly gains while CRISIL~LX (tracks liquid funds) returned 0.41% in June while CRISIL MF~Gilt Index (tracks gilt funds) made marginal monthly gains. JM Basic Fund returns 95 percent in the quarter ended June Diversified equity funds performed exceedingly well over the quarter ended June. Out of the close to 300 schemes analysed, JM Basic Fund gave the highest return of 95 percent over the latest quarter closely followed by Taurus Infrastructure Fund with 94 percent gains. Principal Junior Cap Fund (83 percent gains), JM Emerging Leaders Fund (82 percent gains) and JM Small and Midcap Fund (82 percent gains) were among the other top gainers. While over two thirds of these schemes beat the returns of the S&P CNX Nifty, none gave negative returns over the quarter. Meanwhile, IDFC Small & Midcap Equity (SME) Fund topped the 1-month returns table with 6 percent gains followed by Sahara Midcap Fund (4.25 percent gains) and Escorts Tax Plan (3.93 percent gains). Over the 1-year period, more than two thirds of the diversified equity funds analysed were in the positive zone with JM Mid Cap Fund topping with 32 percent gains for the year ended June 2009 followed by Reliance NRI Equity Fund which gained 29 percent over the year while Birla Sun Life Pure Value Fund rose by 28 percent. Financial sector leads 3-months and 1-year returns chart; IT funds dominate 1-month returns The financial sector led the 3-months returns chart with Sahara Banking and Financial Services Fund returning 80 percent while Sundaram BNP Paribas Select Thematic Funds Financial Services Opportunities gained 74 percent and Reliance Banking Fund gained 68 percent. The sector also dominated 1-year returns with UTI Thematic - Banking Sector Fund, Reliance Banking Fund and Sundaram BNP Paribas Select Thematic Funds Financial Services Opportunities returning 66 percent, 68 percent and 74 percent respectively in the year ended June 2009. IT funds dominated 1-month returns with ICICI Prudential Technology Fund giving 9.69 percent returns followed by Franklin Infotech Fund gaining 9.32 percent. Regulatory Missives In a major investor-friendly initiative, SEBI announced the abolition of entry loads for all mutual fund schemes from August 1. It further stated that, going forward, any upfront commission to distributors shall be paid by the investor directly. Also, distributors shall disclose the commission, trail or otherwise, received by them for different schemes / mutual funds which they are distributing or advising investors.

This move is likely to result in an investor pays advisory model wherein an investor would decide the amount of commission / advisory fees paid to the distributor based on the value of services rendered. In the same circular, SEBI also mentioned that out of the exit load or Contingent Deferred Sales Charge (CDSC) charged to the investor, a maximum of 1 percent of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately. Other regulatory changes included, SEBI slashed NFO document filing fee to 0.002 percent of mop-up as against 0.005 percent charged currently. SEBI also clarified that mutual funds must ensure that schemes comply with the amended norm on investments in money market instruments, limiting exposure to a single issuer to 30 percent, within the next three months. In another important development, SEBI, in view of the improved liquidity scenario, decided to reduce the discretionary mark-up and mark-down levels applicable for both rated and unrated debt securities for calculating NAVs, to the following:- for a rated instruments with duration up to two years, the revised discretionary mark-up and mark-down level stands at 100 bps and 50 bps from the earlier level of 500 bps and 150 bps respectively for a rated instruments with duration over two years, the proposed mark-up and mark-down levels have been fixed at 75 bps and 25 bps respectively, from the previous level of 400 bps and 100 bps Impact of the Union Budget From the mutual fund perspective, the Union Budget s thrust on infrastructure funding is expected to result in an increasing appetite for infrastructure-oriented funds. However, in the light of the recent SEBI circular on entry loads, AMCs may market existing funds within this category, rather than come out with New Fund Offers (NFOs), exhibiting a marked deviation from the past precedents. The focus on infrastructure projects is also expected to result in an increasing number of corporate bond and equity issuances for fund raising by infrastructure companies and institutions. This would provide an expanding avenue for mutual funds to invest in. Further, the increased government borrowings and high fiscal deficit (of 6.8 per cent of 2009-10 GDP) are expected to lead to a rise in bond yields, at least in the short run. This could result in mark to market losses for high duration mutual funds. As a mitigant, one could see fund managers pruning durations on their income and gilt funds to limit losses. Also, increasing issuances of State Development Loans is expected to result in sustenance of the attractive yields for these securities, thus maintaining investor interest.

The Union Budget has also maintained that the New Pension System (NPS) would continue to be subject to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings. The NPS Trust, however, has been exempted from income tax, dividend distribution tax and securities transaction tax for income, dividend paid and purchase and sale of equity shares and derivatives, respectively. While the tax concessions given to the NPS trust is a move in the right direction, the EET method of tax treatment for contributions to the NPS will hinder its potential success in the short term. Other Developments These included, AMFI stating that the government has exempted PAN requirement for investments up to Rs.50,000 in SIPs of mutual funds though a formal notification is yet to be issued; SEBI urging domestic mutual funds to reduce their reliance on corporate money and focus more on retail penetration for long-term growth and Japan s Nomura Holding buying 35 percent stake in LIC Mutual Fund for Rs 3.08 billion. About CRISIL FundServices CRISIL FundServices is India s leading provider of fund evaluation and research to the Indian Mutual Fund industry. Widely acknowledged as the industry standard, CRISIL FundServices is the official provider of valuation tools and market benchmarks. Through its innovative analytics, benchmarks and analytical tools, CRISIL FundServices has played a significant role in shaping investor confidence and facilitating the introduction of best practices in the Mutual Fund industry. Disclaimer CRISIL has taken due care and caution in preparing this report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors in transmission and especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this report. No part of this report may be reproduced in any form or any means without permission of the publisher. Contents may be used by news media with due credit to CRISIL. CRISIL. All Rights Reserved. Contact Details: CRISIL FundServices, CRISIL Limited, 1021, Solitare Corporate Park, Andheri-Ghatkopar Link Road, Mumbai - 400 093 Tel: +91-22-4097 8000 Fax: +91-22-4097 8080 www.crisil.com