Mutual Funds

Capitalstars Investment Advisor

In a rare case of interoperability between regulators, the PFRDA has allowed NPS intermediaries to use mutual fund or equity KYC for NPS. Through a circular dated 23rd September, the regulator allowed NPS Points of Presence (PoPs) to use KYC done for stocks or mutual funds for NPS registration. PoPs can fetch the KYC details from the relevant KRA (KYC Registration Agency).

Note however that investing in the NPS through a PoP is more expensive than investing directly in the NPS. PoPs charge a fee of 0.25% of every contribution. For example an NPS contribution of ₹50,000 per year will attract a fee of ₹125. Most banks in India have registered has PoPs. You can check if your local bank is a PoP here. In addition, entities such as Computer Age Management Services and Stock Holding Corporation of India are also PoPs. In addition, some fintech players like Paytm and Mywaywealth (earlier Fisdom) have also secured an online PoP license. They will be able to leverage their existing mutual fund clients for onboarding customers into NPS.

Alternatively you can directly sign up for NPS through a Central Recordkeeping Agency (CRA) such as NSDL or Karvy. This will save you the fees charged by PoPs for contributions. However in this case, the benefit of existing KYC for mutual funds will not be available. Nonetheless, the KYC for this type of online registration is relatively smooth and can be completed in a single sitting using your ID, address proof and PAN number. In a recently held Workshop on NPS for Corporates by PFRDA-FICCI in Mumbai, Mono Phukon, General Manager at PFRDA clarified that the regulator was in discussions with the Department of Revenue, Ministry of Finance for reviving Aadhar OTP KYC for NPS. Recently this procedure was revived by SEBI for mutual fund investors, which you can read about here

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 The services include empanelment with multiple AMCs, a client portfolio management software and a distributor commission calculation software

In a bid to push up its market share of mutual fund transactions, the BSE has unveiled a set of add on services for mutual fund distributors using its BSE Star MF platform, free of cost. The services include empanelment with multiple Asset Management Companies (AMCs), a client portfolio management software and a distributor commission calculation software. The portfolio management software, launched in association with with Vijya iPrism, will have features like a dashboard for client holdings and data on fund returns.

“The client portfolio software will be useful for Independent Financial Advisors (IFAs) who don’t do goal planning and need a basic version," said Vinyak Sapre, a Mumbai-based IFA. “The brokerage calculation will also help if it is fully automated. Multiple products listing on the BSE platform will prove very handy for IFAs," he added. BSE recently announced that it had received IRDA approval for insurance distribution.

BSE competes with rival National Stock Exchange (NSE), multi-AMC owned MF Utility, Registrar and Transfer Agents (RTAs) like CAMS and Karvy and directly with Asset Management Companies (AMCs) in the market for mutual fund transactions. BSE Star MF has around 55,000 mutual fund distributors registered on its platform and processes 7.84 lakh transactions per day. In terms of market share of mutual fund transaction volume, BSE Star MF commands a roughly 20% market share said Ganesh Ram, Business Head, Mutual Funds, BSE. Apart from the new add-on services, BSE also launched the iOS version of its Star MF app.
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Mutual fund investments in stock markets halved to Rs 55,700 crore in the first 10 months of the year because of lower participation from retail investors.

Fund managers had bought shares worth Rs 1.12 lakh crore during January-October 2018, according to the data provided by the Sebi.

“Inflows from retail investors into mutual funds have slowed compared with a year ago. As a result, mutual funds deployment into stock markets has lowered,” said Vidya Bala, co-founder of Primeinvestor.in.

“Despite markets moving to new highs, since the rally is restricted to select stocks, retail investors have not seen any positive impact on their wealth. Unless retail appetite increases this trend may continue,” she added.


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Tata Focused Equity Fund, an open-ended equity scheme is currently open for subscription and will close on November 29.
Investors could avoid the new fund offering (NFO) of Tata Focused Equity Fund and opt for funds in this category with a track record, according to financial planners.

“Focused funds run concentrated portfolios where stock picking is most crucial. One needs a demonstrated track record before allocating money,” says Harshvardhan Roongta, chief financial planner, Roongta Securities, a Mumbai-based financial planner. Roongta believes there is no compulsion for an investor to invest in an NFO and he should wait to see how the portfolio is constructed before putting in his money.
Frequent churn in the top management as well as fund management team at Tata Mutual Fund have been a cause of worry for investors in the past. Financial planners feel a stable fund management team is a prerequisite before recommending an actively managed equity mutual fund (MF) scheme.

“In the past there have been frequent management changes at the fund house. Investors should wait for the management team to stabilise,” says Amol Joshi, founder, Plan Rupee. Tata Mutual Fund appointed Prathit Bhobe as the CEO in early 2018 and Rahul Singh as the CIO in October. Performance of Tata Mutual Fund's schemes have picked up in the last one year.

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Most of the funds in the small cap category are in negative territory over this period
Going by one year's track record, the fund's outperformance looks impressive, but investors shouldn't lose sight of the fact that equities are long term vehicle of investments

Axis Small Cap fund
In a market where small cap stocks are being thrashed badly (S&P BSE Smallcap is down nine per cent), Axis Small Cap fund has delivered a return of around 22% over the past one year ended November 13, 2019 as per the data available on Valueresearchonline.com.

Most of the funds in the small cap category are in negative territory over this period. The average return of the funds in this category is around minus two per cent over the past one year.

The fund manager of Axis Small Cap fund, Anupam Tiwari, who has been managing the fund since October 2016 says that the outperformance of the fund can be attributed to the stock selection strategy.

Our allocation in sectors such as IT, Chemicals and Financial has worked well for the fund, added Mr Tiwari.

Expanding more on the stock selection strategy, Mr Tiwari said, “We select stocks looking at four parameters — good corporate governance, quality of business, business cycle (favourable business cycle) and valuation."

We completely avoid companies with bad corporate governance and those which don’t show the ability or intent to scale up the business, he added.

Mr Tiwari said, “We look for good scalable and niche businesses and prefer debt free balance sheets. According to us, in case of small caps valuations are least important factor when compared to other mentioned above. But we do try to buy stocks at reasonable price and generally hold them for long term, he added.

With 37 stocks, the portfolio of the fund looks a bit concentrated when compared to some of its peers. This may show high conviction of the fund manager but such strategy can hit the performance of a fund during a market downturn especially in case of small cap stocks.

The fund manager said we do have stock allocation limit to manage the liquidity risk that a small cap fund may face.

What should investors do?

Going by one year's track record, the fund's outperformance looks impressive, but investors shouldn't lose sight of the fact that equities are long term vehicle of investments and therefore it's important investors don't choose their equity funds based on one year performance alone. If you are investing for many years in the future, it's important to look at returns many years in the past as well. Look at historical returns and ideally analyse the returns of the fund over longer period of at least five years to see the performance of the fund across market cycles. Also, returns should also not be the only criteria while choosing funds to invests in. Portfolio attributes such as the concentration risk as well as valuations should also be looked at say experts.

Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors, said, "If an investor is choosing to invest in a fund, he or she should not look at the returns in isolation and should also look at the portfolio of the fund. The current portfolio valuations of Axis Small Cap fund is higher than its peers. If this is going to be the only small cap fund in an investor's Portfolio, it is better to add one more fund with relatively lower valuations to balance the risk."



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Tata Asset Management has launched an open-ended equity scheme called Tata Focused Equity Fund. According to the press release sent by the fund house, the scheme will invest in a concentrated portfolio of up to 30 stocks across market capitalisations.

The benchmark for Tata Focused Equity Fund will be S&P BSE 200 TRI and the scheme will be managed by Rupesh Patel.

The new fund offer (NFO) will open for subscription on November 15 and closes on November 29.

The fund house in a communication said that the scheme will bet on 30 equity stocks – high conviction ideas backed by meaningful allocation. The scheme will be a multi cap fund with no market cap bias or sector preferences and importantly, a low churn construct.

"The fund aims to construct a portfolio of stocks on bottom up basis following the GARP—growth at reasonable price philosophy. The fund will follow multi cap approach without having any particular market cap bias or sector bias. The tilt towards any particular market cap or sector will be purely incidental and would be a result of stock selection. The objective is to have stocks based on their relative risk-reward opportunity and fundamental attributes. Further, from a Risk Management point of view, we would aim to maintain optimal liquidity," said Rupesh Patel, senior fund manager, Tata Mutual Fund.

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Know what to look for and what to discount while assessing the past performance of a mutual fund
In the absence of rolling return data, look at calendar year performances and trailing returns
The return from a mutual fund is typically the start point of evaluating the performance of any mutual fund. While past performance cannot be a guarantee for continued performance in the future, knowing what to look for and what to avoid while assessing past performance can go a long way in making better investment decisions. Make sure the returns show you the whole picture before you make an investment choice.

Define the category

As a first step, you may list funds with the highest returns in the asset class you choose, but this list may not suit your core portfolio needs. For example, the funds that generated the highest one-year return as of 8 November were banking and financial services funds in the equity asset class, and gilt funds in the debt asset class—both tactical fund categories. If you invested in these, you may end up with funds that perform well only in a particular economic cycle or situation.
You should consider the returns only after you have identified the category of funds that meets your investment objectives. “Investors suffer from recency bias and would be tempted to select the funds with the best recent returns," said Srikanth Meenakshi, co-founder, PrimeInvestor.in, a personal finance research platform.
“But this may lead to undesirable choices. It is important to compare the performances of funds of similar profile," he added. For example, if you are willing to take some risk for a goal that is 10 years away, then the multi-cap category may suit your needs, and you may consider the returns of funds from this category.

Using trailing returns

Trailing returns, say the return from a fund over the last five years, is sensitive to the level of the fund value at the start and end points of the period. If the markets and, therefore, fund values were low at the start point and high at the end date then the returns will look very good and vice-versa. A small shift in the dates considered for calculating the returns may change the complexion of the fund’s returns.
For example, the performance of large-cap funds in the period before the general election results in May 2019 and post that event will show significant difference with the funds coming to their own as large-cap indices rallied. The investment strategy adopted by the fund, such as value investing or focused portfolios, may also explain the outperformance of some funds in a particular period. But this may not sustain across market cycles.
Use trailing returns over longer investment horizons, seven years and more, where performance history is available, that would have captured different market conditions to get a better idea of a fund’s performance. “Indian equity investors have only seen a bull market since 2013 and they need to go beyond that period to see how a fund has performed in different market scenarios, including bear markets," said Amit Kukreja, a registered investment adviser and founder, amitkukreja.com. “In case of debt funds, the evaluation period can be much shorter since the debt markets have seen credit cycles and interest rate cycles in the last five years," he added.
“The time frame considered for returns should be relevant to the fund category. For debt funds for shorter investment horizons, one month, three months, six months and one year may be more relevant," said Meenakshi.

Return consistency

Once you have identified the suitable category, it is always tempting to select the fund with the highest recent returns. It is more important to consider the consistency of returns and your comfort with volatility. While it is virtually impossible for a fund to be a top performer in every period, consider the ones that have been in the top quartile or at least have been in the top third of all funds in the category during different periods.
Trailing return over a period tends to conceal volatility since it only looks at the fund’s value at the start and end points in the period under consideration. Some funds may see deep drawdowns in performance in the interim that is made up by a steep climb. Other funds may generate more steady returns even though the trailing return numbers over a period for both funds may be similar.
Calendar year returns can serve the purpose of identifying such volatility since you will be breaking down a period into multiple discrete periods. For example, if you were looking at the seven-year performance of an equity fund, apart from the trailing return, you should also consider the returns in calendar years 2012, 2013 and so on till 2019. Since you are looking at multiple periods, any deep fall or steep rise in any calendar year will show up. “Look at the returns generated by the fund and the benchmark for multiple calendar years to get an idea of consistency," said Meenakshi.
Rolling returns are the most effective way to look at return performance in a way that eliminates the biases inherent in trailing returns. This is because it considers the returns of multiple desired holding periods, for example all the seven-year returns possible by moving forward the start date by one month each time in the last 10 years. By doing this, it captures the fund’s performance continuously rather than just over two points of time. In the absence of rolling return data, look at calendar year performances in addition to trailing returns to understand the fund’s performance in different market conditions and the consistency with which they have generated returns.
Take outlier returns as cues to investigate further. If a fund’s return in a period is much higher than that of its peer group funds, then it is a good idea to investigate before investing.
A case in point is the sharp 45% rise in the net asset values (NAVs) of PGIM India Mutual Fund’s ultra-short duration fund in end September 2019 when it recouped the amounts due from the Anil Ambani group companies, Reliance Business Broadcast Network Holdings Ltd (RBBNH) and Reliance Commercial Finance Ltd, which it had earlier written down when the debentures were downgraded. This pushed the fund to being a top performer in the three- month investment horizon, a period that investors in the ultra-short debt fund category would generally consider. The return of the fund in this period was more than double than that of other funds in the category and may seem as an attractive pick. But if you dug deeper, you would find that the fund had 100% exposure to RBBNH paper and the jump in the NAV came as a result of the write-back after the company paid its dues.

Relative returns

A 20% return from an equity fund may be considered good, while 10% may be seen as average. But it is important to see the return relative to the benchmark and peer group for better assessment. A 20% return may be seen as inadequate if markets have in the same period generated 30% returns. “Alpha relative to the index of a fund is an important consideration for selection. There is no point in investing in an actively managed fund and bearing the expense ratio if it is unable to beat the benchmark," said Kukreja.
While it is important to look beyond returns to determine the performance of a mutual fund, returns continue to be the cornerstone of investment decisions. To make the right use of the data on past performance, it is important to interpret it right. Use it along with the risk and portfolio data before making investment decisions.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

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Capitalstars Investment Advisory

Focused equity funds, which do not hold more than 20-30 stocks in their portfolios, are finding favour with financial planners now. These funds aim to deliver higher returns by investing in a limited number of stocks — typically large caps with strong growth prospects. With many equity funds struggling to beat their benchmarks, financial planners believe a clutch of fewer stocks could help generate better returns. Many multi cap funds hold 70 to 100 stocks in their portfolios. Focused funds, however, carry a higher risk as the portfolios are concentrated with top 10 holdings accounting for almost 60% of portfolios. Five focused funds financial planners recommending:

Axis Focused 25 Fund
Fund Manager: Jinesh Gopani
Assets under management: Rs 8,800 cr
Lumpsum returns (3/5 year %): 18.85/14.68
SIP returns: 3/5 year (%) annualised: 14.64/15.32

Top 3 holdings: HDFC Bank, Bajaj Finance, Kotak Bank
Top 10 stocks (%) holding: 65%
The fund manager has a concentrated portfolio of high conviction ideas with 25 stocks. Companies that come into the portfolio have the capability to sail through business cycles without being affected by short-term market volatility. The fund has a core portfolio of 50-60% which consists of stocks that are steady compounders with low
volatility. 20-25% of portfolio consists of alpha generators bought with a horizon of 18-24 months and the balance 25% is allocated to emerging themes, with a long term time frame. The scheme is benchmark agnostic and is overweight capital goods, engineering and construction, financials and consumer.

IIFL Focused Equity Fund
Fund Manager: Mayur Patel
Assets under management: Rs 446 cr
Lumpsum returns (3/5 year %): 14.63/12.71
SIP returns: 3/5 year (%) annualised: 14.97/14.27
Top 3 holdings: ICICI Bank, HDFC Bank, Axis Bank
Top 10 stocks (%) holding: 57%

The fund manager builds a portfolio of 20-25 high conviction stocks, with no restrictions on sector exposure. While picking stocks in the portfolio, the focus is on investing in businesses with strong earnings growth, cash generating capital-light business model, high ROCE, ROE, and attractive valuation relative to its peers. Typically, the fund managers stay away from companies that have run up beyond fundamentals and where margin of safety is low. The fund is overweight financials, technology and healthcare and has added pharma stocks like Abbott and Dr Reddy’s in October.

Sundaram Select Focus Fund
Fund Manager: Rahul Baijal
Assets under management: Rs 1046 cr
Lumpsum returns (3/5 year %): 16.2/9.42
SIP returns: 3/5 year (%) annualised: 12.66/12.25
Top 3 holdings: HDFC Bank, Reliance, ICICI Bank
Top 10 stocks (%) holding: 64%

The fund manager runs a 30 stock portfolio, with a focus on large caps. While 80-90% of the portfolio is in large cap stocks, a small portion is allocated to mid cap stocks. Being overweight on banking and financials, and underweight on pharma and low weight technology has helped the fund outperform. The fund manager buys stocks with a high visibility of earnings growth, quality and at reasonable valuations.

SBI Focused Equity Fund
Fund Manager: R Srinivasan
Assets under management: Rs 6,125 cr
Lumpsum returns (3/5 year %): 14.34/13.66
SIP returns: 3/5 year (%) annualised: 13.48/13.65
Top 3 holdings: HDFC Bank, SBI, P&G
Top 10 stocks (%) holding: 60%

Known in its earlier avatar as SBI Emerging Business, the scheme has beaten its benchmark over time frames of 1-, 3-, 5- and 10 years. Managed by R Srinivasan for the last 10 years, the fund runs a concentrated portfolio with two-thirds of its assets in large caps and the balance in mid caps. The scheme is benchmark agnostic and the fund is overweight financials, FMCG and engineering, and underweight technology and automobiles.

Motilal Oswal Focused 25 Fund
Fund Manager: Siddarth Bothra
Assets under management: Rs 1,184 cr
Lumpsum returns (3/5 year %): 12.84/11.85
SIP returns: 3/5 year (%) annualised: 11.07 /11.55
Top 3 holdings: HDFC Life Insurance, HDFC Bank, ICICI Bank
Top 10 stocks (%) holding: 71%

The scheme has one of the most concentrated portfolios in the equity mutual fund space with just 20-25 stocks in the portfolio. The top 10 picks account for 71% of its portfolio, with the top 5 accounting for 44% of the portfolio. The portfolio primarily consists of large-caps with financials accounting for 46%. Staying away from PSUs, utilities has helped the scheme come up with a stellar performance in the last one year.
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Capitalstars Investment Advisory

Fund houses have not tinkered with their portfolio as Sebi has assured them that their concerns would be looked into
At present, the Sebi Act exempts mutual funds from investment vehicle provisions

The market regulator has written to the finance ministry over its recent circular tagging foreign-controlled mutual funds as investment vehicles, two people familiar with the matter said. The regulator’s intervention comes amid fears that the new rules could force several equity asset managers to freeze investment activity and even sell their holdings.

The Securities and Exchange Board of India (Sebi) made its representation after mutual funds made their case to the regulator. The anomaly arising from the circular is that retail domestic money invested in the schemes of foreign-owned mutual funds will be counted as foreign money.

“As per the Sebi Act, under all rules and regulations, mutual funds are exempted from all money pooling or investment vehicle provisions. So, the ministry’s view that foreign majority-owned funds are investment or pooling vehicles is in direct contradiction," the first of the two people cited earlier said on condition of anonymity. “This will create unnecessary hurdles for the fund houses if they were to increase their stake in any scrip, which already has foreign investment close to maximum permissible limit under Reserve Bank of India- prescribed threshold."

The 17 October circular under the Foreign Exchange Management Act (FEMA) defined mutual funds with more than 50% foreign shareholding as investment vehicles. This will force them to comply with investment caps under foreign direct investment (FDI) rules. For example, if a company is allowed 74% foreign shareholding under FDI rules, any investment in it by an Indian mutual fund with more than 50% foreign shareholding will be considered part of the 74% cap. Many funds may have to sell their holdings in companies where the overall “foreign holding" has crossed the prescribed cap. So far, only category-III alternative investment funds, real estate investment trusts and infrastructure investment trusts were categorized as investment vehicles.

Some of the fund houses that could be directly impacted by the move are HDFC Mutual Fund, ICICI Prudential Asset Management Co. Ltd and Mirae Asset Mutual Fund, all of which have over 50% foreign ownership.

“We have taken cognizance of the issue and are in dialogue with the finance ministry to resolve the issue at the earliest. The ministry has also understood our concern and may issue a clarification soon," a regulatory official, the second person cited earlier, said on condition of anonymity.

An email sent to Sebi seeking comment on Friday was not answered till press time.

“The recent changes in the law have resulted in investments by some Indian mutual funds in Indian companies being now treated as indirect foreign investment, as against the earlier position of it being treated as Indian domestic investment," said Gautam Mehra, tax and regulatory services leader at PwC India. “Accordingly, additional investments by these mutual funds or other foreign investment would be restricted in investee companies where the permissible level of FDI has been exhausted. Reporting obligations and adherence to pricing norms also follow as a result. It would be useful for stakeholders to fully understand the implications of this change."

Sebi’s communication to the ministry follows multiple representations from asset management companies, which are likely to be impacted by the move. The Association of Mutual Funds in India had also sent a consolidated representation to the markets regulator, said the first person cited earlier.

A senior executive at a foreign-owned fund house said the move unnecessarily favours domestic fund houses.

“Imagine a situation where I decide to invest in a banking stock, but it has already close to 74% foreign investment. So if I do invest in that scrip, I would potentially end up locking out the entire market (foreign investment)," he added.

Despite the concerns, fund houses have so far not tinkered with their portfolio as the regulator has assured them that their concerns would be looked into.

“We, as well as some of the other fund houses potentially impacted by the move, have not changed or altered our portfolios," said the chief executive of a foreign-owned fund. “If this is the law of the land, though highly unfair and may defy logic, we will have to do a major rehaul of our portfolios. The industry is also in talks with consulting firms to guide us in understanding the implications and getting those addressed by the government."

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Equity mutual funds witnessed a net inflow of Rs 6,015 crore in October, the lowest in the last five months, amid a rally in the stock market following a series of reform measures taken by the government. According to data by the Association of Mutual Funds in India (Amfi), open-ended equity schemes witnessed an infusion of Rs 6,026 crore, while there was a small outflow of Rs 11 crore from close-ended equity plans, translating into a net inflow of Rs 6,015 crore in October.

In comparison, net inflows in equity and equity-linked saving schemes stood at Rs 6,489 crore in September.

Such inflows stood at Rs 9,090 crore in August, Rs 8,092 crore in July, Rs 7,585 crore in June and Rs 4,968 crore in May.

"Net inflows continue to pour into the equity-oriented mutual fund schemes tracking the surge in the domestic markets. Through the month of October, the category received a net inflow of Rs 6,026 crore. Though slightly lower than the net inflow of Rs 6,609 crore in the month of September.

"The positive inflow indicates building up of a positive investment trend. A series of steps taken by the government in recent times to boost the domestic economy had improved sentiments and helped the markets to surge. This has helped investors slowly gain confidence and get back to investing," said Himanshu Srivastava, senior analyst manager research, Morningstar Investment Adviser India.

Going ahead, experts believe that equity markets would perform better in the coming months due to positive initiatives taken by the government, which will drive further inflows in mutual funds.

Despite the decline in inflows, the asset base of equity mutual funds increased to Rs 7.9 lakh crore in October from Rs 7.6 lakh crore in the preceding month.

Meanwhile, BSE benchmark Sensex had gained nearly 4 percent in October.

Overall, mutual fund schemes witnessed an inflow of Rs 1.33 lakh crore last month as compared to the redemption of Rs 1.52 lakh in September. The positive inflow could be attributed to debt-oriented schemes, which saw an inflow of 1.2 lakh crore.

Among debt-oriented schemes, liquid funds -- with investments in cash assets such as treasury bills, certificates of deposit and commercial paper for shorter horizon -- saw an infusion of Rs 93,203 crore last month as compared to an outflow of Rs 1.4 lakh crore in September.

The inflow has pushed the asset base of the mutual fund industry, comprising 44 players, by more than 7 percent to over Rs 26 lakh crore at October-end from Rs 24.5 lakh crore at the end of September.


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Sebi on Thursday directed mutual funds to create segregated portfolios of unrated debt in case of default as the watchdog seeks to curb instances of distressed assets impacting investor returns.

The directive comes against the backdrop of liquidity woes in the NBFC sector raising concerns about mutual fund investment in such stressed companies.

Sebi in a circular said it has decided "to permit the creation of a segregated portfolio of unrated debt or money market instruments by mutual fund schemes of an issuer that does not have any outstanding rated debt or money market instruments".

This is allowed provided that a segregated portfolio of such unrated debt or money market instruments may be created only in case of actual default of either the interest or principal amount.

The creation of segregated portfolios is a mechanism to separate illiquid and hard-to-value assets from other more liquid assets in a portfolio.

It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets.

The regulator asked asset management companies (AMCs) to inform industry body Amfi immediately about the actual default by the issuer. Following this, Amfi will have to immediately inform the same to all AMCs.

Pursuant to the dissemination of information by Amfi about actual default by the issuer, AMCs may segregate the portfolio of debt or money market instruments.

Sebi said that the creation of a segregated portfolio should be optional and at the discretion of the AMC. It should be created only if the Scheme Information Document (SID) of the scheme has provisions for a segregated portfolio with adequate disclosures.

All new schemes to be launched will have the enabling provisions included in the SID for the creation of a segregated portfolio, it added.

In December 2018, Sebi had allowed mutual funds to create segregated portfolios with respect to debt and money market instruments.

It had said that segregated portfolio may be created, in case of a credit event at issuer level -- downgrade of a debt or money market instrument to ‘below investment grade' or subsequent downgrades of the instruments from ‘below investment grade' or similar such downgrades of a loan rating -by a registered credit rating agency.

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Capitalstars Investment Advisor

IIFL Focussed Equity Fund is the topper in the multi-cap category in one year. It is ahead of all the other multi-cap schemes from big AMCs. The scheme is offering 21.12% returns in one year at a time when the market has been through a volatile phase. Shivani Bazaz of ETMutualFunds.com spoke to Mayur Patel, Principal Fund Manager, IIFL AMC, to find out what contributed to the outstanding performance. Edited interview.

IIFL Focussed Equity Fund is the topper in the multi-cap category in the last year. The scheme managed to offer around 27% returns. What are the factors that contributed to the performance?
In a volatile market, our bottom up-strategy based on our proprietary SCDV framework - the scheme allocates 40-60% of the portfolio in the secular segment (S) and remaining in quality cyclical (C) and defensives (D) while avoiding investments in Value traps (V) - has enabled us to deliver top-quartile returns in our IIFL Focussed Equity Fund. Despite a challenging environment, a few companies have achieved significant growth in operating performance over the past year. Through our bottom-up research process, we have been able to identify some of these opportunities. For instance, NBFC, pharma, and industrial sectors were amongst the worst-performing sectors in the last one year, whereas most of our alpha has come from these sectors. Our portfolio companies like P&G Health, Aavas Financiers, Siemens, and Bajaj Finance have grown profits significantly over the last year which has also reflected in their superior price performance.
IIFL Focused Equity Fund is hardly five years old. Do you think the recent performance by the scheme would help to change the profile of the fund house?
IIFL AMC is one of the leading alternative asset managers, with an AUM of over $3.3 billion across asset classes like equity, private equity, credit, and real estate. IIFL focussed Equity Fund is one of our first equity funds and is our only equity mutual fund scheme – in line with our approach of focussing our efforts and investment ideas across a single scheme. We have received higher interest from investors and distribution partners due to our recent performance.

How are you going to position the scheme? What is the USP of the fund management in this scheme?
The scheme is positioned as a multi-cap focussed fund with a bottom-up approach. Our investment strategy will continue to be linked to our SCDV framework where we allocate 40-60% of our portfolio in the secular segment (S) and remaining in quality cyclical (C) and defensives (D) while avoiding investments in Value traps (V). Key USPs of this scheme is our bottom up-driven stock selection, our emphasis on buying stocks based on our risk-reward framework, maintain a focussed portfolio of 25-30 high conviction stocks and our ability to shift allocations between cyclicals and defensives based on our assessment of the situation.

The scheme is betting big on financials. Is that one of the main reasons for its outperformance? Which other sectors are you looking at?
We strongly believe that over the long term India will see a trend of financialization - leading to exponential growth across the financial sector (such as banks, financiers, insurance and investments). As I said earlier, over the past year the financial sector has underperformed broader benchmarks. However, due to our bottom-up stock picking approach we have been able to create outperformance through superior stock selection. Financials, IT, pharma and industrials are our top sectoral positions.

What would you tell investors? Who should invest in IIFL Focussed Equity Fund? What can they expect from the scheme?
From our point of view, we will continue to stick to our investment and stock selection approach that has served us well in the past. Hopefully in the times to come we will be able to create value for a larger base of investors.



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Capitalstars Investment Advisor

Financial planners very often have to deal with the problem of plenty. When clients first meet them with their portfolio, in most cases, they have too much of one or more financial products. A few planners Mint spoke with said multiple bank accounts, an overdose of mutual fund investments and an excessive number of insurance policies are quite common. You may think that having multiple products signifies a healthy diversification, but it could also compound to confusion in terms of keeping a track. Too many investments, especially of the same nature, often is the result of fuzzy goals or last-minute rush to save taxes but keep in mind that too much of anything is never a good idea.

Vishal Dhawan, certified financial planner, and founder, Plan Ahead Wealth Advisors said, a clutter of financial products means one is unfocused on the end objective. “What invariably happens is when you actually sit down to clean it up, you are no more rational and tend to eliminate everything and start from scratch, which is a wasted effort," said Dhawan. So is there a perfect number of every financial product that one must hold? Not always. But there’s a way to ensure multiple products don’t come in the way of a healthy financial life. We tell you how to Marie Kondo your money life.

Mutual funds

When it comes to mutual funds, understand that having too little exposure means being too concentrated and having too many schemes means being over-diversified. Sanjiv Singhal, founder, Scripbox, an online mutual funds platform said that too many mutual funds in an individual’s portfolio are a common phenomenon as investors approach investing as buying mutual funds rather than analyzing their financial objective. “Sometimes, investors justify holding many funds in the name of diversification. But most people forget that a mutual fund is already diversified in itself. Having too many different funds that do the same job is not going to help your portfolio," added Singhal. Understand that over-diversification could make it difficult to keep a tab on how the schemes are performing and, hence, you may not realize when to exit the ones underperforming. Financial planners suggest investing in not more than six to seven schemes. “Since the underlying securities in the schemes are a driver of performance, too many schemes could result in large overlaps of securities," said Dhawan.

The right way to plan your mutual fund investments is to start with a goal and depending on your risk appetite and time horizon, build the portfolio. “Having two each of large-cap and multi-cap equity mutual funds should cover most long-term goals. For those with larger portfolios, an addition of mid-cap funds and international funds may be considered," said Singhal. For short-term goals and emergency needs, investing in two or three liquid debt funds is a good idea. Also, keep in mind that over-diversification could make it difficult for your nominee to get a grip on things in your absence. Each fund house has a slightly different process for transmission of assets and a nominee has to navigate through this. It’s a fair amount of paperwork, said Singhal. It’s advisable to stick to only as many funds as you really need and ensure your nominees are aware of them.

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The Securities and Exchange Board of India has issued a circular regarding the process to be followed for Aadhaar-based electronic KYC exercise for domestic investors. According to the circular, direct investors can simply go to the AMC’s website and use Aadhaar to do the e-kyc process. However, mutual fund distributors who want to undertake Aadhaar authentication services through KUAs (KYC User Agency) should enter into an agreement with the KUA. They should also get themselves registered with UIDAI as sub-KUAs.

“This is definitely going to make life easier for a lot of retail investors, especially young investors. Many young, new investors are wary of the offline paperwork and are comfortable with digital kyc processes,” says Vishal Dhawan, Founder, Plan Ahead Wealth Advisors, a Mumbai-based wealth management firm.

Sebi cited the circular by the Department of Revenue, Ministry of Finance, issued on 9 May on procedure for processing of applications under section 11A of the Prevention of Money Laundering Act, 2002(“PMLA”), for use of Aadhaar authentication services by entities other than the banking companies. The use of Aadhaar-based KYC had stopped after the Supreme Court, in its judgement in September,2018, struck down Section 57 of the Aadhaar Act as unconstitutional. As a result of the judgement, no com ..

Mutual fund advisors say the re-introduction of Addhar based digital verification would draw many young investors to mutual funds. Advisors say many young investors change their decisions to invest in mutual funds when they face some trouble with offline procedures. "We have seen people in their 20s decide against investing in the one week that their application takes to get processed. The ‘inconvenience' of filling forms, taking out time, paperwork is a hindrance for them,” says Vishal Dhawan.

However, there are many investors who are still not ready to move to the online mode because they are sceptial about the security online. For them central-kyc and physical verification is a better way of doing things. Mutual fund advisors also say that senior citizens, retired investors, investors who are not tech savvy still prefer the offline mode more than the online kyc. “There are investors who don’t even use net banking. They are not comfortable giving away their Aadhaar details etc to any ..

Sebi has given clear instructions on how retail investors and distributors can approach the new e-kyc. Here are the points that you should know.

If you are investing in a mutual fund scheme directly through the website of the mutual fund house, you can just go to the website, put in your Aadhaar number and complete your KYC by putting in some details and the OTP that comes on your registered mobile number. Sebi has directed the AMCs to not store the Aadhaar number in the databases of the company.

If you are investing via a mutual fund platform, it needs to be either a KUA (KYC Using Agency) or the SEBI registered intermediary which is also a Sub-KUA for you to use the e-KYC facility.

If you are investing via a mutual fund distributor or appointed person for e-KYC through Aadhaar. The Sebi-registered distributors will perform e-KYC using registered devices with KUAs. Investor will enter Aadhaar number and biometric and provides consent on the registered device.


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Capitalstars Investment Advisor

Mutual fund houses were on a spree of launching debt and equity schemes in 2019 despite the market volatility and the credit crisis in particular that shook the mutual fund industry.

According to the data available on the Association of Mutual Funds in India’s website, in 2019, the 43-player mutual fund's industry launched a total of 84 new fund offers.

Of this, interestingly, 25 schemes were from the debt category higher from in 2018 when 18 debt schemes were launched.  Debt funds were impacted the most after credit events.

Fund experts feel that some fund houses may have had a gap in their portfolio and maybe looking to fill it through new scheme launches.
In Oct 2017, SEBI broadly classified all schemes under 10 categories of equity funds, 16 categories of debt funds, and six categories of hybrid funds.

According to the guidelines, there can be only one scheme per category. Excess schemes will have to either be wound up, merged or need to undergo a change in their fundamental attributes.

Another fund manager said that, in the debt category, most fund houses were launching overnight funds that prove to be less risky, particularly after the default of IL&FS hit liquid schemes in 2018.

Overnight funds invest its assets in CBLO (collateralized borrowing and lending obligations) and repo/reverse repo instruments that mature in one day. Liquid funds invest in treasury bills, commercial paper and certificate of deposit that have a maturity up to 91 days.

Overnight funds expose investors neither to credit risk nor to duration risk but yield paltry returns of about 6.4 percent. Liquid funds do slightly better.

On the equity front, the new fund offers fell to 28 schemes from 34 NFOs launched a year ago.

To name a few, DSP Mutual Fund, IDFC Mutual Fund, Canara Robeco, Aditya Birla Sun Life Mutual Fund, Kotak Mutual Fund, Yes Mutual Fund have NFOs in 2019.

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Capitalstars Investment Advisor

Mid-cap mutual fund category is offering 5.06% returns in one year and small-cap funds category is offering 0.46% returns in the same period. The large-cap category is offering 12.64% returns in one year.

The market is hovering around its historic peak, but only some large-cap schemes benefited from it. Mid-cap and small-cap mutual fund schemes continue to languish at the bottom.

Many mutual fund investors share the sentiment. Even the data seems to support their claim. Small and mid-cap schemes seem to have gotten out of the negative territory with the rally, but they are yet to start performing well. Mid-cap mutual fund category is offering 5.06% returns in one year and the small-cap funds' category is offering 0.46% returns in the same period. The large-cap category is offering 12.64% returns in one year.

Here is the scoop: your mid-cap and small-cap schemes may be on the path of the revival of sorts. Yogesh Bhatt, Senior Fund Manager, ICICI Prudential Mutual Fund, says the recent uptick that was witnessed in the S&P BSE Sensex is not a narrow-based rally. “The rally is very much happening across the broader indices. The broader market index is up 2.5%, whereas the small-cap index has gone up 4.5 % in the last two weeks,” says Bhatt.

Bhatt firmly believes that the mid-cap and small-cap schemes are on the path of recovery. “Even though two weeks are a small time-frame to consider, we believe that revival is in process in small and mid-caps,” he says.

Neelesh Surana, CIO, Mirae Asset, also shares the view that the mid-cap and small-cap segments have started showing signs of revival. Surana manages Mirae Asset Emerging Bluechip Fund, one of the top-performing large & mid-cap scheme. The scheme manages assets worth of little over Rs 8,000 crore as on September.


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Capitalstars Investment Advisor

Historically, it has been observed that small-sized companies tend to do well — many a time outperforming large-cap companies — when earnings rally kicks in.

After a massive underperformance of the BSE Small-Cap index to Sensex since January 1, 2018 to August 31, 2019 by 45%, the trend seems to have reversed. In the past two months, BSE 500, BSE Midcap and BSE Smallcap indices have returned 10.3%, 12.2% and close to 10%, respectively, outperforming the Sensex’s 9.7%. Before September, 80% stocks of the BSE 500 index were in the red — indicating a broader market rally. Hence, it makes sense to increase exposure to quality small cap schemes.

Historically, it has been observed that small-sized companies tend to do well — many a time outperforming large-cap companies — when earnings rally kicks in. Investors who believe in this historical trend can consider investing in small-cap schemes. But it may take a long time for this trend to materialize. Hence, such investors need to exercise patience and have an investment horizon of 5 to 10 years. The reasons include markets being at all-time highs and earnings recovery remains uncertain, at least in the foreseeable future.

Among the small-cap schemes, investors can consider SBI Small Cap Fund. The scheme has been a stellar performer, beating its benchmark and peers by a fair margin. In the past 5- and 10-year periods, the scheme has given 17% and 18% returns, while its peer schemes are way behind as they have given returns of 8% and 13% during the same periods, respectively. Fund manager R Srinivasan is known to spot small-cap companies with good management quality and stable return ratios. This scheme is recommended for investors who believe in market wisdom of high risk fetches high rewards

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CapitalStars Investment Adviser

The draft documents for 125 NFOs have been submitted with the Securities and Exchange Board of India (Sebi). Interestingly, many mutual fund companies are looking at index funds and global funds.

With just two months to go for the year-end, draft papers for nearly 125 mutual fund schemes have been filed by asset management companies with Sebi so far in 2019, much lower than 211 such documents submitted in entire 2018. Fund houses attributed the fewer NFOs (new fund offers) in 2019 to tepid investors' sentiment and liquidity crisis in debt funds.

Fixed maturity plan, exchange-traded fund (ETF), retirement, sustainable equity fund and business cycle fund are some of the themes for which the mutual fund houses have filed the applications. Interestingly, many mutual fund companies are also looking at index funds and global funds.

The draft documents for 125 NFOs have been submitted with the Securities and Exchange Board of India (Sebi) so far in 2019 (till October 31), according to the market regulator.

Of these, some of the schemes have already been launched after getting regulatory clearances.

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CapitalStars Investment Adviser

The current rally in the stock market that helped S&P BSE Sensex breach the historic peak has helped equity mutual fund schemes to pocket handsome returns. Eight equity mutual fund schemes gained over 15% in the past one and a half months since the rally started. This surely would bring cheers to investors who had put in Rs 14,251 crore in these schemes.

The benchmark index has moved up by 12% in the last 40 days. The index touched its lifetime record high of 40,392 levels on Thursday.

Quant Active Fund is the top gainer in the last 40 days with 17.86% absolute returns, followed by UTI Transportation and Logistics Fund that gained 17.51%. Nippon India Tax Saver (ELSS) Fund, the second-largest tax-saving or ELSS fund, rose by 16.25% in the same time period. The scheme manages assets worth Rs 9,827 crore.

Other schemes that made quick returns include ICICI Pru Bharat Consumption Fund (16.20%), Quant Infrastructure Fund (16.18%), Quant Mid Cap Fund (15.18%), Quant Tax Plan (15.17%) and DSP Top 100 Equity Fund jumped 15.13%.

There are 73 equity schemes, including the eight funds mentioned above, which grew by over 12% in the last one and half months. Around 250 equity schemes grew over 10% in the same time period.

ETMutualFunds.com looked at a total of 402 open-ended equity mutual fund schemes, including ETFs and index funds.

There were a few schemes, especially in the technology category, that saw negative returns despite the recent rally in the stock market.



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