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CRISIL Mutual Fund Year BookApril 2013
Mutual Funds - The right road to diversification
CRISIL Mutual Fund Year Book
About CRISIL Limited
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Last updated: March 7, 2013
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1
Table of contents
Foreword ................................................................................................................ 3
Overview ................................................................................................................ 5
I - Mutual fund industry reports double digit growth .................................................. 7
II - Way forward for the mutual fund industry.......................................................... 10
III - Equity market up 28% in 2012 ......................................................................... 12
IV - Gilt prices surge as RBI cuts Repo rate ........................................................... 14
Category wise mutual fund performance ........................................................... 17
I - Category wise risk / return trade-off & indicative investment horizons ................ 18
II - Equity & Hybrid Equity - Small & Midcap Funds outperform .............................. 20
III - Sector / Thematic - Banking Funds dominate 2012, Gold Funds lose lustre ..... 21
IV- Debt & Hybrid Debt - Gilt Funds outperform on softening interest rates ............ 22
Articles ................................................................................................................ 23
I - The Science of Financial Planning - Next Frontier for Investment Advisors ........ 25
II - Declining interest rate scenario - Long-term debt funds to benefit ..................... 28
III - Liquid funds - An alternative to savings bank deposits ..................................... 30
IV - Go for paper gold ............................................................................................ 32
V - Protect the downside in equities through capital protection oriented funds ........ 34
Factsheets ........................................................................................................... 37
Annexures ........................................................................................................... 63
I - Fund House Wise Ranks (December 2012) ....................................................... 65
II - AUM Trends..................................................................................................... 66
III - CRISIL Mutual Fund Ranking Methodology ..................................................... 69
IV - CRISIL Mutual Fund Ranking Category Definitions ......................................... 71
Glossary of terms used in the factsheets ............................................................... 73
List of Abbreviations used in the Year Book ........................................................... 75
2
3
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.
2012 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, 2013.
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 2013. 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 2013. 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 2012.
The CRISIL Mutual Fund Year Book is also available on www.crisil.com free of cost.
We hope you find the coverage informative.
Sandeep Sabharwal
Senior Director – Capital Markets
CRISIL Research
4
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5
Overview
6
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7
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 2011. 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 2013.
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 2012.
Figure 1: Year-wise mutual funds’ AUM and inflow/ outflows
* Month-end AUM as of December every year
Source: AMFI
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 2012. 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 2011. The CNX Nifty had fallen by over 24% in 2011.
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.
4,000
5,000
6,000
7,000
8,000
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2008 2009 2010 2011 2012
(Rs in bn)(Rs in bn)
Inflows/ Outflows AUM* (RHS)
8
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 14.50 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 2011. 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.
2012 - 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 super-
institutional 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 pre-
defined 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.
9
■ 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, 2013.
2. 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, 2013.
3. 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.
10
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
11
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 2011-12.
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 penetrat ion 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.
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 2013.
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 2011.
Figure 2: FII inflows vs CNX Nifty Movement
Source: SEBI, NSE
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 bond-
buying (stimulus) program by $85 bn per month and resolved to keep interest rates at record lows until mid-2015. 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 2012-13 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.
-20
36
92
148
204
260
4,500
4,800
5,100
5,400
5,700
6,000
De
c-1
1
Ja
n-1
2
Fe
b-1
2
Mar-
12
Ap
r-1
2
Ma
y-1
2
Ju
n-1
2
Ju
l-1
2
Aug
-12
Sep
-12
Oc
t-1
2
No
v-1
2
De
c-1
2(FII Inv Rs bn)(CNX Nifty)
FII monthly net investment (Rs Bn) CNX Nifty Value
13
Table 1: Movement of Key Equity Market Indices
Index 31-Dec-12 30-Dec-11 Absolute Change % change
CNX Nifty 5905.10 4624.30 1280.80 27.70
CNX 100 5847.50 4477.35 1370.15 30.60
CNX Bank 12474.25 7968.65 4505.60 56.54
CNX Realty 281.30 184.20 97.10 52.71
CNX FMCG 15175.25 10217.15 4958.10 48.53
CNX Auto 4830.55 3390.55 1440.00 42.47
CNX Mid Cap 8505.10 6111.85 2393.25 39.16
CNX Small Cap 3710.15 2711.85 998.30 36.81
CNX Pharma 6035.00 4576.25 1458.75 31.88
CNX Infra 2585.00 2124.90 460.10 21.65
CNX Commodities 2522.40 2113.85 408.55 19.33
CNX Metal 2900.25 2464.60 435.65 17.68
CNX Energy 7927.40 6968.10 959.30 13.77
CNX IT 6024.95 6139.00 -114.05 -1.86
*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-12 30-Dec-11 Absolute Change % Change
Dow Jones Industrial Average 13104.14 12217.56 886.58 7.26
Nasdaq Composite 3019.51 2605.15 414.36 15.91
FTSE 100 (London) 5897.81 5572.28 325.53 5.84
Nikkei 225 (Japan) 10395.18* 8455.35 1939.83 22.94
Straits Times (Singapore) 3167.08 2646.35 520.73 19.68
Hang Seng (Hong Kong) 22656.92 18434.39 4222.53 22.91
*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 debt-
ridden 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.
14
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 2013.
Figure 3: Movement of MIBOR vis-à-vis Repo and LAF
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 2012-13 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 2013.
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.
0.00
0.50
1.00
1.50
2.00
2.50
7%
8%
9%
10%
11%
12%
13%
31-D
ec
-11
26
-Ja
n-1
2
21-F
eb-1
2
18-M
ar-
12
13
-Apr-
12
09
-Ma
y-1
2
04
-Jun
-12
30
-Ju
n-1
2
26
-Ju
l-12
21-A
ug-1
2
16-S
ep-1
2
12
-Oct-
12
07-N
ov
-12
03-D
ec
-12
29-D
ec
-12
(Rs Trillion)(% yield)
Mibor Repo LAF (RHS)
15
Figure 4: Movement of the 10-year G-Sec yield
Source: CRISIL Fixed Income Database
Table 3: Key Debt Market Indicators / Yield
31-Dec-12 31-Dec-11 31-Dec-12 31-Dec-11
Call 9.50% 8.55% 10 year AAA 8.92% 9.41%
CBLO 8.66% 7.45% Cash Reserve Ratio (CRR) 4.25 6.00
Repo Rate 8.00% 8.50% Statutory Liquidity Ratio (SLR) 23.00 24.00
3 month CP 8.99% 9.65% Government Bonds Outstanding (Rs. Bn) 31966 26710
3 month CD 8.44% 9.37% Corporate Bonds Outstanding (Rs. Bn) 333 395
91-day T Bill 8.16% 8.58% Primary Issuances during the year (Rs.Bn) 3363 2431
365 day T Bill 8.00% 8.28% Bank Credit (Rs Bn) 50272 43656
1 year AAA 8.85% 9.69% Bank Deposits (Rs Bn) 64773 58279
1 Year CP 9.45% 10.10% Credit Deposit Ratio 77.61 74.91
1 Year CD 8.75% 9.67% FII Debt Yearly Net Investments (Rs Bn) 354 408
5-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
8.0%
8.2%
8.4%
8.6%
8.8%
31-D
ec-1
1
31
-Jan
-12
29-F
eb
-12
31
-Ma
r-1
2
30
-Apr-
12
31-M
ay
-12
30
-Ju
n-1
2
31
-Ju
l-12
31-A
ug-1
2
30-S
ep-1
2
31
-Oct-
12
30-N
ov
-12
31-D
ec-1
2
10 Yr G-Sec Yield
16
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17
Category wise mutual fund performance
18
I - Category wise risk / return trade-off & indicative investment horizons
S
No
Fund
Type
Investment
Category Investment Universe
Benchmark
Index
Expected
Returns Risk
Indicative
Investment
Horizon
1 Large Cap
Equity
Equity Oriented
Funds
Funds that invest predominantly in large
cap stocks
CNX Nifty High High More than 5
years
2 Diversified
Equity
Equity Oriented
Funds
Funds that invest in stocks across
market capitalisation and sectors
CNX 500 High High More than 5
years
3 Small and
Midcap
Equity
Equity Oriented
Funds
Funds that invest predominantly in small
and mid-cap stocks
CNX Midcap Very High Very High More than 5
years
4 ELSS Equity Oriented
Funds
Diversified equity funds that have a 3
year lock - in period and provide income
tax exemption under section 80 C upto
Rs 1 lakh
CNX 500 High High More than 5
years
5 Index Equity Oriented
Funds
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
The index
that is
tracked by
the fund.
High High 5 years
6 Arbitrage Equity Oriented
Funds
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
CRISIL
Liquid Funds
index
Low Low More than 1
year
7 Thematic
Equity
Equity Oriented
Sector Funds
Sector funds that invest in companies
from a specified sector. Most common
sector themes are infrastructure and
banking
Relevant
sectoral
indices
Very High Very High More than 5
years
8 Capital
Protected
Equity Oriented
Hybrid Funds
Funds that follow an investment
structure which seeks to protect the
initial investment from capital erosion
CRISIL
Monthly
Income
Plans Index
/ CRISIL
Balanced
Funds Index
Low Low 3-5 years
9 Balanced Equity Oriented
Hybrid Funds
Funds that invest at least 65% of the
corpus into equity stocks and the
remainder into debt securities
CRISIL
Balanced
Fund Index
Moderate Moderate 5 Years
10 FMPs Debt Oriented
Funds
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
Usually
compared
with FD
rates
Moderate Moderate 30 days to 5
years
19
S
No
Fund
Type
Investment
Category Investment Universe
Benchmark
Index
Expected
Returns Risk
Indicative
Investment
Horizon
11 Liquid Debt Oriented
Funds
Funds that invest into short term
corporate debt papers, CDs and money
market instruments with a residual
maturity of up to 91 days
CRISIL
Liquid Funds
index
Very Low Very Low Less than
90 days
12 Ultra Short
Term
Debt Oriented
Funds
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
CRISIL
Liquid Funds
index
Low Very Low Less than 1
year
13 Short-term
Income
Debt Oriented
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.
CRISIL
Short Term
Bond Funds
index
Moderate Low More than 1
year
14 Long-term
Income
Debt Oriented
Funds
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
CRISIL
Composite
Bond Funds
index
Moderate Moderate 3 years
15 Gilt Debt Oriented
Funds
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
CRISL Gilt
Index
Moderate Moderate 3 years
16 Monthly
Income
Plans
Debt Oriented
Hybrid Funds
Hybrid funds that invest a small portion
(15-30%) in equity stocks and seek to
declare monthly dividends based on
cash flows
CRISIL
Monthly
Income
Plans Index
Moderate Moderate 3 Years
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
CRISIL Gold
Index
Moderate Moderate 5 years
20
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 29.19 -0.23 5.48 0.09 12.34 22.83
Diversified Equity Funds 32.33 0.66 6.58 1.06 12.42 25.27
Small & Midcap Funds 41.69 3.36 9.52 0.99 12.20 28.03
ELSS 32.05 0.33 6.14 -0.83 9.11 22.82
Index Funds 27.72 -1.78 4.22 -1.29 10.18 17.37
International Equity Funds 17.64 3.15 5.20 1.73 8.08 NA
Hybrid Equity (Balanced Funds) 26.99 3.98 7.87 4.07 12.23 18.55
Benchmark Indices
CNX Nifty 27.70 -1.89 4.32 -0.77 11.03 18.35
CNX 500 31.84 -2.02 3.09 -2.39 9.83 19.88
CNX Smallcap 36.81 -4.88 2.09 -8.54 7.83 NA
CNX Midcap 39.16 -2.01 4.59 -1.56 11.24 23.82
S&P 500 International 13.41 6.48 8.54 -0.58 1.92 4.94
CRISIL Balanced Funds index 21.28 1.89 5.64 2.83 10.15 14.17
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 2012. 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.
21
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 40.81 27.19 26.43 12.96 18.44 29.39
Sector Funds - Pharma & Healthcare 32.23 9.84 16.96 13.71 14.68 NA
Sector Funds - Banking & Finance 55.64 1.60 11.87 6.65 18.30 NA
Sector Funds - IT 6.34 -7.54 2.80 -0.50 7.36 17.23
Thematic - Infra 28.34 -7.84 -3.31 -8.43 9.69 9.51
Gold Funds* 11.09 20.39 20.86 21.96 NA NA
Benchmark Indices
CNX FMCG 48.53 26.95 28.14 19.09 19.24 21.37
CNX Pharma 31.88 8.92 17.09 13.70 15.36 19.40
CNX Bank 56.54 2.85 11.36 4.80 15.54 26.08
CNX IT -1.86 -10.30 1.17 4.59 6.38 -10.88
CNX Infrastructure 21.65 -13.52 -10.46 -15.54 3.84 NA
CRISIL Gold Index 11.95 21.62 22.05 23.28 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 2013. 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.
22
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 1.14 2.39 5.42 10.53 9.27 7.73
Short Term Income Funds 0.74 2.18 4.94 9.95 9.53 8.01
Liquid Funds 0.71 2.10 4.41 9.52 9.05 7.68
Ultra ShortTerm Funds 0.71 2.14 4.47 9.62 9.25 7.94
Gilt Funds 1.43 2.66 5.16 11.00 8.46 7.03
Benchmark Indices
CRISIL Composite Bond Funds index 0.85 2.14 4.81 9.38 8.12 7.06
CRISIL Short Term Bond Funds index 0.66 2.03 4.56 9.15 8.48 7.21
CRISIL Liquid Funds index 0.65 1.97 3.94 8.54 8.33 7.25
CRISIL Gilt Index 1.51 3.17 6.11 12.01 8.46 7.70
Hybrid - Debt
Category Average Returns % 1 Year 2 Years 3 Years
Monthly Income Plans - Aggressive 14.47 7.18 7.17
Monthly Income Plans - Conservative 12.51 7.48 7.05
Benchmark Indices
CRISIL Monthly Income Plans Index 12.12 6.78 6.86
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, 2012. 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
2013. 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%).
23
Articles
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25
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 Non-Scientific Financial Planning
Looks at a more holistic picture of assets and liabilities,
income, expenses and goals
Uses a macro view of an individual’s finances and looks only
at surplus after expenses
Considers every goal and maps products to each goal
separately
Only looks at major financial goals
Plan prepared by specialists like certified financial planners Plan prepared by the next door financial advisor with an
objective of selling the product rather than meeting the specific
needs
These are strategic long-term plans and are only monitored for
product performance; rebalancing is done to maintain asset
allocation
Plans are not sacrosanct but change at short notice
Products recommended based on an individual’s risk profile
across asset classes like equity, debt and gold
‘One size fits all’ traditional product portfolio and includes bank
fixed deposits, postal deposits and traditional insurance
policies; largely debt focused
There is a complete audit trail of all recommendations and
changes proposed in the plan at any time
There is no audit trail of recommendations
Insurance is planned to support exigencies of an individual and
are largely term policies
Insurance is looked upon as an investment (money back
policies) and not as a support for extreme exigencies
Medical insurance is part of the financial planning process Most individuals are not covered under medical insurance
Process involves regular interactions with the financial planner Process is mostly a one-time exercise
26
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
Calendar
year
Income
(growing by
10% p.a.)
Liabilities
like EMI
etc
Lifestyle
Expenses
(growing by
10% p.a.)
Disposable
Income that
flows into
investments (g)
Value of
Investments
(growing by
12% p.a.)
Goals Goal Status
a b c d=a-b-c g h
Year 1 500,000 125,000 250,000 125,000 - -
Year 2 550,000 125,000 275,000 150,000 140,000 -
Year 3 605,000 125,000 302,500 177,500 324,800 -
Year 4 665,500 125,000 332,750 207,750 562,576 -
Year 5 732,050 125,000 366,025 241,025 862,765 500,000 Bought a Car - Goal Met
Year 6 805,255 125,000 402,628 277,628 676,245 -
Year 7 885,781 125,000 442,890 317,890 1,068,337 500,000
Marriage Expenses-Goal
Met
Year 8 974,359 125,000 487,179 362,179 992,575 -
Year 9 1,071,794 125,000 535,897 410,897 1,517,324 -
Year 10 1,178,974 125,000 589,487 464,487 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.
27
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
Asset Classes
Customer Profile
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’.
28
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 2012. 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 2013. 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 2012-13 compared with 6.2% and 9.3% growth in 2011-12 and 2010-11,
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 2013. 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 25-50 bps during 2013-14.
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 Watch Out For
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.
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.
29
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 - 2000-04, 2008 and post April 2012 - 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
Market Cycles
Period
No of
Years
10 Year Government
Bond Yields (%) Annualized Returns (%)
3 Year FD
Rates (%) Start Date End Date
As on
Start Date
As on
end date
Liquid
Funds
Income
Funds
Gilt
Funds
Short Term
Debt Funds
Secular decline in
yields in 2000-04 1-Apr-00 30-Apr-04 4.08 11.1 5.19 6.97 11.89 16.15 12.17 10.50
Flat to high interest
rate period of 2004-08 30-Apr-04 31-Jul-08 4.25 5.19 9.54 6.45 3.69 3.32 5.86 5.38
Sharp correction in
yields in 2008 31-Jul-08 31-Dec-08 0.42 9.54 5.32 9.17 34.61 60.12 17.81 7.88*
Flat to high interest
rate period of 2008-11 31-Dec-08 16-Apr-12 3.29 5.32 8.45 6.49 4.74 1.93 6.54 9.88
Post RBI's repo rate
cut in April 16-Apr-12 28-Feb-13 0.87 8.45 7.87 9.06 10.91 11.99 9.48 9.04*
*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 www.crisil.com to choose superior performing funds in these categories.
30
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%# 6.50-8.75%* 7.11 - 10.00%**
Minimum lock-in No Yes 1 day
Principal guarantee Government-backed
guarantee of up to Rs 1 lakh
Government-backed
guarantee of up to Rs 1 lakh
No guarantee
Safety (to the principal amount) High High Medium
Penalty (on early withdrawals) No Yes1 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% cess
@ 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 requirement
@@Most 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.
31
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 type Investment amount
(Rs)
Indicative
yield
Pre-tax returns
(Rs)
Tax rate
(highest)
Post-tax returns
(Rs)
Post tax
yield
Savings account
500,000
4.00%# 20,000 30.900% 16,910 3.38%
Fixed deposits 6.50%* 32,500 30.900% 22,458 4.49%
Liquid fund – Dividend 9.29%^ 46,450 28.325% 36,197 7.24%
Liquid fund – Growth 9.29%^ 46,450 10.300%** 41,805 8.36%@
#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 day
@yields 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, 2013. 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.
32
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, 2013. 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
115.60 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 50.61 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 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Gold 4.82 23.27 15.77 0.00 21.41 21.77 17.15 28.04 20.99 23.44 32.53 9.54
Equity -16.18 3.25 71.90 10.68 36.34 39.83 54.77 -51.79 75.76 17.95 -24.62 27.70
Debt 25.25 21.66 11.54 -2.87 5.71 5.01 6.80 23.22 -6.37 6.18 5.05 12.01
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
33
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
Portfolio
Asset
class
Amount invested
in 2003
10-year Annualised
Returns
Profit
earned
Total value of
Investment in 2013
Conservative
Aggressive
A Debt 30,000 7% 26,683 56,683
Total 30,000 7% 26,683 56,683
B
Debt 15,000 7% 13,341 28,341
Gold 15,000 18% 63,280 78,280
Total 30,000 12% 65,427 95,427
C
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% 83,855 113,855
D
Equity 15,000 18% 65,304 80,304
Gold 15,000 18% 63,280 78,280
Total 30,000 18% 128,573 158,573
E
Equity 15,000 18% 65,304 80,304
Debt 15,000 7% 13,341 28,341
Total 30,000 12% 66,716 96,716
F Gold 30,000 18% 126,561 156,561
Total 30,000 18% 126,561 156,561
G Equity 30,000 18% 130,609 160,609
Total 30,000 18% 130,609 160,609
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
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.
34
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.
35
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-12 5.50% 3.50%
Franklin Templeton Capital Protection Oriented Fund - 5 Year Plan 5-years 14-Jun-12 7.10% 3.90%
SBI Capital Protection Oriented Fund - Series I 5-years 20-Dec-12 3.98% 0.51%
Sundaram Capital Protection Oriented Fund - Series 1 - 5 Year Plan 5-years 23-Aug-12 5.16% 5.26%
UTI Capital Protection Oriented Scheme - Series I - 5 Year Plan 5-years 22-Mar-12 6.70% 4.90%
Birla Sun Life Capital Protection Oriented Fund - 3 Year Plan - Growth 3 years 3-Aug-10 5.39% 7.26%
DWS Capital Protection Oriented Fund 3 years 1-Jun-10 6.72% 4.97%
Franklin Templeton Capital Protection Oriented Fund - 3 Year Plan 3 years 14-Jun-10 7.70% 7.60%
Sundaram Capital Protection Oriented Fund - Series 1 - 3 Year Plan 3 years 23-Aug-10 8.90% 9.78%
UTI Capital Protection Oriented Scheme - Series I - 3 Year Plan 3 years 22-Feb-10 7.43% 5.83%
Birla Sun Life Capital Protection Oriented Fund - Series 1 27 months 29-Jun-12 5.20% -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 100 77 23 35 100 135 10.42% 9.47%
5 years 100 65 35 70 100 170 11.25% 10.31%
Bear Market - Case 2 - If equity declines by 15% and debt grows by 9% (annualised)
3 years 100 77 23 14 100 114 4.46% 4.03%
5 years 100 65 35 16 100 116 2.93% 2.65%
* Long-term capital gains tax @10% 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 18.29 bn in December 2010 (12
schemes) to Rs 60.25 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.
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37
Factsheets
38
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39
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 2012.
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
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Annexures
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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 1 1 2 4
Baroda Pioneer Mutual Fund 1 2 2 1 6
Birla Sun Life Mutual Fund 7 10 14 9 3 43
BNP Paribas Mutual Fund 2 3 2 7
BOI AXA Mutual Fund 1 2 3
Canara Robeco Mutual Fund 1 7 3 1 12
Daiwa Mutual Fund 1 1 2
Deutsche Mutual Fund 2 4 5 3 14
DSP BlackRock Mutual Fund 1 4 12 3 3 23
Edelweiss Mutual Fund 1 2 3
Franklin Templeton Mutual Fund 3 5 13 7 5 33
Goldman Sachs Mutual Fund 1 1
HDFC Mutual Fund 6 9 16 6 1 38
HSBC Mutual Fund 4 4 7 3 18
ICICI Prudential Mutual Fund 7 5 14 6 3 35
IDBI Mutual Fund 2 1 1 4
IDFC Mutual Fund 6 4 5 5 1 21
IIFL Mutual Fund 1 1
Indiabulls Mutual Fund 1 1
ING Mutual Fund 3 2 1 1 7
JM Financial Mutual Fund 1 3 1 2 2 9
JPMorgan Mutual Fund 5 1 6
Kotak Mahindra Mutual Fund 2 5 9 7 1 24
L&T Mutual Fund 1 4 5 2 3 15
LIC Nomura Mutual Fund 2 1 3 9 3 18
Mirae Asset Mutual Fund 1 1
Morgan Stanley Mutual Fund 1 3 4
Peerless Mutual Fund 1 1 1 3
PineBridge Mutual Fund 1 2 3
Pramerica Mutual Fund 2 2 4
Principal Mutual Fund 4 7 4 3 18
Quantum Mutual Fund 1 1
Reliance Mutual Fund 2 7 13 4 5 31
Religare Mutual Fund 1 4 2 1 8
Sahara Mutual Fund 1 1
SBI Mutual Fund 5 5 15 6 1 32
Sundaram Mutual Fund 1 8 6 5 20
Tata Mutual Fund 1 6 12 5 5 29
Taurus Mutual Fund 3 3 6
Union KBC Mutual Fund 1 1
UTI Mutual Fund 9 5 11 11 3 39
Grand Total 61 116 195 116 61 549
66
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 1018 981 929 901 887 131
Reliance Mutual Fund 931 886 829 802 843 88
ICICI Prudential Mutual Fund 815 765 732 688 695 120
Birla Sun Life Mutual Fund 770 730 673 612 604 166
UTI Mutual Fund 706 708 609 589 578 128
SBI Mutual Fund 542 517 479 427 421 121
Franklin Templeton Mutual Fund 423 405 371 361 373 50
Kotak Mahindra Mutual Fund 324 309 258 262 302 22
DSP BlackRock Mutual Fund 308 302 300 293 306 2
IDFC Mutual Fund 302 282 274 258 269 33
Tata Mutual Fund 197 202 208 198 215 -18
Deutsche Mutual Fund 180 168 139 121 133 47
Sundaram Mutual Fund 146 137 132 141 148 -2
Religare Mutual Fund 141 127 110 105 118 23
JPMorgan Mutual Fund 133 90 53 64 68 65
L&T Mutual Fund 121 39 30 39 46 75
Axis Mutual Fund 107 106 88 89 86 21
Canara Robeco Mutual Fund 76 74 76 77 74 2
JM Financial Mutual Fund 75 56 58 59 69 6
LIC Nomura Mutual Fund 69 64 59 58 62 7
IDBI Mutual Fund 64 55 52 55 61 3
Baroda Pioneer Mutual Fund 54 57 55 42 46 8
HSBC Mutual Fund 53 50 46 49 49 4
Principal Mutual Fund 50 48 47 41 39 11
Goldman Sachs Mutual Fund 48 43 43 43 43 5
Peerless Mutual Fund 47 48 40 38 44 3
Taurus Mutual Fund 42 36 37 37 46 -4
BNP Paribas Mutual Fund 32 38 46 44 48 -16
Union KBC Mutual Fund 30 23 20 14 5 25
Indiabulls Mutual Fund 26 22 22 19 13 13
Morgan Stanley Mutual Fund 25 24 23 21 21 4
Pramerica Mutual Fund 20 20 24 19 21 -1
ING Mutual Fund 13 14 14 15 16 -3
PineBridge Mutual Fund 12 10 7 7 7 5
BOI AXA Mutual Fund 7 3 1 2 2 5
Motilal Oswal Mutual Fund 6 5 5 4 2 4
Daiwa Mutual Fund 5 8 7 8 9 -4
Mirae Asset Mutual Fund 5 5 5 4 4 1
Sahara Mutual Fund 3 2 8 9 5 -2
Quantum Mutual Fund 3 2 2 2 2 1
Edelweiss Mutual Fund 2 3 4 4 6 -4
Escorts Mutual Fund 2 2 2 2 2 0
IIFL Mutual Fund 2 2 2 1 0 2
Fidelity Mutual Fund* - 71 74 88 89 -
Grand Total 7933 7538 6990 6709 6876 1057
Data sorted by December 2012 average AUM
*merged with L&T Mutual Fund since December 2012
Source: AMFI
67
2. AUM by Category (Quarterly Average AUM in Rs bn)
AMC
Category
Grand
Total
(Rs bn)
General
Equity Sector Balanced Index
Gold
ETF
General
Debt FMP
Ultra
Short
Term Debt Gilt
Money
Market
Fund of
Funds
and
others
Axis Mutual Fund 16.95 - - - 3.83 22.88 7.87 14.92 0.37 38.70 1.34 106.85
Baroda Pioneer Mutual Fund 2.73 0.43 0.08 - - 3.07 1.97 11.86 0.05 33.86 - 54.06
Birla Sun Life Mutual Fund 99.41 4.50 5.59 0.30 1.29 243.03 120.91 142.68 4.65 146.52 0.89 769.78
BNP Paribas Mutual Fund 2.76 - - - - 9.15 5.12 9.55 - 5.59 - 32.16
BOI AXA Mutual Fund 1.16 - - - - 0.17 - 0.14 - 5.14 - 6.61
Canara Robeco Mutual Fund 16.07 - 2.03 0.04 1.00 20.44 2.25 8.27 0.25 24.59 0.79 75.72
Daiwa Mutual Fund 0.29 - - - - 2.18 - - 0.06 2.85 - 5.37
Deutsche Mutual Fund 2.13 - - - - 19.41 41.66 44.65 1.67 69.43 1.44 180.37
DSP BlackRock Mutual Fund 112.88 0.43 6.45 - - 51.14 73.00 17.23 3.54 33.48 10.22 308.38
Edelweiss Mutual Fund 0.60 - - - - 0.31 - 0.92 0.07 0.52 - 2.42
Escorts Mutual Fund 0.13 0.02 0.48 - - 0.29 - - 0.00 1.37 - 2.30
Franklin Templeton Mutual
Fund 135.52 1.07 4.53 3.47 - 139.40 13.85 79.59 2.31 27.21 15.79 422.75
Goldman Sachs Mutual Fund 0.95 - - 7.99 33.34 0.06 - - - 5.51 - 47.86
HDFC Mutual Fund 331.70 - 75.75 1.98 7.90 213.70 115.25 129.98 2.88 134.79 3.67 1017.59
HSBC Mutual Fund 15.81 - - - - 25.74 5.18 0.64 0.02 3.56 2.52 53.47
ICICI Prudential Mutual Fund 157.90 3.19 9.63 1.01 2.01 151.19 146.37 147.90 10.37 184.37 1.31 815.26
IDBI Mutual Fund 0.49 - - 2.01 1.75 6.18 5.25 9.18 0.07 37.63 0.99 63.55
IDFC Mutual Fund 58.34 - - 0.12 - 88.59 59.57 46.99 2.15 44.25 1.96 301.98
IIFL Mutual Fund - - - 0.43 - - 1.55 - - - - 1.98
Indiabulls Mutual Fund 0.06 - - - - - 2.16 5.24 - 18.07 - 25.53
ING Mutual Fund 2.52 - 0.20 - - 0.85 - 1.32 0.04 3.82 4.46 13.21
JM Financial Mutual Fund 3.53 2.09 0.08 - - 2.59 0.45 14.27 0.22 51.44 - 74.67
JPMorgan Mutual Fund 4.24 - - - - 22.82 22.32 24.99 - 55.35 3.28 133.00
Kotak Mahindra Mutual Fund 29.11 - 0.52 0.61 12.51 124.30 75.49 17.99 5.46 51.74 6.08 323.81
L&T Mutual Fund 53.55 - 0.24 - - 12.18 11.38 11.63 0.79 30.24 0.63 120.64
LIC Nomura Mutual Fund 6.13 - 1.66 0.63 - 5.62 7.89 1.85 0.52 32.65 11.87 68.82
Mirae Asset Mutual Fund 4.52 - - - - 0.04 - 0.25 - 0.14 0.32 5.27
Morgan Stanley Mutual Fund 15.46 - - - - 4.58 - - - 5.35 - 25.39
Motilal Oswal Mutual Fund - - - 3.30 0.52 - - - 2.06 - - 5.88
Peerless Mutual Fund 0.30 - - - - 2.76 - 13.91 - 30.24 - 47.21
PineBridge Mutual Fund 2.36 - - - - 2.00 0.00 0.21 - 0.03 7.04 11.64
Pramerica Mutual Fund 1.17 - - - - 7.16 - 2.66 - 9.39 - 20.38
Principal Mutual Fund 18.48 - 0.16 0.15 - 8.21 2.57 - 0.71 18.95 0.33 49.55
Quantum Mutual Fund 1.49 - - 0.02 0.65 - - - - 0.36 0.12 2.64
Reliance Mutual Fund 232.39 47.66 5.56 0.88 30.40 188.75 142.59 94.71 1.52 161.88 24.14 930.50
Religare Mutual Fund 5.39 0.49 - 0.02 0.81 52.94 23.05 9.64 2.22 45.69 0.29 140.54
Sahara Mutual Fund 0.63 0.21 - - - 0.32 0.00 - 0.00 1.71 - 2.87
SBI Mutual Fund 148.93 2.49 3.60 0.41 13.37 85.68 81.13 77.46 2.27 117.78 8.54 541.66
Sundaram Mutual Fund 68.36 - 0.51 - - 21.41 19.38 16.55 0.00 19.22 0.51 145.95
Tata Mutual Fund 44.07 - 6.40 0.14 - 9.60 30.20 42.51 2.09 62.41 - 197.42
Taurus Mutual Fund 3.71 - - 0.01 - 3.80 2.48 6.24 0.00 25.53 - 41.77
Union KBC Mutual Fund 1.99 - 0.56 - - 1.53 - 1.68 - 24.36 - 30.12
UTI Mutual Fund 200.57 13.36 76.90 1.74 7.36 60.12 72.21 120.77 2.10 151.24 - 706.38
Grand Total (Rs bn) 1804.77 75.94 200.94 25.27 116.74 1614.20 1093.11 1128.37 48.47 1716.96 108.56 7933.31
Grand Total (%) 23% 1% 3% 0.3% 1% 20% 14% 14% 1% 22% 1%
Equity Oriented Others Debt Oriented Others
Data as of December 2012
Source: AMFI
68
3. AUM by Investor type (%)
Data as of September 2012
Source: AMFI
4. AUM by Geography (%)
Figure 5: By Geography
Data as of December 2012
Source: AMFI
5. Category wise fund flows
Year
Mutual fund inflows / outflows (Rs Bn)
Income
Funds
Equity
Funds
Balanced
Funds
Liquid / Money
Market Funds
Gilt
Funds
Gold
ETFs
Other
ETFs
Fund of Funds
Investing Overseas
Total
(Rs bn)
2008 -426.21 315.44 18.47 -478.87 37.62 0.64 -36.36 9.49 -559.78
2009 1467.12 13.63 -8.79 -3.02 -23.15 4.82 -8.47 -4.4 1437.74
2010 -834.70 -158.38 7.50 62.18 3.43 17.27 4.89 -9.41 -907.22
2011 -121.65 76.61 13.19 196.43 -11.40 40.46 2.64 0.48 196.76
2012 567.45 -156.2 -3.58 162.6 30.38 18.26 -1.60 -4.03 613.28
Source: AMFI
96
6556
11 12
53
40
15
1
7
7
69
53
28
20
38
3
2937
19
35
19
4047
0
10
20
30
40
50
60
70
80
90
100
Liquid/moneymarket
Gilt Debt oriented
Equity oriented
Balanced Gold ETF Other ETF Fund of funds
Institutional Retail HNI
Top 5 cities, 74%
Next 10 cities, 14%
Next 20 cities, 5%
Next 75 cities, 5%
Other cities, 2%
69
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, 2012.
The performance of the surviving plan is considered for all periods of performance analysis post this period.
70
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
(11th 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.
71
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.
72
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.
73
Glossary of terms used in the factsheets
Average Maturity 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
Dividend Yield (%) 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
Expense Ratio (%) 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
Jenson's Alpha 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
Modified Duration 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
Portfolio Beta 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
Portfolio P/B 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
Portfolio P/E Trailing 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
R Squared 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 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
Sortino Ratio 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
Standard Deviation 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
74
Style Box - Debt 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.
Style Box - Equity 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
Treynor Ratio 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
75
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
76
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