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Citrus Analysis: Novel fund launches in the offing
Thu, Nov 01, 2012
Source : Jeni Shukla, Citrus Interactive

So far this year the mutual fund industry has not launched too many exciting or novel products. A glance at the 26 new open-ended products launched this year suggests that a majority of these new fund offers (NFOs) are by relatively newer entrants who wish to enlarge their product basket and a grab a share of the popular mutual fund categories.

The dynamic bond fund category attracted the highest number of NFOs this year. It is not surprising to see players like Pramerica, IDBI, Union KBC and Baroda Pioneer jump on the bandwagon by launching their dynamic bond funds, given that this category's asset under management (AUM) has more than doubled in the last one year.

Interest in gold continued with Canara Robeco and Motilal Oswal launching their gold exchange-traded funds (ETFs).

The only category in which some of the bigger asset management companies (AMCs) like ICICI Prudential, Franklin Templeton and DSP BlackRock launched their NFOs was US equity.

The table below summarises the major types of NFOs launched so far:

Type

No. of schemes launched year-to-date (YTD)

Dynamic Bond Funds

4

US-focused Equity Funds

3

Multi-asset

3

Banking & Financial Services (Equity)

2

Gold ETFs

2

However, one should not get deceived by the lack of fresh ideas in the market so far. New-fangled and lesser-explored themes are in the offing, awaiting the Securities and Exchange Board of India's (SEBI) consent.

Debt Funds

A number of AMCs have set the ball rolling by filing offer documents for infrastructure debt funds (IDFs) with SEBI. These include IDFC, SBI, Reliance, Axis, L&T and IDBI. IDFs are emerging as the next big theme. The significance of IDFs is evident from the fact that SEBI is considering increasing the NFO period from the current limit of 15 days. The framework for establishment of IDFs was announced by the Finance Minister in Union Budget 2011, wherein IDFs were allowed to be set up either as a non-banking financial company (NBFC) or as a mutual fund. These funds are targeted at foreign investors and high net worth individuals. IDFs will help bridge the funding gap in the infrastructure sector.

Besides infrastructure, another debt theme which is seeing greater AMC participation is the banking debt category. Funds like DWS Banking and PSU Debt Fund, IDFC Bank CD Fund and Religare Bank Debt Fund have queued up for SEBI’s approval. The existing funds in this category currently are Axis Banking Debt Fund, ICICI Prudential Banking and PSU Debt Fund, and Principal Bank CD.

Equity Funds

A multiple-parameter based value fund in the pipeline is Axis Fundamental Factors Equity Fund. This fund will be benchmarked against the FTSE RAFI India Index. Its distinguishing feature is that the fund, akin to its benchmark, will decide the weight of its constituent stocks based on fundamental factors such as sales, cash flow, dividend and book value. Hence, unlike momentum-based funds, this fund will not use price to determine the weightage of stocks in its portfolio. In other words, it will not increase its allocation to stocks whose prices have risen relative to other constituents.

We may also for the first time see a trigger-based, close-ended equity fund. Union KBC proposes to launch the Union KBC Trigger 50 Fund. The scheme will mature when it crosses the NAV of Rs. 15 within the three-year period or three years from the date of allotment, whichever occurs first. It will invest in stocks with market capitalisation of up to Rs. 10,000 crore, a segment classified as mid- and small-cap by the fund house.

Indian retail investors' diversification options are set to rise as fund houses strive to make newer offshore markets accessible to them. Emerging market funds and global equity funds exist currently which make diversified exposure to international markets possible. Now, we will see the launch of more foreign nation-specific funds.

With Brazil-, India- and China-focused funds already at the disposal of investors, our mutual fund industry is on the verge of adding the missing ‘R’ of ‘BRICs’, hence completing the basket of products covering the four prominent emerging markets. BNP Paribas plans to launch India’s first Russia-focused equity fund. It will be called the BNP Paribas Russia Fund and will invest mainly in units of BNP Paribas L1 Equity Russia.

Reliance AMC, which filed the offer document for an Indonesia-focused fund (called Reliance Indonesia Opportunities Fund) has been awaiting the green signal from SEBI since 2010. The scheme plans to invest predominantly in equity- and equity-related instruments of Indonesian and Indian markets. A custom benchmark is proposed using the MSCI Indonesia Index to the extent of 65 per cent of portfolio and BSE 200 Index for the balance 35 per cent of the portfolio. This will be the first fund that will make it possible for Indian investors to participate in the Indonesian growth story. 

HSBC China Consumer Opportunities Fund will mark the fund house's entry into the China-focused fund category. This is a feeder fund which will invest primarily in units of HSBC Global Investment Fund's (HGIF) China Consumer Opportunities Fund. Earlier, in May 2011 DSP BlackRock too had filed its offer document for a China-based fund. Only two mutual fund houses—J P Morgan and Mirae Asset Management—have ventured into this space so far.

In an attempt to leverage its recently formalised partnership with Nordea Investment Management, ICICI Prudential AMC has filed for ICICI Prudential Global Stable Equity Fund. This open ended fund-of-funds will invest in units of Nordea 1—Global Stable Equity Fund. This is a fund domiciled in Luxembourg with two-thirds of its total assets invested in global equities. As the name suggests, the underlying scheme will invest its assets in companies offering the best potential for generating stable returns over a long-term horizon.

The Indian consumption story fuelled by rising disposable incomes, changing lifestyles, and increasing urbanisation has been perceived as a potential opportunity by fund houses like Reliance and BNP Paribas. The proposed Reliance Consumption Fund is an ETF that will benchmark itself against the CNX Consumption Index. The index is comprised of companies from sectors like FMCG, healthcare, auto, telecom services, pharmaceuticals, hotels, media and entertainment, and so on. BNP Paribas India Consumption Fund, on the other hand, is an open-ended equity fund which proposes to have BSE 200 as its benchmark, citing the non-availability of any AMFI (The Association of Mutual Funds of India) recognised benchmark for strict comparison to its scheme.

Hybrid and Multi-asset Funds

On the heels of the launch of a number of multi-asset products which invest in a portfolio comprising asset classes like equity, debt and gold, Indiabulls awaits approval for its multi-asset fund which is unique because of its monthly income plan (MIP)-like flavour. This is only the third fund of its kind two years after the launch of Religare MIP Plus and Taurus MIP Advantage in 2010.

Fund houses are awakening to the need for goal-based financial solutions in the form of fund-of-funds. So far Franklin Templeton was the sole provider of goal-based solutions. ICICI Prudential awaits approval of its ICICI Prudential Lakshya Fund. The fund house has proposed an open-ended scheme with 3, 6, 9, 12, 15 and 18-year plans. The scheme will enable investors to invest in a range of funds after taking into consideration their goals, time horizon for achieving those goals, anticipated rate of inflation, and expected rate of return. This will be achieved by making available to investors a "Lakshya Calculator". This calculator will have in-built rates of inflation and different rates of returns. It will require the investor to input details of the goals for which he is seeking to make investment, the target amounts and the number of years to goals. The investor can select the inflation rate and the rate of return. The scheme will seek to generate returns for meeting these goals for its investors by investing in schemes of ICICI Prudential Mutual Fund as well as schemes of other mutual funds, which in our opinion is unique.

A similar product awaiting approval is the Axis Life Plan. It proposes to offer four plans – Plan 2020, Plan 2025, Plan 2030 and Plan 2035. The asset allocation in both schemes will change with time and will become more conservative as the target date approaches.

So far Franklin Templeton has been the only player to offer a dynamic asset-allocation fund based on price-to-earnings (P/E) ratio. DSP BlackRock will be the second one with its DSP BlackRock Dynamic Asset Allocation Fund. The underlying schemes are DSP BlackRock Equity Fund and DSP BlackRock Strategic Bond Fund. Allocation will be based upon relative valuations  of equity and debt markets.

It is encouraging to know that fund houses are exploring untrodden paths and launching novel fund categories. Partly this trend can be attributed to SEBI’s stance of discouraging the launch of schemes which duplicate or overlap with existing ones. That is why we find offer documents explicitly mentioning the rationale for launching a new scheme and comparison of the proposed scheme’s objective with the objectives of existing products. Focus on product innovation, differentiation, simplicity and performance will go a long way towards winning investors.

 
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