Mutual Fund Industry Update April 2009

Changes in Nomenclature of Liquid Plus Funds

• Small and medium sized AMCs are facing problems in operating effectively due to falling stock market, decreasing asset under management (AUM) and no new fund offers (NFOs). These factors may result in mergers & acquisitions in the mutual fund industry
• Industry Sources say that Religare Asset Management Company is already looking out to buy some small sized AMCs to expand its network. They are in talks with Taurus, Sahara and DBS Chola Mutual Fund as these AMCs have seen shrinking assets since Jan 08. Religare AMC had acquired Lotus AMC in November 2008

Fund Managers increasing their Exposure in Derivatives in Equity Schemes

• The fund managers are increasingly taking exposure in derivatives market to benefit from the short term movements in stock market.
• ICICI Prudential, DSP BlackRock and Kotak mutual fund are the asset management companies taking high exposure in derivatives. These AMCs have taken approx 13%-15% exposure in derivatives in schemes such as DSP BlackRock Top 100 Equity Fund, DSP BlackRock Opportunities Fund, and ICICI Prudential Focused Equity Fund etc.

Increased Government Borrowings impacting the Performance of Gilt Funds

• Non-Planned government borrowings of approx Rs 10.3 billion in last quarter has increased the supply of government bonds, thus resulting in falling bond prices.
• There is an inverse relationship between bond yields and bond prices. Decrease in bond prices result in increasing yields that impacts the performance of gilt mutual funds. Therefore, the G-sec yield has risen sharply from 4.86% in 1st week of January 09 to 7% by end of Mar 09.
• Such step by the government has a negative impact on the bond prices impacting the NAVs of gilt funds. The gilt fund category has delivered an average return of –9% in last 3 months and -2% in last 1 month.
• There is a mixed opinion on the future bond yields. On the positive note, RBI has set expectation for the further fall in policy rates. But on the negative side, RBI has announced the bond buyback so as to increase liquidity in the market

Increase in Mutual Fund Asset Under Management (AUM) in February 2009

• The AUM of the Indian mutual fund industry has declined by 1.5% in Mar 09 mainly due to redemption in liquid and short term debt schemes. The redemption from liquid schemes is mainly contributed by banks, who have taken this position to boost their balance sheets at the end of financial year
• In past few weeks, inflows have been seen in equity schemes but that has not impacted the growth in asset under management of the mutual fund companies
• Out of the 35 existing Asset Management Companies, only 12 AMCs have seen increase in their AUM. Reliance continues to be the market leader with AUM of Rs 81,000 cr (approx) followed by HDFC and ICICI Prudential AMC

CRISIL Mutual Fund of the Year Award

• Reliance Mutual Fund was felicitated with 3 awards in diversified equity (Reliance Growth Fund), floating rate (Reliance Floating Rate Fund – Retail) and liquid fund category (Reliance Liquidity Fund – Super Institutional)
• UTI Wealth Builder Fund – Series II has won the “Most Innovative Fund of the Year” for the CNBC-TV18-CRISIL Mutual Fund of the Year Award.

Sectoral Picks of Fund Managers – March 2009