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| February 21, 2014 |
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| Weekly Facts |
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Change |
%Change |
| BSE Sensex* |
20,700.75 |
333.93 |
1.64% |
| Re/US$ |
62.23 |
0.21 |
0.34% |
| Gold Rs/10g |
30,950.00 |
550 |
1.81% |
| Crude ($/barrel) |
110.58 |
2.14 |
1.97% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on February 20, 2014
*BSE Sensex as on February 21, 2014
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Impact 
If you are a seasoned investor in equities, you must have noticed sectorial shifts in the market several times. Equity markets are never static. Factors such as economic conditions, expectations of investors and business environment affect their movement. Not all sectors do well or bad in tandem. Fortunately, mutual fund investors do not have to worry about topsy-turvy of the market. Fund managers take active calls and try to maximise returns for the fund. However, sometimes, their market perception is overlapping to such an extent that their holding pattern depicts similar trends.
The top 5 mutual funds in the equity oriented category (asset base wise) manage majority of the assets in the mutual fund industry. Therefore, their investment preferences affect the returns of a large number of investors.
Where Top 5 fund houses are investing?
At PersonalFN, we studied portfolios of all equity oriented schemes offered by top 5 mutual fund houses as on January 31, 2014 and December 31, 2013. It was found that, they have been cutting exposure to Private Sector Banks and raising weightage of Information Technology in their portfolios. Under few schemes, exposure to Auto has also gone up. Similarly, top-5 fund houses seem to be bullish on Pharmaceutical sector as well, as portfolio weightage for the sector has been on the higher side.
Are mutual funds bullish on I.T. and bearish on Banking?
Data as per portfolios disclosed on December 31, 2013 and January 31, 2014
(Source: ACE MF, PersonalFN Research)
Possible reasons for sectorial preferences...
As you may be aware, asset quality has been the biggest threat to Indian banking sector today. Public sectors banks have taken a hard hit in their balance sheets. Poor economic conditions and high interest rates are affecting the asset quality negatively. For last several quarters, asset quality of public sector banks has declined. As a reason, mutual funds have been reducing their exposure to public sector banks for quite some time now. So far, private sector banks were the favourites with top 5 fund houses. But as RBI has adopted the concept of inflation targeting, it is unlikely that the banking sector would soon bounce back since interest rate scenario may stay unfavourable for longer than anticipated.
Mutual funds have been bullish on Information and Services sector. They are raising exposure to the sector which is expected to benefit in the process of recovery led by the U.S. Moreover, selective buying in the Pharma and Auto space suggests that there are some company specific opportunities that the fund houses are eyeing. Fund houses have largely invested in large caps.
PersonalFN is of the view that, mutual funds may benefit from sector specific opportunities going forward. In pre- Lok Sabha election sessions, the markets would build up expectations around some themes and you might see a few sectors rallying while others taking a hit in both, pre and post-election. Having said this, PersonalFN believes it is extremely risky for you to take active calls on sectors and particular companies as in rapidly changing environment; outlook of a particular sector might undergo a quick change. Investing in sector or thematic funds is equally danger as onus of timely entry and exit lays on you. A consistently performing diversified fund that comes from a fund house following investment systems and processes might be just enough for you to benefit from various opportunities emerging in the market. As George Soros, a legendary investor says, "If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."
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Impact 
If you have a medical insurance policy; be ready to shell out 15%-35% more towards payment of premium this year. Insurance companies are planning to hike premiums on account of various factors that affect their business. As you may be aware, Insurance Regulatory and Development Authority (IRDA), rolled out new rules for making health insurance plans more customer-centric. These rules have become effective from October 1, 2013.
Why would premiums go up?
With introduction of new rules, system of claim based loading has been abolished. Earlier, insurance companies were allowed to hike premium based on claims filed in the previous year by the policyholder. IRDA has directed insurance companies not to raise premiums more than once in three years. Moreover, according to new norms, premium should remain the same for the policyholder till his age band remains the same. According to insurance companies, this has made it critical for them to price products correctly so as to factor in inflation and other costs rising in the span of three years when they cannot hike the premiums. Another change that might result in significant rise in the premium on health insurance policies has been the clause of life-time renewability. At present, insurance companies are making losses in this segment.
What are the implications?
Since premium for elderly can't go up beyond a point; younger people in the pool will subsidise them. As a result, premium amount for younger people is going to be on the higher side which otherwise would have been lower. The maximum claims are filed by people in the age group of 60 and above.
Are you discouraged?
It is likely that you might fret over rise in premium if you are young and haven't filed for any claim so far. PersonalFN is of the view that, despite the likely increase in premium rates, it is advisable that you should get yourself and your family safeguarded, if you are yet to buy a medical insurance policy. Considering benefits that may be reaped by policyholders, rise in premiums shouldn't be taken negatively. Healthcare related expenses are rising fast and you need have protection against the escalating prices. Unforeseen expenses on medical treatments can potentially ruin your finances. Buying adequate medical insurance and life insurance forms is prerequisite of any financial plan.
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Impact
Couple of years ago, interest on savings bank account was deregulated. Thereafter, some banks voluntarily started paying as high as 7% interest to saving account customers. It was believed that, this might make liquid and liquid plus funds less attractive. But month after month this segment of mutual funds continued to witness inflows as returns generated by these funds were attractive. Liquid and liquid plus funds are one of the ideal avenues for parking your short term surpluses. But recently, few mutual fund houses decided to raise the expense ratio of their liquid funds by 20 basis points (bps) (0.20%).
Why mutual funds want to charge you more?
Asset Management Companies (AMCs) are of the view that it is difficult to manage schemes with a low expense ratio and also remain profitable. Moreover, fund houses feel that with the norm of SEBI to keep 2 bps (0.02%) aside for investor education and awareness, maintaining a low expense ratio becomes extremely difficult. It becomes imperative to know whether a hike in expense ratio would make liquid funds less attractive.
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
For quite some time, the Securities and Exchange Board of India Limited (SEBI) was desirous of raising the minimum net worth requirement for mutual funds. SEBI has long believed that the higher capital commitment is necessary for mutual fund houses to weed out players who are not serious about doing business. Without paying much of importance to clamours of smaller players, SEBI put its plans into action last week. It raised the minimum net worth requirement of Asset Management Companies (AMCs) to Rs 50 crore. The fund houses have been given 3 years' time to comply with this norm.
To read more about this news and the view of PersonalFN over it, please click here.
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- Debt funds are not safe and they can also be as volatile as an equity fund at times. Prices of debt instruments can fall sharply for any adverse development. Recently, around 19 mutual fund houses including HDFC Mutual Fund, SBI Mutual Fund, DSP BlackRock Mutual Fund among others, incurred mark-to-market losses. All of them had invested in Certificate of Deposits (CD) issued by the public sector bank-United Bank of India. Yield on CDs shot up to 10.45% from 9.75% over last few weeks. Independent credit rating agency ICRA recently downgraded the bank being concerned over the asset quality of the bank. The bank has reported gross bad loans of about 10.8% in the third quarter of the current fiscal. This stands the highest amount of bad loans among public sector banks. Since quality of assets is directly linked to the credit worthiness of the bank; rating downgrade pushed the yields up and prices down.
Mutual fund industry collectively has an exposure of Rs 2,000 crore to the CDs issued by the United Bank of India.
PersonalFN is of the view that, since the United Bank of India is a government owned bank, there are unlikely chances of a default. However, weak sentiment may push the cost of borrowing up for other public sector banks. Depending on the exposure to the CDs as a percentage of the portfolio, impact on the Net Asset Value (NAV) would be felt by mutual funds holding investments in CDs of the troubled bank.
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Mark To Market: "The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value."
(Source: Investopedia)
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Quote : "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
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