Investors beware of NFOs Jul 17, 2009

Investors beware of NFOs

July 16, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	14,250.3	492.8	3.6%
Re/US$	48.7	0.0	0.0%
Gold Rs/10g	14,825.0	315.0	2.2%
Crude ($/barrel)	62.3	1.5	2.5%
FD Rates (1-Yr)	5.75% - 7.25%

Weekly change as onJuly 16, 2009

Investors beware of NFOs

Impact

In the past few days, fund houses have launched many equity and debt schemes in the market. They have also increased the exit loads on schemes by 0.5-2.0%; currently the exit loads are up to 2%. Investors would recall that effective August 1, 2009, the new regulation will be in place that abolishes entry loads on mutual fund investments and puts a cap on the maximum amount of exit load that can be used by the AMCs for paying commission to distributors and meeting other expenses. Given there is still some time left for this regulation to come into effect, the chances of distributors taking advantage of this are high. They may tempt investors to churn their portfolio by advising them to exit from the existing scheme and invest in NFOs. This will enable the distributors to earn commission in the form of both exit and entry loads.

NFOs launched since June 2009	Entry Load
Edelweiss Nifty Enhancer Fund	Nil
Franklin Build India Fund	2.25%
Quantum Equity Fund of Funds	Nil
Reliance Infrastructure Fund	2.25%
Religare Business Leaders Fund	2.25%

(Source: Crisil Fund Analyser)

Awaiting SEBI Approval	Entry Load
Baroda Large Cap Equity Fund	2.25%
Bharti AXA Build India Fund	2.50%
DSP BlackRock Enhanced Equity Fund	2.25%
DWS Reforms & Rural Economy Fund	2.25%
Fidelity Forward India Fund	3.00%
IDFC Infrastructure Fund	2.00%
Religare PSU Equity Fund	2.25%
SBI Nation Builder Fund	2.25%
Sundaram Select Thematic Funds	2.25%
Tata Small & Midcap Infrastructure Fund	2.25%

(Source: SEBI Website)
(Note: these funds will be able to charge the entry load only if the NFO is launched before August 1, 2009)

Investors should keep two things in mind. One, they should invest in an NFO only if it suits their risk-appetite and can help them achieve their long-term financial goals. They should not get carried away by the 'low NAV' bait, often thrown by distributors to trap investors.

Second, investors should not redeem their existing mutual fund holdings (if they are confident of performance) simply to invest in an NFO which still has to prove its worth. In our view, investors who wish to invest in equities or equity-oriented funds should prepare themselves to stay invested over the long haul (i.e. at least 3-5 years). This will also help in avoiding exit loads at the time of redemption.

Go Global - the new mantra of Indian fund houses

Impact

Global funds are all set to make a comeback in the Indian mutual fund industry. Several fund houses are in the process of launching their global fund offerings. As the name suggests, global funds invest in global stocks and/or mutual funds (that in turn invest in global markets). Investors would recall that in late 2006 and 2007, there was a flurry of global funds. The purpose was to diversify across global markets. However, as economic recession and market downfall engulfed the financial markets across countries in 2008, the demand for such funds diminished. But now the scenario has changed. The financial markets and the economies of all major countries are expected to recover. Many fund houses see this as an opportunity, and hence are announcing launches of global funds (refer to the table below).

Global Funds Proposed

Fund Houses	International Schemes
DSP Blackrock	World Mining Fund
DSP Blackrock	World Energy Fund (NFO is on)
JP Morgan	Greater China Equity Off-shore Fund (NFO is on)
IDFC	World Gold Fund*
ICICI Prudential	Global Basics Fund*
Mirae Asset Management	China Advantage Fund*
Reliance	International Equity Fund*

(* Awaiting SEBI approval)
Global funds do offer diversification. However, it should not be the sole criteria for investing in them. In the Indian context, these funds are largely untested entities. We believe that investors should consider them for investments only when they have a well-established track record and offer the investor lower risk by diversification.

Are Gilt funds losing glitter?

Impact

Gilt funds that had witnessed a huge rally in 2008 are now surrounded with a lot of uncertainty. Gilt funds predominantly invest in government securities that are issued by the central or state government. Earlier in the Union Budget, government had announced huge borrowing plan (by issuing G-Secs in the market), which led to a rising trend in the yields (refer to the graph below) on the G-Secs. This in turn led to a decline in bond prices and the NAV of the gilt funds.

However, only yesterday (July 16, 2009) government has announced lower weekly borrowing of Rs 11,000 cr as against the market expectation of Rs 15,000 cr. The market reacted positively to this and yields dropped by 0.07% on 10-Yr bonds and the bond prices are up again.

(Source:CCIL India Website)
At PersonalFN, we believe that investors should exit from Gilt funds and invest in short term plans given the huge government borrowings plan and its likely impact on the yield curve.

July 31, last date for filing income tax return

Impact

July 31, 2009 is the last day for individuals to file their income tax returns. Many salaried individuals do not file their returns because the Tax is Deducted at Source (TDS) by the employer from their monthly salary. However, it is mandatory by law for individuals to file their income tax returns if the total income earned during the financial year exceeds the basic exemption limit independent of the TDS as explained above.

The following documents are required for salaried individuals at the time of filing the returns:

Form 16
Copy of supporting documents if you have claims for exemption under Section 80C.

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