icra mutual fund ranking brochure september 2011 final...

REPORT CARD

ICRA Mutual Fund Rankings

For the Quarter ended September 2011

ICRA Mutual Fund Ranking September 2011 Quarter Page 1

Executive Summary Regulatory Update- Mutual Funds Industry Overview Equity Market Overview Debt Market Overview Gold Overview MF & FII’s Activity NFO Analysis Folio wise data & Investor Grievances Short Term Bond Funds- Right time to invest? Savings Rate deregulation Gold ETFs – Must in Every Portfolio ICRA Mutual Fund Categories Ranking Synopsis (September Quarter) ICRA Mutual Fund Rankings—Performance Snapshot Ranking Methodology Annexure- (I)

� Category Definitions Annexure- (II)

� Rankings-Exhaustive List Disclaimer

ICRA Mutual Fund Ranking

For

Quarter Ended September 2011


By the time this edition is in your hands, Europe would have decided upon measures to at least postpone the sovereign debt crisis, either by recapitalization of financial institutions or by other means including reduction in social sector spending and increasing retirement age. With the US still wobbling into recovery, it is likely that the Fed would be required to bring in or at least continue with benign monetary policy. Global uncertainty could thus result in a short term phenomenon where portfolios exposure is realigned for emerging markets like India.

Given the increasing correlation with the global economy, recent global macroeconomic developments pose downside risk to domestic growth in addition to domestic headwinds such as high inflation and high interest rates. In spite of rate hikes by the Reserve Bank of India since March 2010, inflation is still not in the comfortable zone. With rising interest rates, it would be interesting to see how we avoid further cooling of economic growth. The monsoons have not disappointed, thus providing a window of hope in terms of positive consumption trends from rural areas and also reduction in raw material prices, which should augur well for corporate as well as the economic growth of the country.

In this volatile scenario the Indian mutual fund industry has witnessed steady growth despite the prevalent turmoil. Reasonably strong economic growth coupled with high savings and investment rate, younger population, rising disposable income, limited share of mutual funds in the household savings all point toward the future potential the Indian mutual fund industry holds. The Industry is in the midst of a paradigm shift in business models, adapting to the various environmental changes in the near term. The enhanced emphasis on transparency, easing of restriction on entry loads (via one time charges), distributors moving to an advisory model of business, rising cost pressures has led the AMCs to revisit their business models to sustain profitability. With stiff competition among the players, product development, innovation and performance increasing the penetration levels through distribution channels, investor education, and right-selling and efficient customer service remain the prime focus areas for the Mutual Fund industry.

The aforementioned combinations of scenarios provide an interesting kaleidoscope for team ICRA Online to present an overview of the Indian mutual fund industry. We have analyzed how market regulators have tried to enhance the investment climate by liberalizing investment norms, as in case of their recent rulings for qualified foreign investors or by enhancing transparency norms for debt investments. They have also tried to rationalize the distribution environment along with opening for discussion the idea of formally separating advisory and distribution functions. The mutual fund industry’s continued tryst to adapt to the ever changing environment has resulted in a net decline in Assets under Management (AUM) in the current quarter. We have provided an explanation into the cause of this decline. Additionally, we have analyzed AUM trends of various asset class related funds to find that ETFs are making steady progress as Indians are finally taking their liking for the yellow metal (gold) to gold ETFs and mutual funds investing in those ETFs.

EXECUTIVE SUMMARY


As mutual funds are nothing but instruments to access various asset classes, we have analyzed the performance of major asset classes. The Equity markets were seen battling headwinds, both economic and regulatory. Bond markets saw yields go northward, as the combined effect of high inflation, tight monetary policy and possible inability of government to meet its fiscal responsibility targets took its toll on sentiments. Gold on the other hand continued to reward its believers in the medium term, despite some short term hiccups. Together the markets presented a story of caution mixed to the long term optimism of the India story, which was recently emphasized by the successful staging of the inaugural Indian Grand Prix. The institutional investors continued their quest to book profits and at the same time exploring opportunities for value buying. FIIs emerged as net sellers in equities but seem to be lapping up whatever opportunities that they have got to enter into the Indian bond markets. This aggression should provide some interesting scenarios for the bond markets in the future. Mutual Funds on the other hand stayed positive on the markets, evinced by the fact that they have emerged net buyers in both debt and equity. Asset managers responded to the current challenging interest rate scenario by launching a number of close ended debt funds. However what was significant was the average lower realization per fund. The Asset Management Companies to their credit have not allowed this to come in the way of addressing investor grievances, which was reflected in an almost cent percent resolution rate by the top 5 AMCs. We at team ICRA believe that we owe our existence to the investor’s need to access unbiased opinion. In this endeavor we have tried to present an analysis of how to use Short term bond funds to achieve investment goals. The latest RBI regulations on deregulating savings rate has opened up another avenue for risk averse investors, and consequently a new challenge to liquid funds. We have tried to present an unbiased view on this development and pointers which could help informed decision making. Last but not the least we have presented a brief but cogent analysis of gold ETFs. Last but not the least we have also appended the latest edition of our industry benchmark rankings with a brief synopsis of the same along with detailed methodologies To conclude we at team ICRA Online have endeavored to present an informed view of the mutual fund space and hope that this report would be useful in informed decision making of all stakeholders. In that spirit we would be delighted to have you, the stakeholders provide your views, suggestions and most important of all, constructive criticism to make future editions more relevant to your needs.


MF-REGULATORY UPDATE

MF Regulatory Update

Mutual Funds play an important role in financial services by offering diversification, liquidity and professional management at an affordable price. In its continuing endeavor to ensure competitive market performance and to gain investors’ confidence, market regulator SEBI has proposed various norms and regulations during this quarter. Circulars issued by SEBI

1. Indicative portfolio or yield in close ended debt oriented mutual fund scheme

In order to enable investors to take informed decision regarding the quality of securities and risk associated with different close ended debt oriented schemes. SEBI has asked the mutual funds and AMCs to disclose their credit evaluation policy along with the disclosure of list of allocated sectors and types of instruments invested. Also they should disclose the floors and ceilings within a range of 5% of the intended allocation against each sub asset class/credit rating.

2. Investment by Foreign Investors in MFs

SEBI has decided to open the door for the Qualified Foreign Investors (QFI) as announced by Finance Minister in his 2011 budget speech. Accordingly it has liberalised the portfolio investment route to accept subscriptions from foreign investors who meet the KYC requirements for equity schemes. This would enable the Indian mutual fund industry to have direct access to foreign investors and to widen the class of foreign investors in Indian equity market. However, overall investment in equity scheme is limited to $10 billion while the same for debt scheme is $3 billion. The investment can be made through holding MF units in demat account through a SEBI registered Depository Participant (DP) and/or holding via Unit Conformation Receipt (UCR).

3. Circular for Mutual funds

Transaction Charges

In order to enhance the reach of mutual fund products in urban areas and smaller towns, SEBI has decided that a transaction charge per subscription of Rs.10,000 and above would be paid to the distributors. This would enable the distributors to set up appropriate infrastructure for servicing investors The transaction charges are subject to the following- A) For the existing investors the payments should be Rs.100 for subscription of Rs.10,000 or above. B) As an incentive to attract new investors, the distributors would get Rs.150 as transaction charge.


C)There shall be no transaction charges for investment below Rs.10,000 and in case of SIP the charges shall be applicable only if the total Systematic Investment Plan (SIP) amount exceeds Rs.10,000 and above. Distributors of mutual fund products

In order to regulate the distributors, SEBI has proposed a reviewing process of the distributors during the time of empanelment. The business model, experience and proficiency along with the record of regulatory / statutory levies, fines and penalties, legal suits, customer compensations should be verified to determine the fit and proper distributors. Transparency of information

SEBI has asked the AMCs to provide point-to-point returns on a standard investment of Rs.10, 000 in addition to CAGR for the scheme. This will provide ease of understanding for retail investors.

SEBI has also instructed to provide performance advertisement since inception and for as many twelve month periods as possible for the last 3 years along with the benchmark index performance for the same period.

Asset under Management (AUM) disclosure

Under the new AMFI rule, mutual funds shall disclose the AUM figures and provide disclosure on bifurcation of the AUM into debt, equity and balanced etc and the percentage of AUM by geographical location. The mutual funds shall disclose the aforesaid data on their respective websites and to AMFI.

Commission disclosure

Mutual funds or AMCs should disclose the total commission and expenses paid to the distributors on their respective websites.

4. Amendments to SEBI (Mutual Funds) Regulations, 1996

Mailing of Annual report

In order to bring cost effectiveness in printing, Annual reports should be sent to the investors through emails. In case of absence of email ids reports should be sent in the form of hard copies. Consolidated Account Statement

AMCs should ensure consolidated account statement for each of the calendar month. The aforementioned SEBI regulations empower the investors as well as the mutual funds and AMCs to maintain a proper working environment for the industry. Taking a step forward, AMFI has also constituted a “Committee on Customer Engagement”. Through this Committee, AMFI aims to closely


look at various issues relating to customers of mutual funds. Forming this Committee has added significance as the Industry is expected to have foreign investors. SEBI Board Meet SEBI Board met on July 28, 2011 in Mumbai and took some major decisions. The following regulations were applicable for MF industry-

1. New Takeover Regulations The board considered the Report of the Takeover Regulations Advisory Committee (TRAC) and accordingly took the following decisions-

a. Initial trigger threshold increased to 25% from the existing 15%. b. The minimum offer size shall be increased from the existing 20% of the total issued

capital to 26% of the issued capital. c. There shall be no separate provision for non-compete fees; all share holders shall be

given exit at the same price. However, the Board did not consider the proposal of the Committee to accept the recommendation of TRAC to provide for delisting pursuant to an offer and proportionate acceptance.

2. Review of Certain policies relating to mutual funds-amendments to SEBI Regulations 1996 a. Transaction Charges-The distributor would be allowed to charge Rs.100 as

transaction charges per subscription and there would be no transaction charges for direct investment.

b. Transparency of information- In order to bring more transparency, SEBI has proposed point to point return on standard investment of Rs. 10,000 and other performance related disclosure.

c. Distributors of mutual fund products- To regulate the distributors of mutual fund products selected distributors will be regulated through AMCs by putting in place the due diligence process to be conducted by AMCs.

d. Common account statement- One common account statement will be dispatched every month for investors who have transacted in any of their folios across the mutual funds.

e. Green initiative and cost effective measure- Annual reports should be sent to the investors through emails. In case of absence of email ids the reports should be sent in the form of hard copies.

f. Infrastructure debt fund scheme- SEBI Board approved a framework for setting up of Infrastructure Debt Funds (IDFs) by any existing mutual fund. However the IDFs have to invest 90% of their assets in debt securities of infrastructure companies. Minimum investment into IDF would be Rs.1 crore with Rs.10 lakh as minimum size of the unit.

3. Single KYC norm for all intermediary regulated by SEBI

Currently KYC is done by each SEBI regulated intermediary like broker, depository participant (DP), mutual funds, portfolio managers etc. However, SEBI Board has proposed setting up one KYC registration norm


The month end Assets Under Management (AUM) of the Indian mutual fund industry witnessed a decline of 7.87% to Rs. 6,41,937 crore (as per AMFI Monthly data) during the month of September 2011. The reduction is attributable to outflows of about Rs. 56,341 crore especially from liquid and income schemes due to advance tax commitments.

This is the second consecutive monthly reduction in AUM in the current quarter. In addition to advance tax commitments adverse interest rate scenario, slowing growth in India and concerns of global recession were other important reasons that led to the downfall.

The Indian Mutual Fund industry consists of 44 players out of which IIFL and Indiabulls Mutual Fund were yet to start their operations in quarter under review. The average Quarterly Assets Under Management (QAAUM) of the overall industry fell by Rs. 30,342 crore, or 4.08%, during July 2011 - September 2011 period. The overall QAAUM of 42 fund houses stood at Rs. 7,12,742 crore at the end of 2011, down from Rs. 7,43,084 crore (Excluding fund of funds).

For the period under review Edelweiss, Sahara and JPMorgan witnessed 73%, 72% & 31% appreciation in their QAAUMs while LIC Nomura, Baroda Pioneer and L&T saw their QAAUMs fall 24%, 23% & 21% respectively. Union KBC Mutual Fund reported first quarterly average AUM of Rs. 869 crore, surpassing nine other AMCs in terms of corpus in the very first quarter of its operation. The top slot saw a swap with Reliance AMC being overtaken by HDFC Mutual Fund. Reliance & UTI were the major losers as their average assets fell by 10.47% and 9.44% respectively. Overall among the 42 AMCs, 18 witnessed a rise in their AUM whereas 23 observed a fall. At the category level, Money Market funds witnessed highest outflow followed by Income Funds. The net outflow in Money Market Funds was Rs. 41,078 crore in September 2011 against a net outflow of only Rs. 10,066 crore in August 2011. Equities and Gold ETFs witnessed net inflows in the last two quarters. This behavior could be attributed to a combination of risk hedging by use of gold and value picking in equity.

INDUSTRY OVERVIEW


Indian equity markets witnessed a volatile quarter due to global and domestic factors. Benchmark indices Nifty and Sensex closed 12% lower due to higher than expected inflation numbers and global uncertainty. The worst performing sectors were Metal, Consumer Goods & Power. Banking sector suffered the consequences of adverse interest rate scenario, Basel II recapitalization norms and rating downgrades. The European debt crisis and a limping US economy didn’t

help sentiments either.

India Vix, index for measurement of market’s expectation of volatility over the near term, reached a high of 35.43 during the month. On Q-o-Q basis it shows a jump of 73.49% as local stocks continued to get hammered amid fears of a deeper malaise in the global economy amid sovereign debt problems in the US and the euro zone.

FIIs were net buyers of equities only in the month of July, whereas for the entire quarter they were net sellers, hiving equities worth Rs. 2,962 crores. MFs on the other hand were net sellers of equities only in the month of September and overall they net bought equities to the tune of Rs. 2,399 crores.

EQUITY MARKET OVERVIEW


DEBT MARKET OVERVIEW

Yields on 10 year benchmark security 7.80% GS 2021 ended the quarter at 8.44% as compared to 8.36% at the previous quarter end. The rises in yields were mainly due to a 75 basis points rate hike by the RBI. The RBI also indicated higher than expected borrowing requirement for second half of the year released by RBI on the last working day of the quarter resulted in yields increasing by 9 bps fearing excess supply in the market.

The second quarter of the financial year witnessed a 5.77% rise in auction volume at Rs. 3, 28,950 crore. The average yield for 91 day T-Bill inched up to 8.33% in the current quarter as against 8.11% in the previous quarter. Similarly for 10 year benchmark bond, the average yields increased by 23 bps during the quarter. A shortfall in small savings was attributed as the reason for this excess requirement. This reason had a negative impact on market sentiments. The market could see much higher borrowings by government if fiscal responsibility targets are not met. An increase in FII exposure limit could be taken as a negative indicator. It is estimated that the infrastructure sector requires an investment of USD 1 trillion during the 12th Five Year Plan. Of this, the private sector is expected to contribute 50 %. In light of this requirement the central bank announced that banks and Non Banking Financial Companies (NBFCs) would be eligible to sponsor Infrastructure Debt Funds (IDFs). The eligibility parameters included a minimum Net Owned Funds (NOF) of Rs 300 crore and capital adequacy ratio of 15 per cent. Besides, the NBFC sponsor’s net non-performing assets (NPAs) should be less than 3% of net advances and the NBFCs should have been in existence for at least five years of which the last three need to be profitable.

The liquidity situation in the banking system was hardened in the last month of the current quarter mainly due to the outflows towards Q2 advance tax payment. The daily net Liquidity Adjustment Facility (LAF) infusion increased to Rs. 52,821 crore in the month of September 2011 as compared to Rs. 38,465 crore in the month of August 2011.


GOLD OVERVIEW

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2011 QoQ Price Movement

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After gains recorded in the month of August, global gold prices cooled off considerably in September. At the London AM Fix, gold closed at $1,629, a drop of 9.05%. However significant rupee depreciation ensured that decline for the Indian investor was rather modest at 3.03%.

What caused the decline this time around?

The Federal Reserve’s disappointing announcements with respect to stimulus acted as trigger points. The renewed strength of the dollar stemming from the weakened Euro Zone also led to a sharp decline in gold prices. In recent times fresh wave of asset liquidation across the globe has caused a shortfall of dollars. It would be pertinent for investors to understand that gold is priced in US dollars. Thus other factors remain consistent, the price of gold falls as the dollar rises, making it almost inversely related to dollar prices.

Secondly, investors also need to realize that recent outperformance of gold has increased its importance as a source of funding for margin calls on other asset classes. Thus gold is undergoing a degree of "forced selling" to cover for losses in other asset classes.

Is the outlook still positive?

In the near to medium term it is likely that bull market for gold should continue due to:-

Sovereign debt crisis throughout the western financial system coupled with slow economic growth is forcing central banks around the world to print more dollars.

Bond markets across the world are preparing for a Greek default any time soon, which should lead to fresh round of recapitalization for European banks as they hold Greek debt on their balance sheets. Should Greece default, these banks will instantly lose money and be forced to search for other ways to raise capital or fail.

The era of negative real rates is expected to prevail for some time and would probably help gold move higher from an ‘expectation of wealth preservation’ standpoint.

Diversification of reserves and investments seems to be finding increasing favor, thus creating a driver for supporting gold prices.

Thus the factors that have caused a decline in gold prices seem to be transitory in nature, and the outlook for the asset class looks positive


MF & FII’s ACTIVITY

The Second quarter of the FY 2011-12, was led by weak sentiments due to various local and international factors. The global slowdown originating from U.S. and euro zone debt crisis, downgrade of ratings of various countries including US from AAA to AA+, were major concerns. Domestic market was stressed up on account of lower GDP numbers, depreciation in Rupee, persistent high inflation, elevated interest rates and increase in prices of petroleum products.

The impact of elevated commodity prices and persistent high inflation was clearly visible in the latest GDP numbers announced for the Q1 FY12. The GDP rate declined marginally by 10 bps to 7.6% from 7.8% announced in the last quarter. As an anti inflationary measure, RBI continued to raise the policy rates. Repo and Reverse Repo rates were hiked twice during the quarter to 8.5% and 7.5% respectively. A slowdown in the private sector investment has been the fallout of rising inflation, high interest rates and increasing input costs. The advance tax outflows to the tune of Rs. 50,000 crores also added to the cause for tighter liquidity.

An M-o-M fall of 11.84% was recorded in the month end AUM for the month of September 2011. The fall was witnessed across all the categories except Gold ETFs. Liquid / Money market instruments were the highest affected as almost 24% of AUM under this category plunged, as compared to the preceding month. On the other hand, Gold ETFs category witnessed a growth of 7.85% in the AUM under this category.

The month of September witnessed the Mutual Funds being net sellers of equity and net buyers of debt. They sold equities to the tune of Rs. 777 crores in September as against being net buyers to the extent of Rs. 2,523 crores in the month of August. They booked profits as lower than expected PMI data for both India and China suggested overall economic slowdown. Quarterly advance tax related outflows to the tune of Rs. 50,000 crores also added to the woes of tighter liquidity. On the Debt front, they turned out to be the net buyers to the tune of Rs. 23,047 crores in the month of September as against being net sellers in the month of August to the extent of Rs. 3,957 crore. On the whole, Mutual Funds continued to be Net buyers, both in the equity and debt category. However, the net inflow under Equity category rose significantly by 104.6% and Debt Category fell by 63.4%, as against the previous quarter.

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Mutual Fund's Net Flow in Debt & Equity


Despite witnessing significant depreciation in Indian Rupee, FIIs did not evince interest in investing in Indian markets. FIIs turned out to be net sellers of equity to the tune of Rs. 159 crore in the month of September, as against, being net sellers to the extent of Rs. 10,834 crore in the month of August. They were net sellers of debt as well, selling Rs. 1,708 crore in September, against being net buyers to the extent of Rs. 2,931 crore in the month of August. The heavy selling by FII’s was mainly triggered by

weakness in the US economy and ongoing debt crisis. On the whole, FII’s were net sellers of equities and net buyers under debt category. On a Q-o-Q basis, the net equity inflows fell by 157.3% and debt inflows rose by 46.1%.

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NFO ANALYSIS

The second quarter of the financial year 2011-12 saw launch of 144 new funds in the second quarter as compared to 145 new funds launched in the first quarter. The weak Indian and Global equity market encouraged the investors to opt for lesser volatile instruments in their portfolio. Crisil Short Term Bond Fund Index has given an absolute return of 2% as against -12% returns of BSE Sensex for last three months. AMCs have grabbed this opportunity and launched 140 Close-Ended Debt funds in addition to 4 Open-Ended Debt funds. Only two equity funds were launched in the second quarter namely Edelweiss Select Midcap Fund and Peerless Equity Fund.

Only 24 AMCs have launched new funds during the first quarter. ICICI Prudential Mutual fund has contributed the most with 20 new funds followed by DSP Mutual Fund, Birla Mutual Funds and Reliance Mutual Funds with 17, 14 & 14 funds respectively.


In the second quarter of the financial year 2011-12, following Open-Ended funds were launched in addition to 140 Closed-Ended funds.

The total amount mobilized by the AMCs in 140 Closed-Ended debt funds was Rs.17,688 Crore. However, during the same period last year, AMCs had mobilized Rs.17,735 Crore in just 77 funds. Over 96% of the total amount mobilized in the second quarter of FY-2011-12 was in “Closed-Ended Debt Funds” whereas, in the same period last year, only 76% of total amount was mobilized in “Closed-Ended Debt Funds”.


FOLIO WISE DATA & INVESTOR GRIEVANCES

The total number of investor’s folio for the mutual fund industry has witnessed a decline of 1.52% Y-o-Y to 47,234,833 in March 2011 from 47,964,062 in March 2010. While on the half yearly basis, investor’s folios fell by 0.13%.

Equity category including ELSS lost 1.45% in terms of folio count in the preceding half year. Balanced category too declined. The decline was lower than equity funds. On the contrary, folio count of debt oriented funds surged by 8.88% to 46, 88,280 in September 2011 from 43, 05,777 in March 2011. On Y-o-Y basis the category grew by 24.18%.

The liquid category preferred for steady returns in wake of current uptrend in short term interest rate gained 3.16%, although it has lost most on a Y-o-Y basis i.e. 19.25%.

During the year, investors were more focused on investing in other asset class particularly in gold ETF, which was reflected in a 117% appreciation in folio count with institutional and retail participating with equal fervor. Similarly other ETF also witnessed a 179% jump in folio count.

Investor Grievances

Alarmed at the increase in the number of complaints by investors against mutual fund houses and brokerage firms, SEBI has taken corrective steps in order to take prompt remedial action.

SEBI has asked all asset management companies to disclose the details of investor complaints on their respective website, on the AMFI website as well as in their annual reports. The said details should be vetted and signed off by the trustees of the concerned mutual fund. Further, SEBI has also prepared a format in which all the AMCs have to disclose necessary information. The complaint format has been classified into three categories-

Category Sep-11 Mar-11 Sep-10 Mar-10

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% Change (Y-o-Y)

Liquid/Money Market 199,541 193,422 254,338 239,539 3.16% -19.25%Gilt 27,867 29,178 30,049 31,501 -4.49% -7.37%Debt Oriented 4,688,280 4,305,777 4,091,622 3,467,310 8.88% 24.18%Equity Oriented 38,707,397 39,278,085 39,225,286 40,928,448 -1.45% -4.03%Balanced 2,772,425 2,790,050 2,836,056 2,827,918 -0.63% -1.34%Gold ETF 428,768 319,679 243,973 147,047 34.12% 117.40%ETFs(other than Gold) 125,712 103,122 60,160 36,898 21.91% 179.48%Fund of Funds investing Overseas 221,366.00 215,520.00 236,835.00 285,401.00 2.71% -24.49%

Total 47,171,356.00 47,234,833.00 46,978,319.00 47,964,062.00 -0.13% -1.52%Source: AMFI & SEBI

Number of folios


1 Delay/Non – receipt of money

2 Statement of Account/Unit Certificate/Annual report

3 Service related

The main purpose of SEBI’s initiative is to protect investor’s interest and bring in more transparency in the existing system. According to AMFI records (2010-2011), we have considered top 5 fund houses on the basis of their AUM as on September 2011.

SEBI’s initiative in bringing the transparency and accountability has led many fund houses to take prompt measures in addressing the client’s complaint, thereby resolving them drastically as seen in the above table. The competency of each fund house above reflects their efficiency in terms of complaints received and solved in a particular time frame.

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UTI Mutual Fund 9887686 10774 10719 55Reliance Mutual Fund 7430653 25571 25566 5

HDFC Mutual Fund 4680610 10429 10328 101ICICI Prudential Mutual Fund 2808475 980 980 -

Birla Sun Life Mutual Fund 2426805 929 926 3Source: AMFI


SHORT TERM BOND FUNDS- RIGHT TIME TO INVEST?

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Many investors in the current scenario could be looking at the way interest rates have moved up and left wondering about how to benefit from this phenomenon. Short term debt schemes could be the answer to this conundrum. In this article we will try to analyze that these funds are most suitable and how best to use these funds. Who should invest? Those investors who are averse to the idea of locking cash for long won’t find a better pick than this. Also the short term debt schemes can be termed as another savings account with higher returns (tax component attached to the returns) than normal savings account. Depending on the maturity period, one can take exposure in three different short term debt categories namely Liquid, Ultra Short term and Short term income. Short term income schemes generate returns by investing in debt securities having a maturity up to 3 years. Ultra short term has much lower risk component attached than short term income as maximum maturity of their debt investment is less than a year. Lastly, liquid schemes have the lowest interest rate risk as the maximum maturity is less than 91 days and deliver lowest returns over the long term period among the categories. Looking at the characteristics, investment in this category is best suited for corporate, institutional players and high net worth individuals (HNI) who come in the highest tax bracket and have surplus funds to invest for short term. In case of retail investors the savings can be deployed where they get attractive returns over the long term period to achieve their financial goals. Hence, over a longer period short term funds are not suitable or perfect for retail investors as returns are lower in the long term than income fund. Retail investor who wants to invest in equity through systematic route (SIP) can invest lump sum amount or SIP route in short term schemes and use Systematic Transfer Plan (STP) to divert the funds in equity schemes. Now after getting convinced who should invest, get ready to know the right time to invest in these schemes. Timing the Market Looking at the interest rate cycle currently it is the right time to invest. Why and How? We at ICRA Online have done a scheme performance study of how the Short Term Debt Mutual Fund Scheme

returns behaved in comparison to interest rates movement over a period of two years. We have compared the mutual fund short term debt returns with interest rate movement of certificate of deposits (CD) floated by banks where a significant portion is invested. For better and easy understanding, we have taken the average category returns of one year rolling returns with a one month


frequency over a period of two years. Hence, we have got 24 average category returns in 24 month period. The accompanying graph shows the returns of all three categories and three different tenure of CDs. It depicts that when interest rates are down returns are also at lower levels. Thereafter, as interest rates goes up returns also gradually go up but at a slower rate. Why? Because when rates increased due to liquidity crisis, the debt securities have to bear the short term losses (mark to market (MTM) margin) as the bond prices declined. But, the pain is short lived as the short term instrument matures much earlier than medium to long term security and can do fresh investment at higher rate. The worst hit in increasing interest rate scenario are the one who holds longer term debt securities like Government security and bond/debentures. Hence, income and gilt schemes have delivered lower returns as compared to their long term average returns and short term debt schemes. In the same study, we have also come out with some more revealing facts. We have calculated the month on month annualized returns from September 2010 to September 2011 in all the three categories. We found that the best month in terms of returns for most of the schemes was July and August 2011 and the worst month was September 2010 and October for some. This is because September 2010 was the month when higher rates adversely impacted the portfolio value similar to what happened in equity market in September 2008 which witnessed the steepest fall. At that time most of the investors sold off their shares at throw away prices. In case of July and August 2011 interest rates were elevated and remained range bound for quite some time. This situation can be better understood when equity share prices are moving up slowly and gradually earning good returns. Now the question would come to your mind is what next. It’s fine if rates remained elevated at higher levels but what if rates start declining (when market is flushed with liquidity) going ahead. Actually it is more fruitful as the bond price of a security gain or move up. But as the short term debt securities will mature early, slowly and gradually returns will go down. So, it is important to keep a track of returns. In this scenario, it is better to shift to medium to long term maturity debt schemes. On the contrary, if rates go up can we land up at the same situation happened in September last year. Not probably as the carnage has already happened and the chances are very less as very few companies or banks would be willing to pay at higher interest rates. Being a debt product, chances of a default also increase after an interest cost is unbearable. So interest rates are already at elevated levels and could remain more or less at similar levels. Lastly, we just want to say that every investment product has bright and gloomy days. So it is important to understand the market and time it accordingly to get maximum returns. However, it is difficult to track every asset class individually and beat the market in all instances. Hence, it is important to have a financial planner in place who will guide according to your financial status in every step of your life to achieve your financial goals.


SAVING RATE DEREGULATION

Demystifying Savings rate deregulation and its impact on Liquid Funds

RBI in its second quarter monetary policy review deregulated the savings bank rates in India with immediate effect. As a part of financial sector reforms, Central Bank had already deregulated interest rates on all kinds of deposits except the savings rate. The last case of deregulation took place in July 2010 when it replaced the Benchmark Prime Lending Rate (BPLR) with the Base Rate system.

A savings deposit by definition is a hybrid product which combines the feature of both a current account and a term deposit account. A current account is mainly maintained by business houses for transaction purposes and their cash management whereas a savings account is meant for both day to day requirement of funds and transaction purposes and is used mostly by individuals and households.

The amount maintained under a current account normally does not provide any rate of interest whereas interest is paid for savings account. The interest rate scenario has changed drastically in India in last two decades but surprisingly interest rate on savings account has been changed only thrice since 1978. Interest rate on savings account in most developed economies is deregulated and is based on prevailing market interest rates.

Advantages and disadvantages of deregulation of interest rates-

Advantages:

Will increase the share of savings account in total deposit- The savings rate was fixed at 3.50% from March 2003 to May 2011, during the period RBI changed Repo and Reverse Repo rates many times but the same was not reflected in the interest rates that the normal household gets. There was huge gap between savings and term deposit rates and hence the ratio of savings deposit in total deposit fluctuated mainly in rural areas. The deregulation would make such accounts more attractive in rural areas where savings account is primarily used for savings purpose and not transaction purpose.

RBI policies would become more effective- As savings account constitute around 22% of the total bank deposit, it provides a source of low cost fund to the banks. Even when the Repo rate was hovering around 8.25%, the savings rate was fixed at 4% before deregulation. Thus the monetary policy review did not have any impact on this particular source of fund for the banks. After deregulation it is expected that savings rate would move in tandem with the RBI monetary policy thus making the policy more effective.

Competition among banks- Most banks would like to maximise their CASA ratio as it provides funds at low cost. Before deregulation there was hardly any competition in this segment and banks especially public sector banks hardly did any innovation in this segment. But after deregulation, it is expected banks would try to lure customers by offering higher interest rates along with other innovations/flexibility to get as many accounts as possible.


Disadvantages:

Might lead to Asset Liability Mismatches- As all banks offered similar rate of interest before deregulation there was no incentive for customer to shift their savings from one bank to other and hence banks used such deposit to finance long term loans. But when the banks are free to set their own interest rates, it can wisely be assumed that banks with lower CASA ratio would offer attractive rate of interest to consumers thus leading to asset liability mismatches.

Could impact small households-When interest rates are deregulated, it is not just on upside but could be on the downside as well. Banks would not be in a position to compensate savers properly if there is enough liquidity in the system. This would impact small savers and pensioners who depend on savings rate interest only for their livelihood.

Unhealthy competition and systematic risk- Savings deposits offers low cost of funds and hence it is very attractive for banks. In order to lure customers each bank would try to offer higher rate of interest thus impacting their Net Interest Margin (NIM). It would result in higher cost of funds for the bank which would ultimately be passed on to the borrower thus leading to higher cost of borrowing.

Thus deregulation of interest rates has its own pros and cons and it would be interesting to see what strategy banks adopt. It is expected that in a higher interest rate scenario they would be forced to provide much higher then what they were providing earlier and hence this move by RBI is a welcome Diwali gift for bank customers.

Interest Rate deregulation- Impact on Liquid Funds

Liquid Funds are mutual funds that primarily invest in debt securities and offer higher post tax returns as compared to savings deposit. They normally invest in Commercial Papers (CPs), Certificate of Deposit (CDs) and Treasury Bills of maturities less than 91 days. Their mandate is to optimize returns with preserving capital. But with deregulation of interest rates in savings account some investors might move towards savings account as it offers higher liquidity and safety to principal amount. The overall corpus might be impacted by reduced difference between yields of savings account and Liquid Funds.

However, Liquid Funds yields better return considering tax rate into account. Moreover it also provides dividend option where only dividend distribution tax (DDT) is deducted by fund houses before the same is distributed. With deregulation, this category of mutual fund will definitely offer more innovation as Reliance AMC is already offering “Any Time Money Card” in collaboration with HDFC Bank.

Thus a normal investor must spread its savings across Liquid Funds and savings account to get the benefit of both as Liquid fund is an alternate investment avenue for individuals to park their short term surplus funds. While savings deposits 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.


GOLD ETFs – A MUST IN EVERY PORTFOLIO

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are the mutual fund units which investor buy or sell from the stock exchange, as against a normal mutual fund unit, where the investor buys /sells through a distributor or directly from the AMC. ETFs are listed and traded on stock exchanges like any other stock or share listed on stock exchange. They enable the investors to gain wider range of exposure towards the index.

For the investors, a confusion remains at the back of their mind, that ETFs and Index funds are same; both behave in accordance to a particular index. However, there lie certain differences between the two, some of which are highlighted below -

� Index Funds are the mutual fund units the portfolio of which consists of only those stocks that constitute its benchmark index. Exchange Traded Funds (ETFs) are the mutual fund units which investor buy or sell from the stock exchange.

� Index Funds units can be bought or sold from or to the AMC. However, ETFs are traded on the stock exchange just like any other stock.

� NAVs of index funds are calculated and declared on day end, whereas, ETFs declare their NAVs on a real time basis like any other stock listed on an exchange.

� For buying/selling an index fund unit, the investor needs to pay the entry load/exit load charged by the AMC, whereas, for buying/selling an ETF the investor needs to pay brokerage, as they need to pay while buying/selling any other stock.

Gold ETFs Various types of ETFs are available around the globe. Amongst them, Index ETF, Commodity ETF and Fixed Income ETF are available in India. In India, Gold ETFs are the most popular and hence we would be exploring whether to invest in Gold ETFs or physical Gold. Nowadays, investing in stock markets is turning out to be a risky affair, as it is always surrounded by global uncertainties. For this reason the investors are looking out to invest their money in the safest havens. Hence, the yellow metal’s shine is only becoming more and more attractive. Investment in gold can either be through purchase of physical gold or through Gold ETFs. Gold ETFs are special types of ETFs which invest in Gold and Gold related securities. Gold ETFs provide investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold. The units of these ETFs can easily be bought or sold at the stock exchange where it is listed on a real time basis. Investing in physical gold requires heavy investment of money, whereas Gold ETFs allow investing in gold in small denominations through SIPs. The prices of gold ETFs move hand on hand with the price of physical gold. When the price of gold moves up, the value of ETFs appreciates and vice versa.


Gold ETFs vs. Physical Gold

� Quantity to Buy/Sell - Physical gold is available in standard denomination, which requires heavy investment. However, Gold ETFS are available in small quantities, hence are more affordable.

� Mode of Storage - As Physical gold are held are available in bars they need to be stored in the lockers or safes, whereas, as the Gold ETFs are available in dematerialized form, they are stored electronically. Hence they also eliminate the risk of theft.

� Convenience in buying and selling - Physical gold is less convenient as it is required to move physically. It is not so in case of gold ETFs as they are held electronically.

� Pricing - If bought from jewelers, gold prices are never uniform, they differ from one jeweler to other. However, the pricing of gold ETFs is done as per international standards and is always transparent.

� Purity - Physical gold always comes with a question of purity in mind, which is not the case with Gold ETFs as the fund house ensures the quality of the same.

� Charges involved - Other than the charges for delivery of physical gold, no other charges are involved in case of physical gold. However, Gold ETFs involve ETF management fee as well as brokerage charges at each time of buy or sell.

� Taxation - Wealth tax is levied on physical gold, whereas, this is not applicable in case of Gold ETFs. Long term capital gains are involved after holding the same beyond 3 years. However, as Gold ETFs are treated as any other stocks, long term capital gains are levied after holding the same beyond 1 year.

Gold ETFs in India With Global uncertainties and fall in the domestic price of the yellow metal, month end AUM of Gold Exchange Traded Funds witnessed a sharp rise. With 42 mutual fund companies present in India, only 14 mutual fund houses have come up with Gold ETFs or FoFs. Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) was the first to start a Gold ETF in March 2007. The scheme name was Benchmark Gold BeES (now known as GS Gold BeES). A fall of 7.87% in the Assets Under Management (AUM) was witnessed on a M-o-M basis, from Rs. 6,96,738 crore in August 2011 to Rs. 6,41,937 crore in September 2011. The fall was observed across all the categories except the Gold ETFs category. The AUM of Gold ETFs increased from Rs. 7,578 crore in August 2011 to Rs. 8,173 crore in September 2011. A rise of 7.85% in the AUM under Gold ETFs category was witnessed despite a fall of 3% in the Gold price in domestic market. On a Y-o-Y basis a significant rise of 186.87% was observed in this category, from Rs. 2,849 crore in September 2010, despite a fall of 2.34% in the total AUM of the Indian Mutual

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Month End AUM Gold ETFs


Fund Industry. Launch of various Gold ETFs and FoFs and global volatility, which led the investors to invest in the safest havens, during the period under consideration are some of the reasons for the increase in the AUM. Performance of Various Gold ETFs Schemes In the one year time frame, all the Gold ETFs schemes have generated a return in the range of 32.62% to 33.76%. UTI Gold ETF was the highest return generator amongst the remaining 11 schemes. As none of the schemes have completed a life span of 5 years, UTI Gold ETF, continued to be the maximum return provider (27.16%) over a period of 4 years. However, on the basis of returns since inception, HDFC Gold ETF stood to be at the top with a return of 36.34%. This scheme has also outperformed its benchmark, i.e. Prices of Gold in the Domestic market, with a return of 34.77%. On a YTD basis returns across all the schemes have been in the range of 24.10% to 24.93%, Kotak Gold ETF being at the top. Benchmark Gold BeES (now known as Goldman Sachs Gold BeES), the first Gold ETF scheme in India, has since inception provided a return of 23.68%.

Performance of Various Gold FoFs Schemes Only 2 out of 6 FoFs schemes, available as on September 30, have been in existence for more than 3 years. AIG World Gold Funds has generated a return of 23.68% as against DSP BlackRock World Gold Fund – Growth which has generated a return of 17.39% in a time horizon of 3 years. Remaining 4 schemes have been in existence for less than 6-7 months.


Category 1 Year 3 Years 5 Years Since InceptionEquity Diversified -16.89 12.32 7.62 10.72Debt Long Term 7.59 6.29 7.37 6.00Debt Short Term 8.11 7.83 7.32 6.57Gilt Long Term 5.18 6.57 6.32 6.30Gilt Short Term 5.77 5.40 5.81 5.74Gold ETFs 33.23 22.70 N.A. 26.78Gold FoFs 5.36 20.53 N.A. 14.58BSE Sensex -18.01 8.56 5.72 16.81S&P Nifty -18.02 8.03 6.61 14.48Prices of Gold 35.41 24.84 23.69 24.04

Average Returns of Various Mutual Fund Categories

Returns below 1 year are absolute returns and above 1 year are CAGR

Source: MFI Explorer

CategoryEquity DiversifiDebt Long TermDebt Short Ter

Aver1 Year

ied -16.89m 7.59m 8 11

rage Returns of V3 Years 5 12.326.297 83

Various Mutual FYears Since I7.62 107.37 67 32 6

Fund Categoriesnception0.72

6.006 57Debt Short Ter

Gilt Long TermGilt Short TermGold ETFsGold FoFsBSE Sensex

m 8.115.18

m 5.7733.235.36

-18 01

7.836.575.40

22.7020.538 56

7.32 66.32 65.81 5N.A. 26N.A. 145 72 16

6.576.305.746.784.586 81BSE Sensex

S&P NiftyPrices of GoldReturns below 1 yea

Source: MFI Explorer

18.01-18.0235.41

ar are absolute returns

r

8.568.03

24.84 2s and above 1 year are

5.72 166.61 14

23.69 24CAGR

6.814.484.04

Gold ETFs and FoFs vs. Other Mutual Fund Categories Amongst all the other mutual fund categories, Gold ETFs have outperformed in the time frame of 1 year, 3 years, 5 years and since inception. Gold ETFs category has also outperformed the benchmark index, BSE Sensex and S&P Nifty, which represents the overall market. However, in spite of being very close to the returns as generated by the physical gold, it could not outperform this index. Over the time frame of 3 years Gold FoFs have also performed well. With unexpected fluctuations in the market, investors are always keen in parking their portfolios in the safest havens. Hence, Gold ETFs turn out to be good investment option for the investors to hedge their assets against the uncertain global market scenario. ETFs, underlying the shinning yellow metal, have outperformed all the various other mutual fund categories under various time horizons. This can also be viewed from the fact that 78.42% of the ETF turnover under the NSE, is governed by the Gold ETFs (Source: NSE ETF Report). Thus the various benefits mentioned above coupled with satisfying the need of small and medium investors to invest and accumulate gold units through SIPs has made Gold ETFs more and more attractive.

ICRA Online LimitedEnterprise, Team Spirit, Innovation...

MFI Explorer is a desktop application catering to research and analysis needs of advisors and fund managers with its comprehensive database on all Indian mutual funds. A daily data feed from our server keeps the application updated. Peer group comparison on risk, performance and portfolio helps the sales and market-ing team pitch for their products. Current and time series analysis of the NAV and portfolio helps the asset

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managers and advisors understand the portfolio trends in the industry. This product is a must have for any advisor who wants to carry out a thorough and unbiased analysis of available funds for its investors. It helps product teams with fund houses and advisors to build their marketing and promotional materials based on market share and performance. User defined templates and synchronized spread sheets helps reduce report delivery timelines.

Powered by our comprehensive mutual fund data, the application is targeted for treasuries and institutional brokers for whom precision in valuation and returns upto the last decimal is sacrosanct. MFI Portfolio Tracker is being used by some of the largest treasuries in the country to manage their transactions in mutual funds. It facilitates flexibility in setting up report template and also provides inbuilt regulatory reporting. Institutional

brokers rely on its reports to analyze their client’s portfolio performance and send reports on demand. The product has been integrated with ERP solutions for automation in processes. Its exposure reports shows the concentration in various sectors and credit ratings that a portfolio might have through investment in various schemes.

MFI Office Manager is a highly scalable back office system that can smoothly manage transactions for banks and retails funds distribution with huge volumes of transactions. The application is flexible to adopt to highly controlled and policy driven business environment as may be seen in banks and wealth management firms to largely uncontrolled and unregulated practice as seen in larger retail distribution. Its stringent transaction reconciliation

ensures that any erroneous transaction set is immediately highlighted with probable causes of such error. The brokerage and incentive calculation engine is capable of calculating all the types of brokerage currently in practice which can be further used to reconcile with actuals, an important step in checking revenue leakage. The application can manage transaction for mutual funds, life insurance, non-life insurance, IPO, fixed deposit, corporate bonds.

ensures that any erroneous transac

With ICRON’s Smart Track Platform you can manage your client portfolios anytime and from anywhere through web. You can issue logins to your team members, branches and investors to log into the platform through web. Our advisor dashboards consolidate all the important information on the landing page of the advisor. The platform is compatible with various feeds from registrars of mutual funds which can be

imported into the platform directly. Brokerage calculation engines are design to capture all standard brokerage types received from various fund houses and calculate brokerage internally based on transaction data. Our goal based financial planning allows you to identify the fea-sibility of investor’s meeting various user defined life cycle goals and post retirement expenses based on lifestyle and income assumptions.

MFI Insurance Explorer is built on a similar platform as MFI Explorer to give various stake holders in the insurance industry a clear and concise view on various products available in the industry. General features of the policy like its minimum and maximum entry age, premium payment terms, top up details, lock in period, rider details are available in an instance. It gives various comparative reports that can be used by insurance

companies and insurance advisors to analyze the performance of their unit linked policies. It features detailed portfolio reports allowing users to compare fund’s exposure in various instruments, companies, sectors and companies for multiple time periods. With over 650 insurance products, and still counting, the data base is quite comprehensive to deliver broader and deeper analytical reports.

ICRA Online LimitedEnterprise, Team Spirit, Innovation...

Our team of analysts capture all the important news and events across the industry so that the same can be presented in a more concise and understandable format. The news and events range from equity, debt and money market to global markets, oil prices and major economic policy decisions. These reports are available at various frequencies and lengths and are delivered with client’s branding.

Research SolutionsNewsletter

DatasheetsIn order to facilitate efficient, accurate, unbiased and transparent reporting on fund’s performance vis-à-vis its peer group and the benchmark, many banks, advisors and fund houses opt for different types of datasheets. These datasheets are available as white label research and can also be customized to include client’s own parameters and scheme universe. Daily Scorecards are spreadsheets with important risk and return parameters of various funds grouped as per their category. This acts as a quick reference for the sales team to compare the up to date performance. Fund Fact sheets are one page report on a fund with comprising of various risk and return measures, fund size, portfolio allocation across companies and all such information required for investment decision.

Fund AnalysisThese are a analytical reports which consist of some data available in factsheet along with performance analysis from ICRON’s research team. The analysis primarily aims to address the suitability and performance of the funds. Reasons of its performance or otherwise are analysed with reference to its stock selection. This report also analyses fund managers performance and management history.

The application helps advisors plan and manage their investor portfolios efficiently. Finan-cial planner allows one to capture all the demographic and income details of the investor and profiles the client as per her risk appetite. A comparison with model portfolio highlights the gaps in existing portfolio. The platform has integrators built to capture data from diverse back

office systems for all asset classes including secondary market trades. In addition to this advisor can input all such investor transactions which are carried out by an external broker. The holistic view on investments helps advisors and planners take valuable decisions on the portfolio health and keeps it aligned with its objective. Various objectives in terms of goals can be defined in the application.

Fund RankingIn order to simplify the fund selection process for the sales team and the investor brokers usually need the schemes to be ranked. These rankings take care of various portfolio and performance related factors and come out with easy-to-understand ranks assigned to each of the schemes under consideration. ICRON designs the ranking model in consultation with its clients to suite their specific requirement.

Portfolio Allocation and OptimisationOur specialized team of researchers help design optimization models to suite the model portfolio requirements for various risk appetite for wealth managers and advisors. These models incorporate various scenarios on the premise of generating the best returns for an acceptable level of risk, factoring in real life market scenarios for asset classes.


ICRA ranks Mutual Funds in 3 broader categories, which are sub-classified into 16 sub-categories.

Debt Funds � ICRA Debt Intermediate � ICRA Debt-Long Term � ICRA Gilt - Long Term � ICRA Gilt - Short Term � ICRA Liquid � ICRA Liquid - IP � ICRA Ultra Short Term � ICRA Ultra Short Term – IP

Equity Funds � ICRA Equity Sector � ICRA Equity Dynamic � ICRA Equity Index � ICRA Equity Large Cap � ICRA Equity Mid & Small Cap � ICRA Equity-Tax Planning

Hybrid Funds � ICRA Balanced � ICRA Marginal Equity

* Ranking is done for a period of one year & three years for all the above categories.

ICRA MUTUAL FUND CATEGORIES


The report card for the Indian Mutual Fund industry for the quarter ended September 2011 is out. Marginal Equity Funds and Debt Intermediate Funds were the best performers in equity and debt categories, respectively, as per the latest ICRA Mutual Fund Ranking powered by ICRA Online Limited.

In the Debt Funds category, Debt Intermediate Funds topped the chart followed by Debt Long Term Funds and Ultra Short Term Funds. This category generated positive returns in the last quarter as compared to equity funds. It was mainly due to volatile bond market that provided much needed rally.

In the Equity Funds category, the average returns in the September quarter were mostly negative due to high inflation, tight monetary policy and global uncertainty. Marginal Equity Funds performed the best as their average equity exposure in equity is less than 65%. In the same period benchmark indices, Nifty & Sensex gave negative return of 11.19% and 11.40% respectively.

RANKING SYNOPSIS - QUARTER ENDED SEPTEMBER 2011


Debt Funds

� ICRA Debt Intermediate

In the ONE-YEAR category, 35 schemes were analysed for ICRA Debt Intermediate category, JPMorgan India Short Term Income Fund and HSBC Income Fund-Short Term Plan grabbed the top positions.

In the THREE-YEAR category, 23 schemes were analysed Kotak Flexi Debt Fund grabbed the top position.

� ICRA Debt-Long Term

In the ONE-YEAR category, 19 schemes were analysed for ICRA Debt – Long Term category. There were no 5 star rated funds in this category.

In the THREE-YEAR category, 27 schemes were analysed ICICI Prudential Short Term Plan and Religare Active Income Fund- Plan A grabbed the top positions.

� ICRA Gilt - Long Term

In the ONE-YEAR category, 18 schemes were analysed for ICRA Gilt - Long Term category, Birla Sun Life Government Securities Fund and LIC Nomura G Sec Fund outperformed its peers.

In the THREE-YEAR category, 19 schemes were analysed, Religare Gilt Fund - Long Duration Plan grabbed the top position.

� ICRA Gilt - Short Term

In the ONE-YEAR category, 7 schemes were analysed for ICRA Gilt - Short Term category, UTI G-Sec Short Term Fund grabbed the top position.

In the THREE-YEAR category, 7 schemes were analysed DSP BlackRock Treasury Bill Fund grabbed the top position.

� ICRA Liquid

In the ONE-YEAR category, 68 schemes were analysed for ICRA Liquid category, IDFC Cash Fund, Principal Cash Management Fund, JM High Liquidity Fund, UTI Liquid Fund and IDBI Liquid Fund outperformed its peers.

In the THREE-YEAR category, 28 schemes were analysed for ICRA Liquid category. There are no 5 star rated funds in this category.

ICRA MUTUAL FUND RANKINGS—PERFORMANCE SNAPSHOT


� ICRA Liquid – IP

In the ONE-YEAR category, 46 schemes were analysed for ICRA Liquid - IP category, IDFC Cash Fund, SBI Premier Liquid Fund, JM High Liquidity Fund, Sundaram Money Fund, UTI Liquid Fund and Tata Liquid Fund grabbed the top positions.

In the THREE-YEAR category, 18 schemes were analysed for ICRA Liquid - IP category, HDFC Cash Fund, and Tata Liquid Fund-High Investment Plan grabbed the top positions.

� ICRA Ultra Short Term

In the ONE-YEAR category, 15 schemes were analysed for ICRA Ultra Short Term category. There are no 5 star rated funds in this category.

In the THREE-YEAR category, 41 schemes were analysed, HDFC Cash Management Fund – Treasury Advantage Fund emerged as the 5 star rated fund.

� ICRA Ultra Short Term – IP

In the ONE-YEAR category, 10 schemes were analysed for ICRA Ultra Short Term-IP category. There are no 5 star rated funds in this category.

In the THREE-YEAR category, 28 schemes were analysed for ICRA Ultra Short Term - IP category, HDFC Cash Management Fund – Treasury Advantage Fund emerged as the 5 star rated fund.

Equity Funds

� ICRA Equity Sector - Banks

In the ONE-YEAR category, 7 schemes were analysed for ICRA Equity Sector - Banks category. There are no 5 star rated funds in this category.

In the THREE-YEAR category, 6 schemes were analysed for ICRA Equity Sector - Banks category. There are no 5 star rated funds in this category.

� ICRA Equity Sector - Software and Consultancy Services

In the ONE-YEAR category, 6 schemes were analysed for ICRA Equity Sector - Software and Consultancy Services. There are no 5 star rated funds in this category.

In the THREE-YEAR category, 6 schemes were analysed for ICRA Equity Sector - Software and Consultancy Services. There are no 5 star rated funds in this category.

� ICRA Equity Dynamic

In the ONE-YEAR category, 104 schemes were analysed for ICRA Equity Dynamic category, AIG India Equity Fund, IDFC Premier Equity Fund, IDFC Small & Mid Cap Equity Fund, UTI MNC Fund, UTI India Lifestyle Fund and UTI Weather Builder Fund emerged as the 5 star rated funds.


In the THREE-YEAR category, 97 schemes were analysed HDFC Equity Fund, IDFC Premier Equity Fund, Quantum Long Term Equity Fund, Reliance Growth Fund and UTI MNC Fund grabbed the top positions.

� ICRA Equity Index

In the ONE-YEAR category, 14 schemes were analysed for ICRA Equity Index category. There are no 5 star rated funds in this category.

In the THREE-YEAR category, 11 schemes were analysed for ICRA Equity Index category. There are no 5 star rated funds in this category.

� ICRA Equity Large Cap

In the ONE-YEAR category, 52 schemes were analysed for ICRA Equity Large Cap category, ICICI Prudential Focused Bluechip Equity Fund, UTI Equity Fund, UTI Opportunities Fund and Canara Robeco Large Cap+ Fund outperformed its peers.

In the THREE-YEAR category, 38 schemes were analysed Fidelity Equity Fund, HDFC Top 200 and Franklin India Bluechip grabbed the top positions.

� ICRA Equity-Tax Planning

In the ONE-YEAR category, 29 schemes were analysed, Axis Long Term Equity Fund grabbed the top positions.

In the THREE-YEAR category, 26 schemes were analysed, Reliance Tax Saver (ELSS) Fund grabbed the top positions.

Hybrid Funds

� ICRA Balanced

In the ONE-YEAR category, 19 schemes were analysed for ICRA Balanced category, HDFC Children Gift Fund emerged as the 5 star rated fund.

In the THREE-YEAR category, 17 schemes were analysed for ICRA Balanced category, HDFC Prudence Fund grabbed the top position.

� ICRA Marginal Equity

In the ONE-YEAR category, 41 schemes were analysed for ICRA Marginal Equity category, Birla Sun Life MIP - Savings 5 and HDFC Multiple Yield Fund held the top position.

In the THREE-YEAR category, 38 schemes were analysed Birla Sun Life MIP - Savings 5 and HDFC Multiple Yield Fund-Plan 2005 grabbed the top positions.


ICRA Mutual Fund Rankings seek to inform investors and intermediaries of the category-wise relative performance of Mutual Fund schemes. The schemes are ranked using the methodology developed by ICRA Online.

� Basic Eligibility

The MF scheme should have declared a minimum 222 Net Asset Values (NAVs) for one year and 666 NAVs for the three year period.

First NAV disclosure should be on or before 365 days for one year and 1095 days for three year.

Minimum 12 portfolios have been disclosed over the 1-year period and 12 quarter end portfolios for the 3-year period.

A scheme is required to have made full portfolio disclosures (monthly/quarterly) during the ranking horizon and its average fund size should be larger than the cut-offs set for each category, which vary from Rs 10 crore to Rs 500 crore.

Only open-ended growth schemes are considered for ranking, apart from Liquid and Ultra Short Term schemes, where Institutional Plans have also been considered.

� Scheme Classification

One of the unique characteristic of ICRA rankings is the dynamic classification of schemes, which is based on the asset allocation and investment pattern across asset classes and sectors of the schemes, over the ranking periods of one and three years, rather than the objective stated in their prospectus This kind of approach of investment based scheme classification holds more relevance as asset allocation and investment pattern determines the risk level associated with the schemes and also serves as an indicator of the fund manager’s investment style. The net result is that these rankings reflect market realities, thereby serving as an effective guide to the users. After classification, the ranks assigned to the schemes are a result of an in-depth analysis on certain critical parameters, including:

Risk-Adjusted Return Portfolio Concentration Characteristics Liquidity Analysis Corpus Size Average Maturity Credit Quality

RANKING METHODOLOGY


� Risk Adjusted Return Analysis: Risk adjusted return is calculated on the basis of an internally developed ratio called the Investor Expectation Ratio (IER), which is defined as the ratio of excess return to the total risk of the portfolio. The excess return is the average weekly active return of the scheme calculated for the ranking period over the risk free return. The downside deviation of the scheme’s return (calculated for the period covered) is taken as the surrogate of risk. In the case of Index schemes, tracking error is used. Loads are not taken into consideration during the ranking exercise.

� Portfolio Concentration Analysis: MF schemes that do not have an adequately diversified portfolio carry a higher risk than well-diversified schemes. While for equity schemes, company and sector concentration is considered, for debt schemes, sector concentration is evaluated. Company and Sector concentration in equity schemes is judged taking the respective scheme benchmark’s portfolio structure to ascertain the level of concentration of the scheme’s portfolio. For debt schemes, the sectors considered are: Gilt; Non-Banking Financial Companies; Manufacturing Companies; Banks/Financial Institutions/ Development Institutions, Realty, Securitized Debt and Non-Financial/Non-Manufacturing Companies. Overexposure to any of these sectors is penalized.

� Liquidity Analysis: Liquidity analysis is done for equity schemes. In this case, the liquidity coefficient for a scheme is calculated as the weighted average of the liquidity coefficients of all scrips in the portfolio. The liquidity coefficient of individual scrip is calculated as the total number of shares in the portfolio of the scheme divided by the total daily turnover of the scrip.

� Corpus Size: Since a larger size of a scheme's corpus lends stability to it during periods of high redemption pressure, preference is accorded to large-size schemes.

� Average Maturity: Average maturity is considered in the case of the Debt, Gilt and Liquid categories. Schemes with higher average maturity carry higher interest rate risks as compared with schemes with lower average maturity.

� Credit Quality: The credit quality of a portfolio is given significant weightages in deciding the final ranks. This credit quality is ascertained based on ICRA's credit indicators for companies.


� ICRA Mutual Fund Ranking

In order to ensure that the variation in the final scores is captured, the methodology considers the final scores as a distribution for which random numbers are generated. Based on these, the final scores are placed on a normal distribution curve. The cumulative probability distribution ascertained gives the position of the schemes on the bell curve. Based on the confidence level, the schemes are then assigned star ranks.

ICRA MUTUAL FUNDS RANKING SCALE

Scale Interpretation

7-Star Best Performance amongst 5-Star Funds in the respective category

5-Star Funds with composite score in the top 4.96% confidence* interval in the respective category

4-Star Funds with composite score lying between 95.4% and 84.38% of the confidence* interval in the respective category



1-Star Funds with composite score below 38.3% of the confidence* interval in the respective category

* Based on the positioning of a scheme in the category’s normal distribution

� ICRA 7-Star Gold Award The best performing fund amongst the 5-Stars is ranked as a 7-Star Fund provided its fund size is greater than the average of the respective category or Rs. 100 crore, whichever is lower. Funds are awarded 7-Star award only in the year end ranking.

� Fund House of the Year Fund House of the Year is determined in the Equity and Debt categories separately. To qualify for the award a Fund House needs to have at least one scheme ranked 3 Star or above in at least three of the equity and debt categories, respectively defined by ICRA. The scoring aims at assessing the number of superior performing schemes managed by the fund house over the current one-year period. The result also takes into account qualitative factors of an AMC’s structure based on their responses to a due diligence questionnaire. Fund House of the year is selecting only in the year end ranking.


1 Year

ANNEXURE – II - RANKINGS


3 Year


The ranks assigned by ICRA/ICRA Online are based on an objective analysis of information obtained from the entities concerned as also other sources considered reliable by ICRA/ICRA Online. However, the ranks must be construed solely as statements of opinion and ICRA/ICRA Online shall not be liable for any losses incurred by any user from any use of the ranks. Also, the ranks are neither a certificate of any statutory compliance nor any guarantee on the future performance of the ranked entities/schemes.

An entity wishing to use the ICRA Online Mutual Funds Rankings for any publicity or in its prospectus / offer document / promotional literature / advertisement or wishing to re-disseminate these rankings may do so only after obtaining the written permission of ICRA / ICRA Online.

DISCLAIMER

The origins of Group ICRA date back to 1991 when a company by the name Investment Information and Credit Rating Agency of India Limitedwas established by leading financial/investment institutions, commercial banks, and financial services companies in India. Set up as an independent

and professional investment information and credit rating agency, the company was subsequently renamed ICRA Limited (ICRA).

Today, ICRA, a full-service credit rating agency with its shares listed on the Bombay Stock Exchange and the National Stock Exchange, has three

wholly-owned subsidiaries:

ICRA Management Consulting Services Limited (IMaCS);ICRA Techno Analytics Limited (ICTEAS); and

ICRA Online Limited (ICRON).Together, ICRA and its subsidiaries, along with their subsidiaries, form the ICRA Group of Companies, that is, Group ICRA.

CREDIT RATING MANAGEMENTCONSULTING IT (SOFTWARE) INFORMATION

SERVICES/KPO

ICRA Limited

GROUP ICRA

ICRA Management Consulting Services

Limited

ICRA TechnoAnalytics Limited

ICRA Sapphire Inc.

Axiom TechnologiesLimited

ICRA Online Limited

www.icra.in www.imacs.in www.icteas.com www.icraonline.com

GROUP ICRA

Mr. P. K. Choudhury (Vice-Chairman & Group CEO, ICRA Limited.)

Mr. A. K. Basu (Formerly CEO, IDBI AMC; Executive Director, Pegasus Advisory Private Limited.)

Mr. Naresh Takkar (Managing Director, ICRA Limited.)

Mr. R. Raghuttama Rao (Managing Director, ICRA Management Consulting Services Limited.)

Mr. Prateep Kumar Guha (Managing Director, ICRA Techno Analytics Limited.)

Ms. Sushmita Ghatak (Executive Director & COO, ICRA Online Limited)

Mr. Rajesh Dubey (Executive Director)

BOARD OF DIRECTORS

ICRA Online Limited (ICRON)

ICRON, a wholly-owned subsidiary of ICRA, was incorporated in January 1999 and has since then established itself as an independent and credible source of

authentic information and software solutions.

Today, ICRON is a leading information services and technology solutions provider and caters for some of the biggest names in the financial services sector in India

and abroad. A testimony to its product quality, commitment, and credibility. ICRON has two Strategic Business Units (SBUs) with a list of reputed global and domestic

clients:

The Information Services and Technology Solutions Division (MFI Division); and

The Knowledge Process Outsourcing Division (KPO Division)

PT. ICRA Indonesia

Regd. Office: FMC Fortuna, A-10 & 11, 3rd Floor, 234/3A, AJC Bose Road, Kolkata - 700 020Tel +91-33-2287 6617/8839/2280 0008, Fax +91-33-2287 0728

Corporate Office: 107, 1st Floor, Raheja Arcade, Plot No.61, Sector-XI, CBD Belapur, Navi Mumbai- 400 614Tel +91-22-6781 6100, Fax +91-22-2756 3057

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ICRA ONLINE LIMITEDEnterprise, Team Spirit, Innovation...

Mail us at: For MFI Division: [email protected]

For KPO Division: [email protected]

US Representative Office: ICRA Techno Analytics Inc.

10000 Lincoln Drive East, Suite 201Marlton, NJ 08053

Email: [email protected] Phone: +1 732 626 5000 Cell: +1 848 482 6440

Visit us at: www.icraonline.com

www.MutualFundsIndia.com

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Fax +91-20-2553 9231

AhmedabadTel +91-79-2658 5049/2008/5494

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Enquiries may also be directed to the following ICRA Offices:

This document contains information proprietary to ICRA Online Ltd., and may not be reproduced, disclosed or used in whole or part without the express written consent of ICRA Online Ltd. Copyright©2011. All Rights Reserved.

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icra mutual fund ranking brochure september 2011 final...

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