Debt Mutual Fund Picks
Visit us at www.sharekhan.com February 25, 2015 Debt Mutual Fund Picks Data as on January 31, 2015 Macro data round up The Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy review, kept the policy repo rate unchanged at 7.75%. However, the RBI reduced the Statutory Liquidity Ratio of scheduled commercial banks by 50 basis points from 22.0% to 21.5% of their Net Demand and Time Liabilities with effect from the fortnight beginning February 7, 2015. The RBI also replaced the export credit refinance facility with the provision of systemlevel liquidity with effect from February 7, 2015. India’s Gross Domestic Product (GDP) grew 7.5% in the third quarter of FY14-15 compared to an upwardly revised 8.2% rise (5.3% earlier) in the September quarter. The Government forecasted annual economic growth to accelerate to 7.4% during FY14-15. Data from the Commerce Ministry showed that the country’s exports contracted by 11.19% to $23.88 billion in January this year compared to the same month in 2014 when imports fell 11.39% to $32.2 billion, leaving a trade deficit of $8.32 billion. The trade gap in January last year stood at $9.45 billion. Key rates Closing value Weekly Mthly Yearly Inflation* -0.39 -0.39 0.11 5.11 91 Days T-Bill 8.18 8.12 8.22 8.80 364 Days T- Bill 8.05 7.89 8.30 8.94 10 Year G-Sec Yield 7.69 7.70 7.86 8.77 MIBOR 7.53 7.86 9.01 8.12 6 Months LIBOR (USD) 0.36 0.35 0.36 0.34 Call Money Rate 7.72 7.86 8.91 8.29 Repo Rate 6.75 6.75 7.00 7.00 Reverse Repo 7.75 7.75 8.00 8.00 CRR 4.00 4.00 4.00 4.00 SLR^ 21.5 22.00 22.00 23.00 Bank Rate 8.75 8.75 9.00 9.00 *Wholesale Inflation rate for January, 2015 ^SLR rate as on February 3, 2015 India’s wholesale inflation turned negative in January mainly on the back of a sharp fall in fuel prices. The Wholesale Price Index (WPI)based inflation for January was reported at (-) 0.39% against 0.11% in December. This is the lowest level of inflation since June 2009. On the global front, Greece reached a deal with euro zone creditors to extend its bailout agreement for four months. The European Central Bank announced higher-than-expected monthly bond-buying program, amounting to 60 billion euro till September 2016 to counter deflationary pressures within the Euro zone and revive the stagnating economy. The U.S. Federal Reserve, in its monetary policy review meeting, kept interest rates unchanged and reiterated its pledge to be "patient" on raising interest rates. This comes amid concerns that unusually low inflation could affect the U.S. economic recovery. Bond / Debt market round up Bond yields fell for the fifth consecutive month mainly on the back of an unexpected rate cut by the Reserve Bank of India (RBI). Continued fall in global crude oil prices and better-than-expected consumer inflation data for December further boosted bond prices. Fund inflows into the debt market also provided further support. Foreign Portfolio Investors bought debt worth Rs. 21,089 crore in January 2015, much higher than Rs. 11,059 crore bought in the previous month and Rs. 12,356 crore in the same month of the previous year. The inflow of January was the highest since July 2014. However, gains were capped as concerns over the Government’s ability to meet the fiscal deficit target also weighed on investor sentiments to some extent. The yield on the 10-year benchmark bond fell 17 bps to close at 7.69% against the previous month’s close of 7.86%, after moving in the broad range of 7.69% to 7.90% over the month. Bond / Debt Outlook: A couple of major events are lined up in February, which can have significant impact on bond markets. The Economic Survey will be published on February 27 and subsequently the Union Budget will be published on February 28. Market participants will track inflation numbers, both at wholesale and retail level. Next month, the Central Bank will conduct the auction of 91-days, 182-days and 364days Government of India Treasury Bills for an aggregate amount of Rs. 56,000 crore. Model portfolio – Asset classes Investor Profile Fixed Income Ultra Short Term Short Term Floating Rate Funds Long Term Gilt Liquid Funds/Cash Conservative Moderately Conservative Moderately Aggressive 70-75% 15-20% 10-15% 10-15% 5-10% 10-15% 20-25% 75-80% 10-15% 10-15% 5-10% 10-15% 20-25% 15-20% 80-85% 5-10% 5-10% 5-10% 15-20% 25-35% 10-15% Sharekhan 1 February 25, 2015 Mutual Gains Investment strategy After the RBI kept key interest rates unchanged at its sixth bi-monthly monetary policy, movement in bond yields has remained mixed and with a downward bias. The Union Budget to be announced on February 28 will be the next big trigger for the bond market. The market expectations from the budget are unprecedented as it is the first non-coalition Government that the country has seen in decades, and hence is less susceptible to arm twisting by populist demands. The Government’s fiscal consolidation process and concrete steps to boost economic growth are keenly awaited. Investors can continue to target a portfolio similar to Moderately Aggressive funds, as a fall in yields will improve returns. Research Process The model portfolio has been determined on the basis of the risk-return trade-off offered by various asset classes. As the risk appetite of the investor increases, the return expectation also increases. The portfolio volatility as measured by the standard deviation of the inherent asset classes has been used as a surrogate of risk. Allocation has been ascertained keeping in mind the trade-off between higher volatility in returns and the safety of capital. Therefore, while gilt funds are the most secure, the relatively higher volatility in returns may not be suitable for a conservative investor; at the same time a moderately conservative investor will be able to absorb the gyrations in returns. The model portfolio has been expressed in ranges to offer flexibility in creating actual portfolios. Sharekhan’s top debt fund picks Monthly Income Plan Funds that offer a marginal flavor of equity (upto 15% or more) especially for portfolios that are otherwise debt oriented. They predominantly invest in debt and money market instruments. Scheme Name Returns (%) (Simple Annualized) AAUM ** (Rs Crs) 1Mth 3 Mths 6Mths Exp* Ratio (%) Avg. Mat (Days) 1 Yr Credit Quality (% Allocation) AAA/P+ AA/AA+ Below AA Cash & Call BSL MIP II - Wealth 25 353.3 31.6 32.3 32.6 31.7 0.4 -- 49.1 3.1 1.6 46.3 Franklin India MIP 328.4 36.5 26.8 26.0 26.3 2.3 4132 58.3 21.0 -- 20.6 HDFC Mult. Yld - 2005 186.7 9.0 12.5 14.0 22.0 1.8 265 74.7 -- -- 25.3 UTI - MIS - Adv Fund 475.9 34.7 22.6 21.9 25.4 2.1 2110 51.7 19.4 -- 28.9 BSL MIP II - Savings 5 226.7 18.9 22.8 22.1 20.5 1.3 -- 62.4 9.5 4.3 23.8 28.7 19.0 18.5 19.5 Crisil MIP Blended Income Funds Funds that invest in income bearing instruments with any maturity and across the yield curve to generate regular income, such as corporate bonds, gilts, treasury bills, certificates of deposit and commercial papers etc. Scheme Name Returns (%) (Simple Annualised) AAUM ** (Rs Crs) 1Mth Axis Banking Debt Fund 3 Mths 6Mths Exp* Ratio (%) Avg. Mat (Days) 1 Yr Credit Quality (% Allocation) AAA/P+ AA/AA+ Below AA Cash & Call 612.6 8.0 8.2 8.7 9.3 0.4 20 97.3 -- -- 2.7 1528.1 19.3 15.9 15.4 14.2 1.9 1826 21.8 43.7 31.6 3.0 UTI Dynamic Bond Fund 431.6 22.8 21.0 17.0 16.1 1.1 4336 83.9 7.5 -- 8.6 BNP Paribas Flexi Debt 222.4 26.4 25.2 20.5 15.5 2.0 5625 90.6 -- -- 9.5 Can Robeco Income 160.6 30.0 24.8 21.0 16.1 1.9 6592 87.8 9.6 -- 2.6 20.5 18.2 16.7 15.4 Franklin India IBA Crisil Composite Bond Sharekhan 2 February 25, 2015 Mutual Gains Short Term Debt Funds Funds invest in short-term debt instruments of high quality and low risk, that mature in about next 15 to 18 months and generally best suited to investors with 1 to 2 years of investment horizon. Scheme Name Returns (%) (Simple Annualised) AAUM ** (Rs Crs) BSL Treasury Opt Plan DSP Bl Inc Opp Fund Kotak Flexi Debt Fund BSL Dynamic Bond Fund BSL ST Fund - DAP 2459.7 1531.4 405.6 9638.2 5426.3 Crisil ST Debt Index Exp* Ratio (%) 1Mth 3 Mths 6Mths 16.3 16.2 17.7 20.0 14.1 14.1 12.0 13.7 22.8 11.6 14.0 11.8 12.4 19.2 11.7 13.2 11.6 11.0 16.0 11.5 11.3 10.7 10.7 10.8 Avg. Mat (Days) 1 Yr 0.6 1.7 1.5 1.3 0.3 -1405 916 --- Credit Quality (% Allocation) AAA/P+ AA/AA+ Below AA Cash & Call 80.1 29.4 55.0 78.5 78.7 7.5 21.0 18.0 0.3 14.1 -46.2 ---- 12.4 3.4 27.1 21.2 7.3 Ultra Short Term Funds Funds that invest exclusively in debt instruments with very short maturity period, usually one year or less. Scheme Name BSL Savings Fund Franklin LDF IDFC MM Treasury Plan Relig Invesco Credit Opp IDFC MM Invest Plan Returns (%) (Simple Annualised) AAUM ** (Rs Crs) 10908.8 2721.3 1066.2 2346.2 1738.0 Crisil Liquid Fund Index Exp* Ratio (%) 1Mth 3 Mths 6Mths 9.2 12.3 8.2 7.4 8.0 9.0 10.3 7.8 7.6 8.2 9.2 10.2 8.2 7.7 8.6 9.7 10.4 8.7 8.1 9.2 8.0 8.2 8.6 9.2 Avg. Mat (Days) 1 Yr 0.2 0.7 1.0 1.8 0.5 -423 231 34 42 Credit Quality (% Allocation) AAA/P+ AA/AA+ Below AA Cash & Call 73.6 24.2 71.7 92.2 98.8 16.0 39.8 27.7 0.1 -- -29.5 ---- 10.4 6.5 0.6 7.8 1.2 Floating Rate Funds Funds that predominantly invests in debt securities with a floating rate of interest. And these debt securities peg their coupon or interest rate payable to market driven rate such as Mibor. Scheme Name SBI Magnum Income Fund UTI Floating Rate Fund Franklin India Savings Plus Can Robeco Savings Plus HDFC F R I F - LTF Returns (%) (Simple Annualised) AAUM ** (Rs Crs) 860.6 4064.3 417.6 225.2 1938.5 Crisil Liquid Fund Index 1Mth 3 Mths 8.8 8.5 10.4 8.7 8.5 8.0 Exp* Ratio (%) 6Mths 1 Yr 8.4 8.3 8.8 8.5 8.6 8.5 8.5 9.1 9.0 9.0 9.0 8.9 9.3 9.2 9.3 8.2 8.6 9.2 1.3 0.4 0.9 0.6 0.1 Avg. Mat (Days) 204 252 299 285 49 Credit Quality (% Allocation) AAA/P+ AA/AA+ 86.6 81.0 90.0 69.3 99.7 11.9 10.9 7.7 12.4 -- Below AA ------ Cash & Call 1.5 8.1 2.3 18.3 0.3 Liquid Fund Funds investing only in short-term money market and debt instruments that mature in up to 91 days such as treasury bills, commercial paper and certificates of deposit. Scheme Name BOI AXA Liquid Fund HDFC Liquid Fund IPru Money Market Fund Returns (%) (Simple Annualised) AAUM ** (Rs Crs) 1Mth 3 Mths Exp* Ratio (%) 6Mths 1 Yr Avg. Mat (Days) Credit Quality (% Allocation) AAA/P+ AA/AA+ Below AA Cash & Call 1674.4 8.3 8.5 8.6 9.0 0.1 26 93.9 -- -- 17292.3 8.4 8.5 8.7 9.1 0.1 32 95.7 0.6 -- 6.1 3.7 5989.1 8.4 8.5 8.7 9.1 0.1 25 83.7 -- -- 16.3 SBI Magnum Insta Cash 2022.6 8.3 8.4 8.6 9.0 0.2 29 78.2 4.4 -- 17.4 Reliance Liquidity Fund 5959.7 8.4 8.5 8.7 9.0 0.1 30 90.9 -- -- 9.1 8.0 8.2 8.6 9.2 Crisil Liquid Fund Index Sharekhan 3 February 25, 2015 Mutual Gains Gilt Funds Funds which invest only in government securities of different maturities with virtually no default risk. Scheme Name Returns (%) (Simple Annualised) AAUM ** (Rs Crs) SBI Magnum Gilt LTP UTI Gilt Advantage Fund Reliance G Sec Fund IPru Gilt Fund - Inv- PF Birla Sun Life G Sec Fund 287.8 191.7 463.0 299.4 427.1 NSE GSec Composite Exp* Ratio (%) 1Mth 3 Mths 6Mths 37.5 37.7 33.0 32.7 33.0 35.7 34.2 31.5 31.5 31.5 28.9 29.3 26.0 26.6 25.9 22.5 22.9 20.6 23.1 19.8 17.7 19.5 13.9 13.0 Avg. Mat (Days) 1 Yr Credit Quality (% Allocation) AAA/P+ 1.3 1.2 1.7 0.4 1.4 8158 9210 7030 7139 -- 97.7 95.6 98.1 96.6 97.1 AA/AA+ Below AA ------ Cash & Call ------ 2.3 4.4 1.9 3.4 2.9 *Exp – Expense ratio (latest available date) ** AAUM (Rs crs) – Figure represents September 2014 quarter average AUM Methodology We have identified the best debt-oriented schemes available in the market today based on the following 5 parameters: Avg. rolling returns for one and two years, Sharpe ratio, Fama (net selectivity), Credit quality and Average Maturity. Credit quality-10%, Avg.Maturity-10%, Avg.rolling returns for 1 and 2 years – 20% each, Sharpe-20% and FAMA (net selectivity)-20%. Tax rates Tax on distributed income (payable by the scheme) rates Scheme Type Individual Equity Oriented Schemes Domestic Companies NRI Nil Nil Nil Money market and Liquid schemes 28.325% 25% + 10% Surcharge** + 3% Cess 33.990% 30% + 10% Surcharge** +3% Cess 28.325% 25% + 10% Surcharge** + 3% Cess Debt schemes (other than infrastructure debt fund) 28.325% 25% + 10% Surcharge** + 3% Cess 33.990% 30% + 10% Surcharge** + 3% Cess 28.325% 25% + 10% Surcharge** + 3% Cess Infrastructure Debt Fund 28.325% 25% + 10% Surcharge** + 3% Cess 33.990% 30% + 10% Surcharge** + 3% Cess 5.665% 5% + 10% Surcharge** + 3% Cess Tax Implications on Dividend received by Unit holders Scheme Type Individual/ HUF Domestic Company NRI Equity Oriented schemes Nil Nil Nil Debt oriented schemes Nil Nil Nil Capital Gains Long Term Capital Gains (Units Held for more than 12 months) Scheme Type Equity oriented schemes Individual/ HUF$ Domestic Company @ Nil Nil 10% without indexation or 20% with indexation whichever is lower 10% without indexation or 20% with indexation whichever is lower 10% without indexation or 20% with indexation whichever is lower Other than equity oriented schemes (Listed) (applicable from July 11, 2014) 20% with indexation 20% with indexation 20% with indexation Other than equity oriented schemes (Unlisted) (applicable from July 11, 2014) 20% with indexation 20% with indexation 10% without indexation Other than equity oriented schemes (applicable on or before July 10, 2014) Nil NRI$/# Sharekhan 4 February 25, 2015 Mutual Gains Short Term Capital Gains (Units Held for 12 months or less) Scheme Type Individual/ HUF$ Domestic Company @ NRI$/# Equity oriented schemes 15% 15% 15% Other than equity oriented schemes 30%^ 30% 30%^ Tax Deduced at Source (Applicable only to NRI Investors) Scheme Type Short term capital gains Long term capital gains Equity oriented schemes 15% Nil Other than equity oriented schemes (Listed) 30% 20%## Other than equity oriented schemes (Unlisted) 30% 10% * Securities transaction tax (STT) will be deducted on equity funds at the time of redemption/ switch to the other schemes/ sale of units. ** Effective from June 1, 2013. $ - Surcharge at the rate of 10% is proposed to be levied in case of individual/ HUF unit holders where their income exceeds Rs 1 crore. @ - Surcharge at the rate of @ 5% is proposed to be levied for domestic corporate unit holders where the income exceeds Rs 1 crore but less than Rs. 10 crore and at the rate of 10% where income exceeds Rs. 10 crore. # - Short term/ long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors only. ## - After providing for indexation ^ Assuming the investor falls into highest tax bracket. Category Write-up Indian equity markets strengthened during the month with S&P BSE Sensex and CNX Nifty touching all-time highs of 29,844 and 8,997 points, respectively. A surprise rate cut by the Reserve Bank of India (RBI) outside its scheduled Monetary Policy Review and encouraging economic data boosted markets. Hopes of further reform measures by the Government in the upcoming Union Budget contributed to the rally. Rise in domestic equity markets led to an improvement in the MIP category, where returns rose to 18.98% (one-year, monthly rolling returns). The 10-year Indian benchmark bond yield fell for the fifth consecutive month mainly on the back of an unexpected rate cut by the RBI. Continued fall in global crude oil prices and better-than-expected consumer inflation data further boosted bond prices. The one-year rolling returns across debt fund categories witnessed an improvement, with the exception in the returns of liquid funds. The major beneficiaries during the month were funds in the Gilt Long Term and Debt Income categories, where one-year rolling returns stood at 16.41% and 12.50%, respectively. Returns under Debt Short Term and Ultra Short Term categories also improved to 10.35% and 8.81%, respectively. Returns from Gilt Short-Term and Floating Rate Funds improved the lowest at 9.85% and 8.66%, respectively. However, Liquid funds remained slightly under pressure as returns eased to an annualized 8.24%. Risk Reward Graph Sharekhan 5 February 25, 2015 Mutual Gains Methodology The bubble diagram gives you a snapshot of how the mutual funds have performed on the risk – return parameter in the past. We have used bubble analysis method to measure their performance on two parameters i.e. Average rolling returns and Standard deviation. For all funds, we have considered one month rolling and periodic frequency for the period of one year, as on January 31, 2015. Forthcoming NFOs Fund House Scheme Name Open Date Close Date Structure Nature Religare Invesco Fixed Maturity Plan Series 25- Plan C - (1148 Days) 24-Feb-15 02-Mar-15 Close Ended Fixed Maturity Plan Birla Sun Life Fixed Term Plan Series MJ (1099 Days) 02-Mar-15 02-Mar-15 Close Ended Fixed Maturity Plan ICICI Prudential Mutual Fund ICICI Prudential FMP - Series 76 1140 Days Plan N - Regular Plan (G) 24-Feb-15 04-Mar-15 Close Ended Fixed Maturity Plan ICICI Prudential Mutual Fund ICICI Prudential FMP - Series 76 - 1142 Days Plan M - Regular Plan (G) 19-Feb-15 25-Feb-15 Close Ended Fixed Maturity Plan Deutsche Mutual Fund DWS Hybrid Fixed Term Fund Series 35 18-Feb-15 04-Mar-15 Close Ended Fixed Maturity Plan Religare Invesco Mutual Fund Religare Invesco Fixed Maturity Plan Sr 25 - Plan C (1148 D) Regular (G) 24-Feb-15 02-Mar-15 Close Ended Fixed Maturity Plan Religare Invesco Mutual Fund Birla Sun Life Mutual Fund Disclaimer Nothing in this report constitutes investment advice or tax advice in any form and these products may or may not be suitable for you. Investors should make independent judgment taking into account specific investment objectives, financial situations and needs before taking any investment decision. Mutual fund investments are subject to market risk. Please read the offer document carefully before investing. Past performance may or may not be sustained in the future. This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. 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