Base rate of all banks

Ahead of the Reserve Bank of India's (RBI) review of monetary policy on 27 July, most of the banks have announced their base rates.

 RBI had directed all the banks to switch over to the base rate system from the existing Benchmark Prime Lending Rates (BPLR) system  with effective from 1 July.

 All new loans sanctioned after 1 July and those falling due for renewal from 1 July, (except exempt categories as per RBI Guidelines will now be priced with linkage to base rate.  

Banks	Base Rate (PA)
State Bank of India	7.5%
Punjab National Bank	8%
Bank of Baroda	8%
Union Bank	8%
Central Bank of India	8%
Bank of Rajasthan	8%
Indian Bank	8%
Uco Bank	8%
IDBI Bank	8%
Indian Bank	8%
Dhanlaxmi Bank	7%
Federal Bank	7.75%
State Bank of Mysore	7.75%
Corporation Bank	7.75%
Karur Vysya Bank	8.5%
Canara Bank	8%
Indian Overseas Bank	8.25%

 

Pramerica’s DART to nimbly move between debt and equity—but it may not hit the bull’s eye

he newly-entered fund house Pramerica Mutual Fund’s new fund offer comes with an option of a ‘dynamic plan’ that adjusts the fund’s exposure in tune with market valuation. It is a marketing gimmick—as the examples of three other funds show

Pramerica Mutual Fund, sponsored by the US-based Prudential Financial firm which received the Securities and Exchange Board of India (SEBI) approval to enter the mutual fund business in India last month, has filed a draft offer document to launch the ‘Pramerica Growth Fund’. Pramerica has also filed its draft offer document with the regulator for its ‘Pramerica Liquid Fund’ and Pramerica ‘Ultra Short Term Bond Fund’ on 16 June 2010.

The ‘Pramerica Growth Fund’ scheme comes with two plans. The first one is an equity plan and the second is dynamic. The Equity Plan will invest 35% of its portfolio in debt and 65% in equity. Around 60% of this portfolio will be mainly invested in large-cap companies which comprise the top 75% of the total market capitalisation of the National Stock Exchange (NSE).

Under the dynamic plan, 30% of the portfolio will have exposure to equity and up to 70% in debt. The debt portion of the dynamic plan will be actively managed while the equity portfolio of the plan will closely replicate the equity investments of the ‘Equity Plan’.

The fund house will use Pramerica Dynamic Asset Rebalancing Tool (‘Pramerica DART’ tool) which will determine the allocation between equity and debt. According to the prospectus, Pramerica DART works on the philosophy of mean reversion. The theory of mean revision suggests that prices and returns eventually move back towards the long-term average. Such an average can be the historical average of price or return.

The model factors in three elements like fundamentals, liquidity and volatility. DART assigns a score which indicates whether the stocks are undervalued or over-valued. Based on these scores, the model then calculates the optimum equity-debt mix.

Will DART hit the bull’s eye? Ideas of moving between equity and debt are old and usually add no value to investors. Tata Mutual Fund had launched a similar fund called ‘Tata Equity Management Fund’ in June 2006 which came up with a novel method of pre-deciding the exact quantum of hedging under different market conditions. TEMF, like anybody else, banked on historical data of high and low P/Es to determine degrees of overvaluation. Moneylife had previously reported about the scheme when it was first launched. (Read here: http://www.moneylife.in/article/81/5319.html). This was too simplistic and the scheme has not lived up to its promise. The fund has posted 9.14% return since inception while its benchmark S&P CNX Nifty has posted 18.96% since the fund’s inception.

How have the other funds with similar strategies done? HSBC had launched its ‘HSBC Dynamic Fund’ in August 2007. This fund is benchmarked against the BSE 200. The fund has posted -1.79% returns since inception while its benchmark has yielded 7.53% returns since the fund’s inception.

Similarly, ICICI Prudential launched ‘ICICI Dynamic Fund’ in October 2002. The scheme is benchmarked against the S&P CNX Nifty. The fund has yielded 34.98% since inception while its benchmark has yielded a whopping 58.07% return in the same period.

The ability of fund managers to time the market is a myth, as these three examples show. But fund companies never tire of marketing them, as the Pramerica example shows

Equity funds underperform the rise but buck the fall during the recent round trip of the Sensex

The Sensex rose more than 2,000 points in the Feb-April period and then gave up all the gains thereafter in April-May. How did equity funds do during this period?
The Sensex went up from 15,725 on 5th February this year to its peak of 18,047 on 7th April and quickly fell back to 15,960 on 25th May. The mutual fund sector's performance in this round trip was a study of contrasts. In the rally of 14% in the Feb-April period, only 49 equity diversified growth schemes out of 216 schemes outperformed their respective benchmarks.

This stands in sharp contrast to the performance during the decline of 11% in the April-May period when as many as 174 schemes outperformed their benchmarks. This shows that funds have been conservative with their portfolio construction. By and large they have stayed away from highly volatile stocks that ensured an outperformance during the recent market decline.

The top performer among the 216 schemes during the rally was Canara Robeco Force Fund. Its Net Asset Value (NAV) was up 17% over the period while its benchmark, S&P Nifty was up 14%. Birla Sun Life Long Term Advantage Fund - Series 1 was second with NAV rise of 16%, while BSE500, its benchmark, changed 13%. Templeton India Growth Fund (up 16%), Escorts Growth Plan (up 15%), IDFC Strategic Sector (50-50) Equity Fund-Plan A (up 15%) were among the top five. Out of the 49 schemes, which outperformed their benchmarks, 21 schemes have beaten the Sensex.

Schemes of JM Financial Mutual Fund have been laggards in any market scenario. It repeated this unique distinction during this short rally too. JM Core 11 Fund, JM Emerging Leaders Fund, JM Small & Mid-Cap Fund were among the bottom five. Their NAV yielded a return of 6%, 5% and 3% respectively while their benchmark BSE Sensex, BSE200, CNX Midcap were up between 13-14%. Sahara REAL Fund and SBI Magnum Midcap Fund were the others in the bottom five. Their returns rose 7% and 6% respectively.

Following this rally, the Sensex tumbled 11% between 7th April and 25th May. In this fall, out of the 216 schemes, the NAVs of two schemes actually were up: DSP BlackRock Micro Cap Fund and HSBC Small Cap Fund. The first was up 3% and the second 2% while their benchmark, BSE Small Cap, fell 9%. Others among the top five outperformers were dividend yield plans-Escorts High Yield Equity Plan (1%), Tata Dividend Yield Fund (3%) and ING Dividend Yield Fund (3%) while their benchmark CNX100, Sensex and BSE200 fell 10%, 11% and 10% respectively.

Among the worst performers during this decline were Bharti AXA Equity Fund, Franklin India High Growth Companies Fund, Reliance Natural Resources Fund, Birla Sun Life Special Situations Fund and Religare AGILE Fund. Remember these names. They have stocks that are inherently more volatile.

DSP BlackRock Micro Cap Opens The Door For New Investor......

DSP BlackRock Micro Cap Fund, the only Closed Ended Fund in the Equity basket of DSP BlackRock Mutual Fund, has become an Open Ended Fund from today viz. from 15^th June, 2010. The Fund is now made Open Ended for daily transactions from today onwards.

DSP BlackRock Micro Cap Fund was launched in June, 2007 and the units were offered at Rs. 10/- per unit. The NAV of DSP BlackRock Micro Cap Fund as on 14^th June, 2010 was Rs. 14.765 per unit registering a gain of 14.52% CAGR since inception, one of the best performing Funds in the Equity Fund category in last 3 years.

Background:

As the name of the Fund indicates, DSP BlackRock Micro Cap Fund was launched with an objective to generate long term capital appreciation from a portfolio primarily constituted of Companies not forming part of Top 300 Companies by market capitalization.

The Fund has generated very good returns since its inception (14.52% CAGR) in the respective category mainly because of the better stock selection and active fund management by the experienced fund management team of DSP BlackRock Investment Managers Pvt. Ltd. The following is the return snapshot of the Fund for your information.

Attached herewith please find

(a)   The latest Single Pager of DSP BlackRock Micro Cap Fund.

(b)   The latest Portfolio of DSP BlackRock Micro Cap Fund as of 31^st May, 2010.

(c)   A detailed Presentation on DSP BlackRock Micro Cap Fund explaining its positioning, performance, rationale and opportunities in the Micro Cap segment.

We hope this information will be useful to you to showcase DSP BlackRock Micro Cap Fund to create wealth for your esteemed investors.

We solicit your wholehearted support in the promotion of DSP BlackRock Micro Cap Fund on its re-opening from today for further subscription.

Mutual Funds line up index funds

Fund houses are in a race to launch index funds to shore up their assets under management (AUM). The latest to join is ICICI Prudential Mutual Fund which has floated a new open-ended fund named Nifty Junior Index Fund. The new fund offer (NFO) opened on 10th June 2010 and closes on 21st June 2010. ICICI had launched ICICI Pru Index Fund in February 2002. The scheme is benchmarked against the S&P CNX Nifty.

Over the past decade, there have been only about 20 index funds. But suddenly in the last few months, four new index funds have hit the market. Taurus Mutual Fund launched Taurus Index Fund; IDFC Mutual Fund introduced the passively managed IDFC Nifty Fund in April 2010; and in May 2010, IDBI Asset Management Company (AMC) launched IDBI Nifty Index Fund as its first fund offering.

ICICI Pru's fund will be benchmarked against the CNX Nifty Junior Index and will invest 90% of its corpus in the underlying Nifty Junior Index stocks and 10% in debt and money market instruments.  The CNX Nifty Junior consists of 50 stocks and represents about 12% of the free-float market capitalisation as on 31 December 2009.

The scheme carries a 0.25% exit load if redeemed or switched less than seven days after investing.  Investors can choose growth or dividend option. The Fund bears a maximum annual expense of 1.50%, depending on the corpus of the fund.
Index funds are supposed to exactly replicate their benchmark and outperform most actively managed funds.

Most of the index funds are benchmarked against Nifty or Sensex. The Nifty Junior index is much more volatile than these two main indices. Nifty Junior rises sharply in a bull run and falls as sharply when the market crashes. From the bottom of October 2008 to the peak of April 2004, the Nifty was up 113% whereas the Nifty Junior was up 206%. Earlier, the Nifty Junior had crashed 73% from January 2008 to October 2008 while the Nifty had declined 61% in the same period.   
 
The Fund will compete against the much cheaper 'Junior BeES' launched by Benchmark Mutual Fund, which launched India's first mid-cap index fund in the year 2003.

Principal to launch pension fund in October

Principal Financial Group (PFG), the largest pension player in the United States, is looking to launch its pension business in India.
“We already have fairly advanced plans and will launch this programme in October,” said Norman Sorensen, president and chief executive officer of Principal International Group, a division of the Principal Financial Group.
Chances are that PFG will set up a separate company to launch pension plans. “We don’t know yet as the structure is yet to be defined. However, we believe the expertise that we have on a global basis in this area is so significant that we can bring to bear an independent company,” Sorensen said.
If PFC does set up a separate company to manage its pension fund business, it will be the first instance of a private pension fund company in India, soliciting as well managing money for building a retirement corpus.
Currently six pension fund managers manage money for the money raised under the New Pension Scheme. These are SBI Pension Funds, UTI Retirement Solutions, IDFC Pension Funds, ICICI Prudential Pension Funds, Kotak Mahindra Pension Fund and Reliance Capital Pension Fund.
These pension funds just manage the money raised under NPS, and have nothing to do with raising or soliciting that money from investors.
The other option is to launch the business through Principal Mutual Fund, a joint venture that Principal has with Punjab National Bank and Vijaya Bank.
On whether this business will be regulated by Securities and Exchange Board of India (Sebi), Sorensen said, “Sure. There is no reason to regulate it otherwise”.
Currently pension plans are offered by insurance companies, which are regulated by the Insurance and Regulatory Development Authority of India (Irda). However, Franklin Templeton Mutual Fund does offer a pension plan regulated by Sebi.
PFG manages $300 billion worldwide (The entire Indian mutual fund industry manages around $169 billion). “In Brazil we are the number two pension player and we manage $18 billion in pensions. In China, we manage only $6 billion. In Mexico and Malaysia we manage $5 billion and $6 billion, respectively,” said Sorensen.
So what exactly is PFG’s plan?
“We have something in the United States called target funds. We intend to introduce those funds in India,” said Sorensen. “Target funds basically target your age. A 25-year-old who has a target date of retirement of 2050, is likely to invest in target retirement fund 2050. And that’s why the name. The fund will probably begin with 80% investment into equity and with age the allocation to equity will come down. It basically increases the conservatism of the investment portfolio as your age grows,” he added.
Also, the investment for these pension plans is so carried out thatit is better than average performance. “It does not intend to at any point be number one in the market. Why? Because then you take more risk,” said Swanson.
And what will happen to the accumulated money on retirement? Well it all depends on the individual who invests in the pension plan. “This is absolutely retirement money but it is up to you what you do with that money afterwards,” said Sorensen.
“The idea behind the retirement plan is to provide income until you pass away. The money can be put into an immediate annuity, so that it provides fixed income or it can be invested in some very conservative fund. And we would not recommend equity of course,” he explained.
How is this product different from pension plans offered by insurance companies?
“There is no restriction on withdrawal unlike some of these pension plans,” said Sorensen. “Some people decide to take out some money before retirement, (which is) not necessarily a wise thing because the money seizes to accumulate,” he added.
Pension plans of insurance companies come with a lock in of 5 years. Over and above this, at maturity, an individual who is holding a pension plan from an insurance company has to necessarily buy immediate annuities using two third of the corpus. The remaining one-third can be withdrawn.

Seven reasons gold rally will continue:Jeff Nichols

A few months ago most analysts were skeptical about $1500 an ounce for gold by end of 2010, however, the recent rally in gold coupled with economic uncertainties have forced those who earlier disputed the bullish forecasts to jump on the bandwagon, according to Jeffrey Nichols, Senior Economic Advisor to Rosland Capital and Managing Director of American Precious Metals Advisors

US inflationary policies: The US monetary and fiscal policies are inflation. Official federal debt, now around $12.8 trillion is only a small part of Washington's actual obligations.Off-budget and unfunded future liabilities are another $108 trillio, Jeff Nicols said. So the end result would be higher inflation, currency depreciation and higher gold prices.

European crisis: Europe's sovereign debt crisis will continue to favour gold. The European Central Bank's loss of anti-inflationary credibility and the questionable future of the euro has diminished the European common currency's appeal as a reserve asset and dollar-substitute in the world economic order.

Central Banks and gold buying: Central banks have become net buyers since 2009 after several years of selling an average 400 tons per year. And official sector will continue to be net buyer of gold for years to come, Jeff Nichols said. Last year, the People’s Bank of China (PBOC) announced it had been buying gold regularly from domestic mine production for several years — but did not report these purchases in its official reserve accounts.

Rising investment demand:Rising private-sector investment demand for gold from across the old industrialized world: Private investors in the United States and Europe, both individuals and institutions, are buying more gold reflecting the same concerns and fears that are driving central banks to accumulate the metal.Substantial physical investment demand is seen across Germany, Switzerland, France, the UK and other countries, Jeff Nichols said.

India, China investment demand: Moderate growth in disposable personal incomes could result in rising gold purchases in China and India where gold is a preferred medium of investment and savings for households

Rise of ETFs: The growth of gold exchange-traded funds allow investors to purchase gold via an equity-like vehicle and there are more than 18 such frunds traded on many stock exchanges around the world- and a new gold ETF is just now being launched in Japan. Jeff Nichols said these new products and distribution channels will result in far more gold investment offtake in the years ahead, so much so that the potential future price is far greater than most analysts and investors today think reasonable.

Declining world gold-mine production: Global gold-mine production has been in a downtrend for decades. Despite a small uptick last year and possibly again this year, the fall in world mine output will continue for at least for the next five years or more.

The ebb in mine production reflects many factors, including the depletion of existing deposits, the continuing drop in ore grades, the decline in operating depths at many mines, the rise in energy and labor costs, the expense and time required to meet increasingly restrictive environmental regulations, unfriendly government attitudes toward foreign investment in some gold-producing countries, and the lack of financing available to many gold-mining exploration and development, Jeff Nichols concluded.

Insurance firms to tap market?

he much-awaited guidelines comprising listing norms for life insurance companies is likely to be ready in the next few weeks, with several insurers such as ICICI (ICICIBANK.NS : 826.6 +17.25) Prudential and HDFC Standard completing 10 years of operation. However, companies, which have not completed 10 years, would also be allowed to launch their initial public offerings.At present, life insurance companies are not allowed to raise funds through the market.
"It is in the final stages and the guidelines would be put up soon," a senior government official, who did not wish to be identified, told Hindustan Times.
At present, the foreign direct investment (FDI) limit for the sector is capped at 26 per cent. The Insurance Amendment Bill, which seeks to raise it to 49 per cent is pending before Parliament, and it may not be taken up on a priority basis, sources said.
The Insurance Regulatory and Development Authority (IRDA) has already come up with both valuation and disclosure norms comprising solvency levels and claim settlement on a half-yearly basis. The Institute of Actuaries of India had also looked into the issue. "Life insurance business is capital-intensive and we hope the listing guidelines are issued at the earliest as the FDI limit has also remained at 26 per cent," a senior executive of a Delhi-based life insurance firm.

Sebi panel may bar MFs from selling eq.uity products..

A COMMITTEE of market regulator Sebi will consider the issue of restricting mutual funds from selling an equity product that involves betting on future prices.

   The Sebi Mutual Fund Advisory Committee is concerned that this is not mutual funds' core activity and may take a decision on May 31. Equity options is a derivative product where investors bet on future value of stocks or their indices and Sebi is against mutual funds getting into the hedging business, as it could suffer losses.

   In a letter sent to all fund houses recently, Sebi had sought proposals from asset management companies (AMCs), regarding selling of equity options and an increased disclosure of their investment in this segment, sources in fund houses said. Mutual funds have already submitted their view to Sebi and they may be reviewed at the Sebi's Mutual Fund Advisory Committee meeting scheduled on May 31. "MF industry body Association of Mutual Funds of India (Amfi) has already submitted its views in consultation with industry players. The proposal would be discussed on May 31," a Sebi source said on condition of anonymity.

   The market regulator on its part wants the fund houses to control the risk exposure and clearly demarcate their risky exposure, he added. Industry players said, Sebi has been looking at ways and means of regulating distribution of MF products and also MFs investment in derivatives..

   Selling an option usually involve huge losses as the underwriter gets exposed to unlimited risks when market becomes volatile or collapses or hits the upper circuit. The objective of Sebi could be to ensure that MFs can hedge by buying options, but they should not underwrite the option as it is not the core business of MFs to take risk this way.

‘Flash Crash’ Shows How Mutual Funds and ETFs Differ

The market’s sudden drop on May 6 was stunning for investors to watch. While it had a far-reaching effect, it primarily has thrust exchange traded funds (ETFs) into the spotlight. But is that fair? Chuck Jaffe for MarketWatch reports that the meltdown only highlighted the differences between ETFs and mutual funds, showing why some investors may choose one or the other:

• ETFs are mutual funds that trade like stocks. They are priced minute-by-minute throughout the day; if you want in or out, you should get the market price the moment you pull the trigger. Some brokerages are taking expenses down to 0, helping investors that want to make the trade.With mutual funds, all transactions are made at the next closing price. [Comparing the Costs of Both Funds.]
• ETFs, typically, are focused on indexing — although there are more actively managed offerings all the time — while traditional funds focus more on active management. [Taking the Best of Both Worlds.]

Vanguard Group founder and index investing legend Jack Bogle has long said that ETF investors tend to trade at the wrong time instead of buying and holding in order to capitalize on the broader trend, and his words are once again being brought to the fore.
With all due respect to Bogle and others who are critical of ETFs in the wake of the crash, we disagree.

• First, to suggest that mutual fund investors are better served because they offer end-of-day pricing is mind-boggling. Without even getting into that argument, the benefits that ETFs offer over mutual funds still make them far more appealing and better for investors. You can’t beat their transparency, low-cost, tax efficiency and ease of use. On top of that, intraday liquidity is a superior feature that makes ETFs leaps and bounds better than mutual funds. Why wait until the end of the day to do what you want to do now?
• Second, Bogle is assuming that most investors don’t have the mental capacity to handle ETFs, but that is simply not true. Pointing fingers at ETFs and their users is just silly. Just because  there are some bad drivers on the road does not mean that all drivers need to be painted with the same broad and insulting brush.