Monday, September 5, 2011

Prajna Capital

Prajna Capital

Mutual Fund Review: SBI Magnum Global Fund

Posted: 04 Sep 2011 11:11 PM PDT

SBI Magnum global fund is another Open Ended Equity Scheme from SBI Mutual Fund. Recently it has declared a dividend of Rs 5 per unit on the face value of Rs 10 per unit. The record date for the dividend is 31-May-2011.

 

Investment Objective:

 

The main investment objective of the scheme is to provide maximum growth opportunity for the investors by investing in investments after doing sufficient research. The investments include equities in Indian markets and in Bonds with high growth potential.

 

The various options available for investing in this scheme are Growth and Dividend option. In dividend option there are two plans available for investing i.e. dividend reinvestment and dividend payout.

 

There is no entry load for investing in this scheme. If the scheme is redeemed within 1 year from the date of investment an exit load of 1% would be charged. If the amount is redeemed after 1 year from the date of investment, then there is no exit load.
 

The Rise of Fixed Maturity Plans (FMPs)

Posted: 04 Sep 2011 10:32 PM PDT

 

 

Way back in March 2007, Fixed Maturity Plans (FMPs) peaked in popularity, accounting for 50 per cent of the assets of debt mutual funds. So by comparison, to say that they account for 31 per cent of the assets four years later (June 2011) seems to state that they have dropped in the popularity contest. In reality, they are back in vogue. In the last two months of 2009, FMPs were so shunned that they accounted for slightly less than 4 per cent of the assets of the debt schemes. From that low, they have risen substantially.

 

 

The rise in popularity is simply because the interest rate scenario is conducive to such an investment. Since April 2010, the Reserve Bank of India has been the most aggressive central bank in Asia and has increased its rates on 10 separate occasions in a bid to contend with inflation. The reverse repo rate has increased from 3.75 per cent to 6.50 per cent and the repo rate is from 5.25 per cent to 7.50 per cent.

 

Over the past 12 months, the market has also seen substantial liquidity tightness for multiple reasons. It began with the 3G and broadband auction resulting in telecom companies borrowing aggressively from the banking system to fund the bids.


Then there were blockbuster initial public offerings (IPOs), in the form of Coal India Ltd, Power Grid Corporation of India and Manganese Ore. The amount of demand that these disinvestments attracted was huge and large amount of money was pulled out from circulation during these public issues. All these three IPOs collectively attracted more than Rs 3.80 lakh crore from the domestic investor.

 

Credit pick-up from other sectors also remained robust while the government held large cash balances. The credit-deposit ratio of the banking system was above one which meant that banks were lending more than fresh collection by way of deposits. With banks gasping for liquidity, deposit rates began to move up in order to attract fresh deposits to improve the liquidity and balance sheet ratios. To add to it, inflation was exceeding expectations and market rates started pricing in expectations of stronger hikes by the RBI.

 

Due to these multiple factors, the return on short-term corporate paper and certificates of deposit (CDs) went up. Since it is not possible for a retail investor to benefit from this, the next best option is either a short-term debt fund instrument or an FMP, both of which invest in such instruments.

Out of the 763 new fund offerings (NFOs) that have been launched since July 2010, 655 have been FMPs. However, the focus has been on shorter tenure FMPs that are looking at playing the volatility in short-term rates. Since April 2010, the number of FMPs with maturity of a maximum three months has been 189, while those with a tenure of at least 12 months have been 98.

Here are the issues that investors need to get clarity on before they invest in an FMP.


How liquid an instrument is it?


Not very. It is now mandatory for all FMPs to be listed on either the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). But it is not so easy to exit before maturity as buyers are tough to come be. So ensure that it is money you do not need for the tenure of the scheme.


Being close-ended in nature, would an investor face an issue if a dominant investor walked out?


This would have been a problem a few years ago. If a corporate was in need of cash, the exit load would be paid and the investor would walk out with his investment valued at current net asset value (NAV). The fund manager would have to sell the investments at a loss to meet the redemption requirement, a move that would impact the investors who stay on. Now such exits are banned. Investors, if they want to exit before maturity, will have to sell their units on the stock exchange.


How risky is it?


Much less risky than it was during the hey days of 2006 and 2007. At that time, FMPs were permitted to declare indicative portfolios and indicative yields. With a dozen FMPs clamouring for investors' money and attention simultaneously, the one way to get noticed was to offer a higher indicative return. In the race for returns, credit quality was the casualty, which increased the risk of the investment. It did not stop there. Fund managers also began to take a gamble on the tenure of the paper. Ideally, the portfolio should sport paper that would mature at the same time as the scheme. But if the tenure of the paper was slightly longer than the scheme's tenure, it could provide a higher rate. Just before the scheme matured, the fund manager would have to sell that paper. The risk was that if interest rates rose at the time of maturity, he would end up selling at a loss and the final return would be lower than the indicative return. In 2009, the Securities and Exchange Board of India (SEBI) banned mutual funds from announcing indicative returns and displaying indicative portfolios for their FMPs.


How efficient is it tax-wise?


In an FMP you pay long-term capital gains at either a rate of 10 per cent without indexation or 20 per cent with indexation (whichever is lower). If they mature within a year of purchase, short-term capital gains tax will be charged based on the existing tax slab of the investor. In the case of fixed deposits, the return is treated as income from 'Other Sources' and the normal tax slabs apply, irrespective of the tenure of the deposit.


Is the return guaranteed?


No. Unlike a fixed deposit you are not guaranteed a return. However, the risk is not high and this instrument can be clubbed into the medium to low category as far as risk goes. With the current returns for 90-day CDs at around 9.4 per cent and the one-year returns around 10 per cent, one can accordingly expect such a return from a FMP.

 

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Also, know how to buy mutual funds online:

 

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

 

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

 

3) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html

 

4) Sundaram Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html

 

5) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

 

6) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

  

7) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

 

8) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

 

9) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

 

 

 

Simpler IPO form

Posted: 04 Sep 2011 09:30 PM PDT


   There is some good news for the small investors. They no longer need to fill up the long and cumbersome initial public offer (IPO) forms. The Securities and Exchange Board of India (SEBI) has suggested improvisation of the IPO forms so as to make them more simple and easy.


   According to SEBI, the present IPO form is not investor-friendly. It takes a lot of time to understand it. The application forms currently being used for bidding in an IPO and follow-on public offer (FPO) are long and require the investors to fill in some details that can be done away with. Besides, these forms run into 15-20 pages in many cases, although there are only 2-3 pages where particulars need to be filled in by the investors. The rest of the pages contain instructions, information about the company and the issue, and details about bankers, registrars and bidding centres. There are details that are either repetitive or of no use to the investors in taking investment decisions.


   Taking all this into account, the whole form has been changed and this will lead to reduction in the size of the form by about one-fourths. The market regulator decided to introduce a new short and simple form for IPO investors. This is expected to increase the individual participation in the stock markets.


   SEB's aim is to make the form simple and understandable for individual investors. It has also decided that the form should carry information regarding peer companies' price-to-earnings (PE) ratios and track record of the lead managers of the IPO.


   SEBI decided to review the bid-cum-application form and the abridged prospectus. It revised the structure, design, format, contents and order of information in the bid-cum-application form and abridged prospectus. The aim is to ensure that materially important information is provided in a structured, logical and user-friendly manner to aid the investor in taking his investment decisions.


   The revised abridged prospectus will contain the company or project-specific information and highlight materially-relevant disclosures such as peer comparison of important financial ratios and risk factors. Information that is of generic nature and not specific to the issuer will now be brought out in the form of a general information document (GID) in English and Hindi or in regional languages and given along with the application form.

Benefits for investors on implementation:

Easier to handle the application and abridged prospectus as it is in booklet form of A4 size Approximately 50 percent reduction in number of pages Rationalisation and logical sequencing of information to make it more readable and investor-friendly Highlighting material disclosures Availability of information regarding price Standardisation of form Single form for ASBA and non-ASBA Increase in space for key data fields in the application form facilitating easier filling

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