Tag: mutual funds

Simply Put: Roll-down strategy – The Hindu BusinessLine

Personal Finance

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Mutual fund houses have been rolling out scheme after scheme, the past several months. Among the ones rolled out are also those that follow what is called the roll-down strategy. Two friends, Sita and Geeta discuss what it is.

Sita: All these years, I was made to believe that equity mutual funds (MFs) are risky and that debt MFs are a safe bet. Now I see debt MF returns fluctuating too. So, where do I invest?

Geeta: Why don’t you invest some money in a roll-down strategy MF scheme?

Sita: What’s that? Is that a scheme where hard-earned money rolls down from my pocket into the wallets of mutual fund houses! Just joking. Can you please explain?

Geeta: Sure. While debt fund returns may not gyrate as much as equity fund returns, they are not all safe. Debt investments suffer from interest rate risk – as interest rates go up, prices of existing bonds fall, hurting MF debt scheme returns. The reverse holds true too.

Target maturity funds and fixed maturity plans (FMPs) follow the roll-down strategy and help minimise the interest rate risk.

Sita: How do they achieve this?

Geeta: Such schemes invest in debt papers of a certain maturity and then hold them till maturity. As time passes, the maturity of these papers and so of the scheme portfolio gradually goes down. And with it, the interest rate risk.

Such schemes offer some degree of return predictability. On maturity, you are returned your original investment plus return.

Sita: From now on I’ll invest only in such schemes to get assured returns.

Geeta: Not so fast. These schemes promise only return predictability and not return certainty. They give you a fair sense of what your returns are likely to be and not what they will be. After all, debt MFs are market-linked products, and nothing is guaranteed.

Sita: I understand. Anything else that I should know?

Geeta: I forgot to mention – all this applies only if you stay invested until the end of scheme maturity.

If you decide to redeem your investment any time before that (of course, FMPs don’t allow premature exit), then the roll down strategy won’t save you from interest rate risk.

Your return can, then be higher or lower than that indicated at the start, depending on whether interest rates have fallen or risen since you invested.

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Niyo plans to apply for mutual fund licence; aims to double user base by end of FY22, BFSI News, ET BFSI

Banking & Finance

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Niyo, a neobank, is keen to enter the asset management space and mulling to apply to Sebi for a mutual fund licence, a company official said on Thursday. The Bengaluru-based fintech firm, which started off with prepaid instruments, is targeting to more than double its user base to 5 million by the end of FY22 from the present 2 million on the back of new tie-ups with players in the financial services space.

“We are keen to enter the AMC space and are in the process of exploring the idea of applying for a licence,” its co-founder and Chief Technology Officer Virender Bisht told .

In December, Sebi had allowed fintech firms to apply for MF licences.

Niyo had had last year announced the acquisition of Goalwise, an MF distribution platform. The company already distributes insurance policies, has a presence in wealth management through an acquisition and also offers stock buying.

Niyo on Thursday announced a tie-up with Equitas Small Finance Bank, wherein it will be launching a co-branded digital first savings accounts platform initially aimed at the millennial segment.

Its founder and chief executive Vinay Bagri said the platform has features like an interest rate of over 7 per cent, and explained that savings account and wealth management offerings, when given together, can get stickiness to a relationship and make an account last for over a decade.

Niyo, which already has a presence on the wealth management side through an acquisition and also allows users to trade in equities through it, is targeting to add 1 million users from the partnership with Equitas by the end of 2021.

Equitas’ Chief Digital Officer Vaibhav Joshi said the lender has 8 lakh savings accounts at present and is aiming to more than double the number through the partnership.

Bagri said it is a savings account and wealth management proposition to start with, but eventually Niyo will be looking at offering lending solutions to the same segment as well.

Initially, there is no revenue generation possibility, but eventually once the user starts availing mutual funds or loans, it will help in revenue booking, Bisht added.

Bisht also said Niyo is also looking at a newer funding round later in 2021 to fuel its expansion, but stressed that the saving account opening partnership, its most ambitious business initiate yet, is not capital intensive.

The fintech company will get another 0.5 million users from a blue collar workers-focused offering for which it has tie-ups with other lenders, Bisht said, exuding confidence that the target of 5 million users is achievable.

At present, Niyo is a “growing” company with some of its offerings reporting operating profits, he said.

The biggest hindrance for the company for growing users was the inability to offer interest on deposits and also lack of UPI gateway, which gets sorted with the partnership with Equitas, Bisht said.



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Relief for MFs: SEBI eases norms on perpetual bonds

Banking & Finance

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In a major relief, the market regulator SEBI has allowed mutual funds to meet its norms on valuation of perpetual bonds in a time bound manner with the life span of bonds increasing over the years.

On March 10, SEBI had stated that the maturity of all perpetual bonds shall be treated as 100 years from the date of their issuance for the purposes of valuation.

Based on the representation of the mutual fund industry to consider a glide path for the implementation of the policy, it has been decided that the deemed residual maturity for the purpose of valuation of existing and new bonds issued under Basel III framework will be achieved over a period of two years.

In the financial year ended March 2022, the AT-1 bonds will be valued at 10 years or the call date mentioned in the bond. From April to September 2022, it will be valid at 20 years and from October 2022 to March 2023 it will have a life span of 30 years. Finally, from April 2023, the perpetual bonds will be valid at 100 years.

All Basel-III tier-two bonds will be valid at the contractual maturity.

Further, if the issuer does not exercise the call option for any of the perpetual bonds, then the valuation and calculation of duration shall be done considering a maturity of 100 years from the date of issuance for AT-1 bonds and contractual maturity for Tier-2 bonds, said SEBI.

If the non-exercise of call option is due to the financial stress of the issuer or if there is any adverse news, the same shall be reflected in the valuation, it said.

The Association of Mutual Funds in India has been advised to issue detailed guidelines with respect to valuation of bonds issued under the Basel III framework, which shall be implemented by April 1, 2021.

The change in rules comes after the Finance Ministry had raised concerns over the duration of perpetual bonds.

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Mutual funds’ exposure to bank certificates of deposits declines 67%

Banking & Finance

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Mutual funds’ investment in bank certificates of deposits dipped sharply by 67 per cent last month to ₹53,000 crore against ₹1.59 lakh crore in same period last year, largely due to fall in interest rate on this debt instrument.

In fact, the overall mutual funds’ debt schemes’ investment in bank certificates of deposit has fallen to 3.2 per cent in February from 10.4 per cent logged in the same period last month, according to Care Rating research report.

The average rate of interest on CDs has fallen by 2 percentage points in last one year to 4.2 per cent last month against 6.2 per cent in February 2020 with the excess liquidity unleashed by the RBI to stimulate economy marred by the Covid pandemic.

G Pradeepkumar, Chief Executive Officer, Union Asset Management Company, said the issuance of certificates of deposit by banks has come down considerably in last one year as they are flush with funds and papers issued by few banks are also coming with lower interest. Debt funds, in general, are investing in the papers issued by corporates and government are the active borrowers in the market, he added.

Overall debt fund inflows last month was at ₹1,735 crore against outflow of ₹33,409 crore in January while debt fund AUM remained almost stagnant at ₹13.74 lakh crore.

Debt schemes accounted for the largest share of AUMs at 47 per cent, followed by equity at 31 per cent and hybrid schemes at 11 per cent while solution-oriented and other schemes accounted for the rest, said the report.

Most debt has taken fancy to corporate debt papers with investments increasing by ₹660 crore to ₹3.73 lakh crore. This segment includes floating rate bonds and non-convertible debentures, etc.

Debt fund exposure to NBFCs halved to ₹1.6 lakh crore in February against ₹2.3 lakh crore logged in September, 2018 when the series of default by corporates rattled the market. Mutual fund investment in commercial papers of NBFC dipped to ₹72,000 crore against ₹1.26 lakh crore.

Equity funds’ exposure

Among equity funds, the top six sectors accounted for over 61 per cent share of equity funds worth ₹8.9 lakh crore.

Deven Mistry, Research Analyst, Motilal Oswal, said mutual funds also showed interest in metals, oil and gas, utilities, cement, NBFC, capital goods, real estate, retail and infrastructure while they were underweight on technology, healthcare, consumer, telecom and automobiles.

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Perpetual bond yields move up 25-35 bps

Banking & Finance

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The yields on perpetual bonds floated by banks have moved up 25-35 basis points in the past two days following the SEBI circular on valuation of mutual fund investment in these bonds and the subsequent Ministry of Finance letter directing SEBI to withdraw the circular.

The MF industry has invested about ₹35,000 crore in perpetual bonds of banks with tenure of 100 years.

The top four mutual funds alone hold 80 per cent of the investment in these bonds.

Last week, SEBI directed mutual funds to value the perpetual bonds as a 100-year instrument and limit investments to 10 per cent of the assets of a scheme.

According to SEBI, these instruments could be riskier than other debt instruments.

Mahendra Jajoo, CIO – Fixed Income, Mirae Asset Mutual Fund, said the yields will further move up by 50-75 basis points if SEBI retains the circular without any changes, as there is nervousness and uncertainty over the regulator’s next move.

Though the investment cap prescribed by SEBI is absolutely fine, the net asset value (NAV) of schemes holding these bonds will come down if yields firm up further, he added.

Risk profile

SEBI has a valid point in restricting the mutual fund investment in these perpetual bonds as the Employees’ Provident Fund Organisation and insurance companies including LIC, which manage long-term money of investors, do not invest in these bonds due to its risk profile, said an analyst tracking mutual fund investments.

Moreover, some short-term debt schemes have also made huge investment in these perpetual bonds, breaching their investment mandate and putting investors’ money at risk, he added.

The RBI had recently allowed a complete write-off of ₹8,400 crore on AT1 bonds issued by YES Bank as part of a bailout package led by State Bank of India.

Perpetual bond prices fall if yields firm up, and the NAV of the schemes which hold these bonds will go down. Mutual funds will be forced to sell other debt paper to meet the redemption pressure.

Subsequently, the quantum of investment in AT1 bonds of these schemes will move up and test the 10 per cent cap imposed by SEBI. It is a sort of double whammy and needs to be dealt with immediately, he said.

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Rakesh Jhunjhunwala, Samir Arora file for mutual fund license, BFSI News, ET BFSI

Personal Finance

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Months after Securities and exchange board of India relaxed norms, fintechs are making a beeline to apply for mutual funds. Four new companies have filed papers for mutual fund licenses in the last four months. Among these are two ace investors Rakesh Jhunjhunwala and Samir Arora.

Samir Arora’s Helios Capital Management and Rakesh Jhunjhunwala’s Alchemy Capital are among the four companies that have recently applied for the mutual fund status. It remains to be seen whether they get an approval for the same.

Apart from these two, Unifi Capital Private Limited and Wizemarkets Analytics Private Limited have applied for the mutual fund license.

Sebi in December paved the way for technology startups to enter the mutual fund business by waiving the profitability requirement, approved doing away with minimum promoter contribution toward further public offers (FPO), and also eased norms on investing in insolvent companies.

Before December, regulators required an entrant to have five years of experience in the financial services business, demonstrate three years of profitability, and maintain a net worth of Rs 50 crore.



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Bank lending activity now stronger than last year; credit growth at 6.6% in February

Banking & Finance

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The credit growth of banks ranged between 6.5% to 7.2% in April 2020.

Banks gave out credit at a faster rate during the fortnight ending February 12, as compared to the same period last year, helped by an increase in retail loans. The bank credit growth was recorded at 6.6%, marginally higher from the 6.4% recorded last year, a report by CARE Ratings showed. With this, the credit growth is back in the range that was last seen during the early months of the pandemic. The credit growth of banks ranged between 6.5% to 7.2% in April 2020.

Bank credit growth strong

Bank credit during the fortnight ended February 12 stood at Rs 107 lakh crore, up from Rs 105 lakh crore at the end of December 2021 but at par with the previous fortnight ending January 29. “The retail, agriculture and allied segment have driven overall credit growth in January 2021 growing by 6.7% and 9.5% respectively,” the report showed. The retail segment accounted for 29% of the total credit, against the 28.1% share recorded in the year-ago period. Industrial segment, however, had the largest piece of the pie accounting for 29.6% of the total credit. The services sector accounted for 28% of the total.

“Trade and tourism, hotels and restaurant segment registered a (credit) growth of 15.7% and 8.9% respectively,” the report said. The professional services segment registered a de-growth of 25%, computer software segment too registered de-growth, making them the only two segment to slip.

Mutual fund redemptions aid deposit growth

Deposits with banks have also increased during the period under review. “Deposit growth increased during the fortnight ended February 12, 2021, compared with 11.1% growth registered during the fortnight ended January 29, 2021, and also as compared with the previous year,” CARE Ratings said. The report further added that the outflows in debt mutual fund and equity mutual fund could support the rise in bank deposits. Of these deposits, time deposits grew at 89% while demand deposits account for the remaining 11%.

With deposit growth outpacing credit growth in the banking system, liquidity remained in a surplus position. “The outstanding liquidity in the banking system as of February 26 aggregated Rs 6 lakh crore, higher than a month ago level of Rs 5.76 lakh crore,” the report said.

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How you can take the benefit of indexation

Personal Finance

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With the deadline for filing tax returns approaching, two friends, share their tax woes.

Ram: I made a neat gain of ₹1 lakh when I sold some of my old mutual funds (MF). But what the market giveth, the taxman taketh. I wonder what will be left after the taxman’s cut.

Shyam: Worry not. Let’s see if you can apply indexation.

Ram: What is indexation and what has it got to do with my taxes?

Shyam: Well, indexation is one of the few acts of kindness from the tax department. So, accept it graciously when you can! Under the Income-tax Act, you can apply indexation, that is, adjust the purchase price of an asset for inflation while calculating capital gains.

Ram: As if taxes were not enough, you want me to deal with inflation too!

Shyam: No. You see, this is one time, you wish inflation were higher! To calculate capital gains, you must deduct the purchase price of an asset from its sale price. But you also need to account for the erosion in the value of that asset over time due to inflation. So, the tax laws allow you to adjust your purchase price for inflation before you calculate your capital gain.

Ram: So, I can finally put the soaring Consumer Price Index inflation to some use.

Shyam: Not so fast. You can only use the Cost Inflation Index (CII), published by the Indian Income Tax Department for indexation. Let me give you an example. If you invested ₹2 lakh in debt MF schemes and redeemed your investments at ₹3 lakh a few years later, then your capital gain isn’t really ₹1 lakh.

Ram: Then what is it?

Shyam: If the CII for the year of purchase is 100 and for the year of sale, 120, then you can adjust your purchase cost by a multiple of 1.2 (120 / 100). That is, your inflation- adjusted purchase cost is ₹2.4 lakh (and not ₹ 2 lakh) and your capital gain effectively becomes ₹60,000 (₹3 lakh minus ₹2.4 lakh). It’s on this amount, that you pay 20 per cent tax.

Ram: Let me use indexation to get whatever I can out of my MF investments.

Shyam: It’s not that simple. You can seek refuge in indexation for investments made in debt MF schemes, but not equity schemes. Also, you can do this only for long-term capital gains, that is, only if you held on to your debt MF investments for 36 months or longer.

Ram: Should have known that ‘terms and conditions apply’ always!

Shyam: Don’t be disappointed. You can also use indexation for other assets such as property (land/ house) and gold (jewellery / ETF). Gains made on sale of property held for more than two years and gold held for more than 3 years are considered ‘long-term’.

Ram: Maybe I shouldn’t crib when my wife buys and sells gold. As long as she does it after three years!

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