Highlights
• Indian Investors prefer protective conventional debt investments over riskier ones such as equity
• In the long run however, equity as an asset class has historically given superior inflation adjusted returns
• Key question: Is it possible to offer high growth potential of equity while aiming for capital protection?
• Presenting Birla Sun Life Capital Protection Oriented Fund Series 7 (BSLCPOF- Series 7)
o Oriented towards protection of capital
o Seeks to participate in the upside of equity market through Call Options
Indian investors prefer capital protection over growth as per the KPMG-CII survey :
• For every thirty citizens in India, only one invests in equity market
• For every ` 100 saved in India, only 3 is invested in equity market
Internal estimates based on data sourced from: AMFI, World Bank, RBI, IRDA, NSDL & CDSL
“I want protective products with guaranteed income and good absolute returns”. That’s what Indian investors are looking for as per a survey done by KPMG-CII in 2009 on Indian mutual fund industry.
As visible in the graphs below, conventional savers in India prefer security and certainty of return. The certainty though comes at a cost...cost in terms of lower return that, on post inflation, post tax basis, could make savers poorer, rather than richer. On the other hand, equity has historically provided much higher real return (inflation and tax adjusted) over long investment horizons. But this return also has a cost… cost in terms of certainty of return, market risks and longer holding period.
Some mutual fund products offer a viable product blend that has capital protection orientation of debt and growth of equity!
For traditional savers who have never experienced mutual funds, this product could be a gateway to market linked investment-avenue. To offer investors an opportunity to participate in equity market along with the focus on capital protection, Birla Sun Life Mutual Fund launches the Birla Sun Life Capital Protection Oriented Fund – Series 7, close ended capital protection oriented scheme.
What is this scheme’s Investment Strategy?
This scheme seeks to provide capital appreciation linked to equity market with downside protection at the end of tenure:
• Scheme expects to achieve down side protection by investing in debt securities with tenure comparable with the tenure of the Plan,
subject to the credit risk.
• Scheme expects to achieve the market-linked appreciation (upside) by investing in premium of exchange traded Index options.
The scheme proposes to restrict its derivative exposure only to the extent of buying of call options of the Nifty Index. Hence the maximum loss would be restricted to the extent of premium paid, not any more. Moreover, the premium paid will be equal to or lower than the expected coupon receivable from fixed income securities after providing for fund expenses.
How do we orient the portfolio to provide Capital Protection?
The scheme expects to achieve capital protection by investing in AAA or equivalent rated debt securities with tenor comparable with the tenure of the Scheme. The selection of debt securities and investment norms are elaborated in the “Asset Allocation and Investment
Pattern” section of the SID.
Illustration: Assume an initial investment of ` 100 for 36 months. Assuming interest rate of similar tenure AAA rated papers as 9.20%, one would need to deploy about ` 78 in AAA rated instruments so that it grows to ` 100 at the end of 36 months, assuming no tenor mismatch between investments and the tenure of the scheme.
The remaining ` 16.75 (after providing ` 5.25 for expense for 36 months) can be used to buy call options which could provide market linked returns.
Interest Rates assumed are as per current expectations and may be vary at the time of deployment The actual allocation & performance would depend upon prevailing market conditions. Within the specified limits, the actual expense ratio could be higher or lower than the assumption above.
How does the scheme participate in equity market?
The scheme expects to achieve the market linked appreciation (upside) by investing in premium of exchange traded Index Call Options. By buying call options, we are purchasing the right to buy the Index at a ‘pre-defined price’ (also known as the strike price) at the level, after a pre-defined time (about 33 months for this product as the option will mature in June 2014). To buy call option, we have to pay a premium (cost for buying the right). Buying of a call option gives the buyer a right but no obligation to buy the Index at a future date. Hence,
• If market goes up, buyer has a right to buy the Index at a lower level and sell at the prevailing rate, thereby realizing profit.
• If market goes down, the buyer loses the premium paid. But the maximum loss for a buyer is the premium paid, even if the market (though theoretically) becomes zero.
Sunday, September 18, 2011
Invest in SBI Capital Protection Oriented Funs Series - III
SBI Capital Protection Oriented Fund – Series III
helps you protect your money while giving it an opportunity to grow. The fund will invest predominantly in debt and debt related instruments & money market instruments with an option of investing up to 18% in equity and equity related instruments including derivatives. SBI Capital Protection Oriented Fund – Series III can thus capture the best of both the worlds i.e. Equity and Debt while endeavouring for capital protection. The fund's portfolio is structured in such a way that it is oriented towards protection of the capital.
OVERVIEW :
In our pursuit to invest our hard-earned money, we are often faced with a investment dilemma that forces us to choose between capital protection and growth. Traditional investment avenues often tend to be safe but with safety wouldn't you like your money to give better returns? SBI Mutual Fund understands your need and we therefore bring to you a unique fund, SBI Capital Protection Oriented Fund - Series III. The fund's portfolio is structured in such a way that it is oriented towards protection of the capital. However, there is no bank guarantee, insurance cover etc. for the same. This specially designed fund gives your money an opportunity to grow besides protecting the capital.
What is SBI Capital Protection Oriented Fund - Series III
SBI Capital Protection Oriented Fund - Series III is a 3 - year close - ended capital protection oriented fund which will invest predominantly in debt and debt related instruments & money market instruments with an option of investing upto 18% in equity and equity related instruments including derivatives. On one hand, the portfolio will be dominated by investment in G secs and AAA or equivalent rated securities, and on the other hand it has the option to invest upto 18% in equity assets which will help the fund to participate in the growth too, beyond conserving the capital.
SBI Capital Protection Oriented Fund - Series III can thus capture the best of both the worlds i.e. Equity and Debt while endeavouring for capital protection.
helps you protect your money while giving it an opportunity to grow. The fund will invest predominantly in debt and debt related instruments & money market instruments with an option of investing up to 18% in equity and equity related instruments including derivatives. SBI Capital Protection Oriented Fund – Series III can thus capture the best of both the worlds i.e. Equity and Debt while endeavouring for capital protection. The fund's portfolio is structured in such a way that it is oriented towards protection of the capital.
OVERVIEW :
In our pursuit to invest our hard-earned money, we are often faced with a investment dilemma that forces us to choose between capital protection and growth. Traditional investment avenues often tend to be safe but with safety wouldn't you like your money to give better returns? SBI Mutual Fund understands your need and we therefore bring to you a unique fund, SBI Capital Protection Oriented Fund - Series III. The fund's portfolio is structured in such a way that it is oriented towards protection of the capital. However, there is no bank guarantee, insurance cover etc. for the same. This specially designed fund gives your money an opportunity to grow besides protecting the capital.
What is SBI Capital Protection Oriented Fund - Series III
SBI Capital Protection Oriented Fund - Series III is a 3 - year close - ended capital protection oriented fund which will invest predominantly in debt and debt related instruments & money market instruments with an option of investing upto 18% in equity and equity related instruments including derivatives. On one hand, the portfolio will be dominated by investment in G secs and AAA or equivalent rated securities, and on the other hand it has the option to invest upto 18% in equity assets which will help the fund to participate in the growth too, beyond conserving the capital.
SBI Capital Protection Oriented Fund - Series III can thus capture the best of both the worlds i.e. Equity and Debt while endeavouring for capital protection.
Tuesday, September 13, 2011
Key Global Economic Events for the week
China :
· In China, the August consumer price index (CPI) came in at 6.2% year-on-year compared to 6.5% last month, in line with a Bloomberg consensus analyst estimate of 6.2%. Investors are now expecting a halt to rate hikes as inflation begins to trend down.
· China's trade surplus narrowed: China's trade surplus narrowed in August on surging imports, a positive sign for the global economy as it indicates that Chinese demand remains strong. The surplus fell to $17.8 billion in August from $31.5 billion in July
India :
· Food inflation rose 9.55% y-o-y in the week ended Aug.27, edging down from the previous week’s 10.05%.
· India has now received 3% above-average monsoon rain between June 1 and Sep. 7, according to India’s Meteorological Department. Additionally, rains that usually subside by the first week of September are likely to continue for longer this year. The monsoon rains are expected to boost farm output and cool food prices
· Domestic car sales dip 10.08%, bike sales up 15.43% in Aug: Domestic passenger car sales declined by 10.08% to 144,516 units in August, 2011, from 160,713 units in the same month last year
· The rupee hit a 1 year low today on Monday (12th Sept) of 46.97 to the dollar. This is due to the dollar strength globally.
Ø The July Industrial Output (IIP) numbers will be announced today (12th September). A CNBC-TV18 poll threw up a forecast of 6.1%. Weakness in the Purchasing Managers Index (PMI) and auto sales may impact industrial output
Ø Inflation number for the month of August will come on September 14. CNBC Forecast is of 9.6%.
Ø The markets will be looking for decision from a crucial RBI policy meet on 16th September. The IIP numbers today and inflation numbers on 14th Sept will give an indication on the next step from RBI
Global :
· US government laid out a $450 billion stimulus plan to boost economic growth, including tax cuts, funds for infrastructure and support for mortgage financing. President Barack Obama proposed a $447 billion jobs package on Thursday to help boost the U.S. economy, challenging Congress to pass legislation made up largely of tax cuts for workers and businesses.
· Greece on Sunday slapped a new tax on real estate to plug a 2011 budget hole, please international lenders and secure a key new loan tranche as concerns mounted in Europe over its euro zone membership
· Greece Prime Minister George Papandreou, said in a speech late on Saturday he was determined to do whatever it takes to save Greece from bankruptcy and keep it in the euro.
· Late last week the rifts in European policymaking circles came out in the open when German economist resigned from the European Central Bank’s executive board following differences over the purchase of bonds from debt-laden countries.
· European Central Bank left interest rates unchanged and may lower its inflation and growth forecasts as the region’s debt crisis worsens. ECB officials meeting in Frankfurt today kept the benchmark rate at 1.5 percent.
· In China, the August consumer price index (CPI) came in at 6.2% year-on-year compared to 6.5% last month, in line with a Bloomberg consensus analyst estimate of 6.2%. Investors are now expecting a halt to rate hikes as inflation begins to trend down.
· China's trade surplus narrowed: China's trade surplus narrowed in August on surging imports, a positive sign for the global economy as it indicates that Chinese demand remains strong. The surplus fell to $17.8 billion in August from $31.5 billion in July
India :
· Food inflation rose 9.55% y-o-y in the week ended Aug.27, edging down from the previous week’s 10.05%.
· India has now received 3% above-average monsoon rain between June 1 and Sep. 7, according to India’s Meteorological Department. Additionally, rains that usually subside by the first week of September are likely to continue for longer this year. The monsoon rains are expected to boost farm output and cool food prices
· Domestic car sales dip 10.08%, bike sales up 15.43% in Aug: Domestic passenger car sales declined by 10.08% to 144,516 units in August, 2011, from 160,713 units in the same month last year
· The rupee hit a 1 year low today on Monday (12th Sept) of 46.97 to the dollar. This is due to the dollar strength globally.
Ø The July Industrial Output (IIP) numbers will be announced today (12th September). A CNBC-TV18 poll threw up a forecast of 6.1%. Weakness in the Purchasing Managers Index (PMI) and auto sales may impact industrial output
Ø Inflation number for the month of August will come on September 14. CNBC Forecast is of 9.6%.
Ø The markets will be looking for decision from a crucial RBI policy meet on 16th September. The IIP numbers today and inflation numbers on 14th Sept will give an indication on the next step from RBI
Global :
· US government laid out a $450 billion stimulus plan to boost economic growth, including tax cuts, funds for infrastructure and support for mortgage financing. President Barack Obama proposed a $447 billion jobs package on Thursday to help boost the U.S. economy, challenging Congress to pass legislation made up largely of tax cuts for workers and businesses.
· Greece on Sunday slapped a new tax on real estate to plug a 2011 budget hole, please international lenders and secure a key new loan tranche as concerns mounted in Europe over its euro zone membership
· Greece Prime Minister George Papandreou, said in a speech late on Saturday he was determined to do whatever it takes to save Greece from bankruptcy and keep it in the euro.
· Late last week the rifts in European policymaking circles came out in the open when German economist resigned from the European Central Bank’s executive board following differences over the purchase of bonds from debt-laden countries.
· European Central Bank left interest rates unchanged and may lower its inflation and growth forecasts as the region’s debt crisis worsens. ECB officials meeting in Frankfurt today kept the benchmark rate at 1.5 percent.
Wednesday, September 7, 2011
Equity funds underperform their respective benchmarks while debt funds outperform
Majority of large cap and diversified equity funds underperformed their benchmark indices; in contrast, majority of long-term debt funds outperformed their benchmark across all three periods of analysis
According to the latest Standard & Poor’s Index versus Active Funds (SPIVA) scorecard, majority of large cap and diversified equity funds underperformed their benchmark indices i.e. the Nifty and the S&P CNX 500 respectively, across three periods of analysis (1, 3 and 5 years). Higher proportion of large cap equity funds underperformed their benchmark vis-à-vis the diversified category. Diversified funds said to offer a greater probability of generating excess returns as they have a wider choice than large cap funds.
Speaking on the underperformance, Tarun Bhatia, Director - Capital markets, Crisil Research, said “In recent years, the higher volatility associated with equities compared to bonds has not been rewarded with higher returns for the majority of these funds”.
In the case of equity-linked saving schemes (ELSS), majority of funds have underperformed the benchmark S&P CNX 500 over the three and five year time frames whereas in the hybrid category, majority of the equity-oriented balanced funds underperformed the benchmark (CRISIL BalanCEX) across all time frames. In contrast, majority of the debt-oriented monthly income plans (MIPs) outperformed the benchmark (CRISIL MIPEX) across all time frames. Clearly, MIPs with relatively lower exposure to equities generated adequate returns vis-à-vis balanced funds.
Among pure debt funds, most of the gilt funds which mainly invest in sovereign-guaranteed securities underperformed their benchmark (CRISIL Gilt Index) in the three and five year time frame. These funds are largely based on duration calls taken by the fund manager, based on their interest rate views but these funds are likely to outperform if its average maturity falls in a rising interest rate scenario.
On the other hand, majority of long-term debt funds which invest mainly in corporate debt outperformed their benchmark (CRISIL CompBEX) across all three time frames led largely by active duration calls in a volatile interest rate environment.
Simon Karaban, Director, S&P Indices Asia Pacific Research, said active managers of Indian fixed income funds have performed better than their US counterparts. He further said “However, with the exception of emerging market debt, more than 50% of US active managers failed to beat benchmarks in all fixed income categories”.
According to the latest Standard & Poor’s Index versus Active Funds (SPIVA) scorecard, majority of large cap and diversified equity funds underperformed their benchmark indices i.e. the Nifty and the S&P CNX 500 respectively, across three periods of analysis (1, 3 and 5 years). Higher proportion of large cap equity funds underperformed their benchmark vis-à-vis the diversified category. Diversified funds said to offer a greater probability of generating excess returns as they have a wider choice than large cap funds.
Speaking on the underperformance, Tarun Bhatia, Director - Capital markets, Crisil Research, said “In recent years, the higher volatility associated with equities compared to bonds has not been rewarded with higher returns for the majority of these funds”.
In the case of equity-linked saving schemes (ELSS), majority of funds have underperformed the benchmark S&P CNX 500 over the three and five year time frames whereas in the hybrid category, majority of the equity-oriented balanced funds underperformed the benchmark (CRISIL BalanCEX) across all time frames. In contrast, majority of the debt-oriented monthly income plans (MIPs) outperformed the benchmark (CRISIL MIPEX) across all time frames. Clearly, MIPs with relatively lower exposure to equities generated adequate returns vis-à-vis balanced funds.
Among pure debt funds, most of the gilt funds which mainly invest in sovereign-guaranteed securities underperformed their benchmark (CRISIL Gilt Index) in the three and five year time frame. These funds are largely based on duration calls taken by the fund manager, based on their interest rate views but these funds are likely to outperform if its average maturity falls in a rising interest rate scenario.
On the other hand, majority of long-term debt funds which invest mainly in corporate debt outperformed their benchmark (CRISIL CompBEX) across all three time frames led largely by active duration calls in a volatile interest rate environment.
Simon Karaban, Director, S&P Indices Asia Pacific Research, said active managers of Indian fixed income funds have performed better than their US counterparts. He further said “However, with the exception of emerging market debt, more than 50% of US active managers failed to beat benchmarks in all fixed income categories”.
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