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Best corporate bond mutual funds to invest in 2019

Mutual fund managers and advisors have been asking debt mutual fund investors to stick to corporate bond funds.

 

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Here's the monthly update on our recommended corporate bond schemes. The good news is that there is no change in our recommendations this month. Corporate bond funds are less volatile than credit-risk funds, long-term debt schemes and gilt schemes, say mutual fund advisors. Corporate bond funds category has offered 8.16 per cent returns in the last one year.

These advisors believe that if you are looking for a debt mutual fund scheme to invest for a medium term of three to five years and don't want to take too much risk on your investment, you may think of investing in corporate bond funds.
As per new Sebi categorisation, corporate bond funds must invest at least 80 per cent of their corpus in the highest-rated corporate bonds. That means these schemes would invest most of their corpus in corporate bonds that is rated AAA. That makes them a relatively less riskier than credit risk funds. However, since we are dealing with companies, there is always a bit of risk.

Sure, highest-rated companies are much more reliable than their counterparts rated lower. However, a higher rating doesn't mean that their ratings won't come down in future or they may not default on their payment. IL&FS saga is a clear example of how a so-called reliable bet can go wrong. But the chances of them defaulting or suddenly becoming junk-rated are remote.

If you have a moderate risk profile and you want invest for a medium term without thinking about the market forces like interest rates, you may invest in corporate bond funds. The ideal investment horizon for these schemes in three to five years. The corporate bond mutual fund category has offered around 6.09 per cent in the last one year, 7.16 per cent in the last three years and 7.86 per cent in the last five years.

Investor wealth rises by Rs 3.86 lakh crore in 2 days of rally

The Sensex had hit its all-time high of 40,124.96 during the trade on May 23.

 

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New Delhi: Investors' wealth has gone up by Rs 3.86 lakh crore in two days of market rise where the Sensex has gained 872 points after the decisive mandate for the BJP in the general election.

The 30-share BSE key index has gained 871.9 points in two days. The Sensex Monday closed 248.57 points higher at 39,683.29.

Led by the rally in the equity market, the market capitalisation (m-cap) of BSE-listed companies rose by Rs 3, 86,220.41 crore to Rs 1, 54, 11,395.90 crore on the BSE.

At the close of trade on Thursday, the market valuation of BSE-listed firms was Rs 1, 50, 25,175.49 crore.

The Sensex had hit its all-time high of 40,124.96 during the trade on May 23, the day election results were announced.

Hemang Jani, Head (Advisory), Sharekhan by BNP ParibasNSE 0.64 % said, "Indian markets end the day on a positive note. The markets continue their upward trend supported by FII (foreign institutional investor) buying in the past two consecutive trading days. The current government wining the general elections by a two-thirds of majority will clam the political environment in the country."
He said slowdown in global growth, US-China trade war along with rise in oil prices pose an immediate threat to domestic markets

"However, post the elections, we now expect the market to revert to fundamental issues such as earnings growth," Jani added.

From the 30-share pack, 17 scrips gained led by Tata Steel, YES BankNSE 2.18 %, NTPC, Larsen and Toubro, Axis BankNSE 0.35 % and State Bank of India.

Among sectoral indices, the BSE capital goods, power, industrials, utilities, metal and realty indices rallied up to 3.06 per cent.

In the broader market, the S&P BSE Midcap index gained 1.13 per cent and BSE Smallcap 1.77 per cent.

On the BSE, 1,793 scrips advanced, while 785 declined and 188 remained unchanged.

Net inflow in small-cap MFs in April soars despite weak show

 

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  • Investors see opportunity amid sharp corrections in mid-cap and small-cap stocks
  • Valuations in mid- and small-cap cooled off due to sharp corrections, which has drawn investors

MUMBAI: Mutual funds are significantly investing in mid-caps and small-caps despite their weak performance, and the risks associated with volatility of smaller companies. According to data released by the Association of Mutual Funds in India (Amfi), while net inflow into large-cap funds in April stood at Rs 48.27 crore, for mid-cap funds it was at Rs 491.04 crore, and for small-cap funds it stood at Rs 955.83 crore. For the first time, Amfi has released granular monthly data for investments by mutual fund houses.

Mutual funds’ preference for mid- and small-caps over large-caps comes at a time when the BSE MidCap and BSE SmallCap indices have been under pressure. BSE MidCap fell 8.56%, while BSE SmallCap lost 6.29% so far in 2019, after slipping 13.38% and 23.53%, respectively, in 2018.

In 2019, the benchmark index, Sensex, has gained 2.9% and the BSE LargeCap index has jumped 1.58%, while both indices gained 2-6% in 2018.

In April 2019, too, the BSE LargeCap index and the Sensex were up nearly 1%, while BSE MidCap and BSE SmallCap were down 3-4%.

Analysts said steep valuations in mid- and small-cap stocks have cooled off due to sharp corrections, providing an opportunity for investors.

“Valuations have come off considerably in mid- and small-caps after corrections, and we believe there is a significant opportunity here to generate alpha. These levels of inflows may not be suitable for small-cap funds that are already too large. However, they can be handled by funds of a small to medium size," said Radhika Gupta, chief executive officer (CEO), Edelweiss Asset Management Ltd.

Valuations of mid-caps, which were considered frothy and had a premium over large-caps till last year, have cooled off significantly. According to Bloomberg data, the BSE MidCap is currently trading at 17.48 one-year forward price to earnings (PE), which is much lower than three-year average of 19.66. The BSE MidCap is trading at 14.78 times PE, while the Sensex is at 17.60.

 

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According to Swarup Mohanty, CEO, Mirae Asset Global Investments (India) Pvt. Ltd, the large gap between small- and large-cap inflows seems to be the result of trend-buying on the part of investors. “Small-caps, as a category, are down 17% over the past year, hence, investors could be blindly contrarian."

Meanwhile, the share of both the BSE MidCap and the BSE SmallCap indices in overall market capitalization has decreased, while that of the Sensex has grown since January. At current levels, the BSE MidCap index contributes 12.77% to India’s total market capitalization, down from 13.72% in January.

In contrast, the contribution of the Sensex to the country’s total market capitalization has grown from 44.87% in January 2019 to 46.18% at current levels.

Typically, domestic institutional investors’ (DIIs) investment is skewed towards the mid and small stocks segment, while foreign institutional investors’ (FII) money largely goes into large-caps. So far in 2019, FIIs were net buyers of Indian shares worth $9.92 billion (approximately Rs 6.99 trillion), while DIIs have sold shares worth Rs 13,368.4 crore.

Mid, small-cap funds ride on Modi wave, post up to 5.4% gains in a week

According to data from Amfi, small- and mid-cap funds posted gains of 5.4 per cent and 4.6 per cent, respectively, over the past week 51

Mid- and small-cap schemes, which had given tepid returns in recent years, have bounced back sharply in the last week following the euphoria surrounding election results. After the Bharatiya Janata Party’s stunning victory, market players now see scope for a broad-based market rally.

Further, they expect quality mid- and small-cap companies to do well. According to data from the Association of Mutual Funds in India (Amfi), small- and mid-cap funds posted gains of 5.4 per cent and 4.6 per cent, respectively, over the past week. Both categories bettered the gains.

New debt disclosure norms to improve transparency, say fund managers

Legal experts said the move to specify penalties for default in payment or delay in listing in the term-sheet will bring in more legal sanctity

 

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The new disclosure framework for listed debt securities will help improve transparency and could potentially reduce the information asymmetry among different sets of debenture holders, said fund managers.

The market regulator Securities and Exchange Board of India (Sebi) on Monday introduced a couple of critical changes to the disclosure regime directing the so-called debenture trustees (DTs) to disclose their compensation structure, maintain a calendar of interest payments and redemptions and introduce additional covenants in case of privately placed debts.

"The intention of Sebi seems to be to plug information gaps between different set of debenture holders. However, more clarity is needed. It would help if all set of investors come to know when there is a default," said a debt fund manager, requesting anonymity.

The Sebi, in its circular, said that issuer of the debt securities will have to share details of debenture holders with the DT at the time of allotment and by seventh working day of every following month, "so that DTs keep their records updated and communicate effectively with debenture holders, especially in situations where events of default are triggered".

"The disclosure norms will help give more visibility to the new investor on track-record of the issuer in making timely payments. Also, the investor will have some clarity on the upcoming redemptions for the borrower," added Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund (MF).

Further, Sebi has given directions that would require DTs to update status of payment (security wise) against issuers not later than one day from the due date. "In case the payment is made with a delay by the issuer, DTs shall update the calendar specifying the date of such payment, with a remark ‘delayed payment’."

Legal experts said the move to specify penalties for default in payment or delay in listing in the term-sheet will bring in more legal sanctity.

“The clause pertaining to additional interest payments for default or delay in listing have been there from the start. However, mentioning them in the term sheet will bring in more transparency and set a floor coupon rate,” said a lawyer.

Sebi has said the issue details in the summary term-sheet for an agreement between the issuer and investor will have to include additional covenants that state “in case of default in payment of interest and/or principal redemption on the due dates, additional interest of at least at the rate of 2 per cent per annum over the coupon rate shall be payable by the company for the defaulting period.”

19% returns in three months; is it time to bet on banking sector mutual funds?

The toppers in the category have offered around 23 per cent returns in both three months and one-year horizon.

 

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Banking sector mutual funds are the talk of the town these days. These sector schemes have been offering exceptional returns in the short term: 6.09 per cent in one month, 19.17 per cent in three months, and 15.43 per cent returns in one year. The toppers in the category have offered around 23 per cent returns in both three months and one-year horizon. Investors are asking whether the performance is going to last or will it be short lived?

Fund managers believe that the outlook for the banking sector has definitely improved in the last one year. “In the near term, for the private banking space, competition landscape has become better. NBFCs have become weaker and PSU banks are struggling. The woes of asset quality are behind the large private sector banks. They don’t have a dearth of capital and this has helped the run up in the banking segment,” says Sonam Udasi, fund manager, Tata Banking and Financial Services Fund.

The return of Modi government has improved the sentiment in the market and it has given an extra push to these funds in the last one week. The BSE Bankex Index has jumped 1,360 points since the election results showed the return of the BJP government at the centre. However, fund managers believe that the momentum is unlikely to continue. “Definitely a strong government has pushed the indices up but the NAVs of the banking sector funds were already very strong. This push has just been additional,” says Jimmy Patel, CEO, and Quantum Mutual Fund.

The liquidity problems and the NPA issues might be partially behind the sector but mutual fund managers believe that it might continue to haunt the sector in the coming months. The Reserve Bank of India (RBI) on Friday proposed introducing a liquidity coverage ratio (LCR) for large NBFCs to help tackle liquidity problems in the NBFC sector.

“We have seen exceptional performance by the sector but we have to think about the issues that are lying under the carpet. The NPA issue is still not completely over for many banks, the PSU banks are struggling, there are investments in housing finance companies, NBFCs etc. which will hit the banks when the lending process from the banks starts again,” says Jimmy Patel.

With all these issues on the table, the fund managers still believe that the sector has the potential and these funds might reward investors who can take risk. “We believe that the large private sector banks will have a good run up in the next two to three years because of the weak competition. Even if the credit growth were to remain lower, they will take an incrementally higher market share. It may be volatile but the sector will remain positive for the coming years,” says Sonam Udasi. However, for retail investors, the advice remains the same- do not go for sector funds if you can’t take extra risk. “We have always advised retail investors to take exposure to the sectors via their multi cap or regular equity schemes. You should think of investing in sector funds only if you are aware of the sector and want to take positions,” says Jimmy Patel.

Small and mid caps revival on cards; should mutual fund investors join the party?

Many stock market pundits believe that mid cap and small cap stocks are likely to bounce bank in the current rally in the market.

 

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Many stock market pundits believe that mid cap and small cap stocks are likely to bounce bank in the current rally in the market. The short term performance of small cap and mid cap mutual fund schemes underscore the trend: the small cap mutual fund category has returned 5.26 per cent and the mid cap category has offered 4.61 per cent returns in the last one week. Though the pundits attributed the impressive performance to improved sentiment in the market following the election mandate to NaMo government, they believe small cap and mid cap mutual funds may continue to gain in the coming days.

“We are expecting mid cap and small cap segments to do well, but that doesn’t mean they will outperform the market like 2017. The two segments have seen correction and we are expecting the valuation to become better. We can’t say that small and mid cap mutual funds will start giving great returns. However, as a segment, we can see revival in mid cap and small caps, but it will not happen overnight,” says Gopal Agrawal, senior fund manager and head of macro strategy, DSP Mutual Fund.

Fund managers believe that the easing interest rate scenario is ideal for the small and mid cap segments. However, the rate cuts earlier this year did not translate into a good show by both these segments, probably because lack of transmission of rates by banks. “Due to the liquidity issues, which have been more or less resolved by RBI’s OMOs, and a narrow market rally, the small and mid cap segments did not perform in the last couple of months. These segments will go up but we shouldn’t expect them to outperform the rest of the segments,” says Vinay Paharia, CIO, Union AMC.

Small and mid cap mutual funds have been beaten down in the last one year but there are signs of revival in the short term. However, fund managers believe that investors shouldn’t expect too much from these schemes. “In the last couple of years, we have seen the valuations of small and mid cap companies running much ahead of fundamentals. To some extent, the valuations have corrected but real outperformance in mutual fund schemes will take time,” says Vinay Paharia.

Mutual fund managers say that investors shouldn't make the mistake of seeing the entire small and mid cap segment as one. They point out that only quality mid and small cap stocks would outperform in the current market. “Sure, there will be select quality companies which will do well, but for the entire segment we will have to wait for the government to fix liquidity, GST compliance issues and tighten macros for smooth revival in mid and small cap segments,” says Gopal Agrawal.

According to these fund managers it is always a good time to invest in small and mid cap schemes If you have the risk appetite and a long investment horizon. Investors can invest in small and mid caps at any point, they add.



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