MUTUAL FUND

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Mutual Fund Yearly Report
I. AUM:

April 21, 2011

Indian Mutual Funds industry performance – an annual (FY 2010 -11) review:
The Assets Under Management (AUM) of the Indian mutual fund industry as on March 31, 2011 (as per AMFI Monthly data) has witnessed a decrease of 3.54% to Rs. 5,92,250 crore on a year on year basis, on account of substantial outflows from equity, liquid and income schemes. Even though there were inflows of Rs. 27,912 crore into FMPs that were mopped up by way of NFOs during the month of March 2011, the financial year end requirements by banks and corporates led to redemptions from income and liquid funds. A sharp fall in equity markets as well as spiked yields on the long term debt side during the financial year forced the investors to opt for other alternate asset classes like gold and silver. Maximum growth was observed in AUM of Gold ETFs by 176.7%, while AUM of ‘FOF Overseas’ dropped the most with 12.2%. The financial yearend AUM of the industry for March 2011 stood at Rs. 5.92 lakh crore, down from Rs. 6.13 lakh crore in March 2010.

*= Source AMFI, ** = Source SEBI

On a year-on-year basis, the AUM for equity category fell by 2.47% to Rs. 1,69,754 crore. Turbulences in the equity market over the course of the financial year subdued the investors’ sentiment that resulted in more redemption on equity side, although the primary indices –Sensex and Nifty registered annual returns about 10.93% and 11.14% respectively.
Mutual Fund Yearly Report: FY 2010 - 11 Retail Research

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Mutual Fund Yearly Report

contd…

As the NAVs of most schemes inched back upto the 2007 levels, some investors opted to redeem their equity holdings. The equity category witnessed outflow of Rs. 13,404 crore during the year. This category accounts for 29% of the industry’s total asset base. The other categories ELSS and Balanced observed growth in their AUM by 6.25% and 6.95% respectively. ELSS, a tax saving instrument from mutual fund segment attracted inflows about Rs. 266 crore during the year (the lowest annual collection since FY06). An inflow of Rs. 1,344.72 crore during the Financial year into balanced category reflected the cautious stance of investors against equity market downturns. Gold ETFs has been glittering and attracting investors’ attention during the year. The category witnessed a highest growth of 176.73% in AUM to a total of Rs. 4,400 crore in the year. The category attracted inflows of Rs. 2,248 crore during the period and yielded an annual return of 25.77% while the physical gold prices rose 27.35%. The category –Other ETFs, a collection of equity exchange traded funds (ETFs) also witnessed higher growth of 162.90% during the year. Debt categories saw their assets shrink relatively more in wake of high WPI inflation that resulted in an uptick in interest rates which consequently caused yields of debt securities to inch up to elevated levels. The tight liquidity condition in the banking system compared to previous financial year on account of 3G and BWA auctions, advance tax outflows during the year led the banks and corporates to pull out money from such schemes further impacting their AUMs. The income and liquid categories witnessed outflows of Rs. 36,706 crore and Rs. 3,519 crore respectively during the period. II. Equity Market: In the financial year 2010-11, Indian equity markets continued its good performance for the second consecutive year on the back of record inflows from FII, considering the cumulative inflows at $24.1 billion against net inflow of $23.35 billion in FY10. The key primary indices -Sensex and Nifty delivered return of 10.94% and 11.14% respectively. The mid-cap segment underperformed large-cap during the year and the BSE Mid-cap, CNX Mid cap and BSE Small-cap delivered returns of 1%, 4.35% and -3.78% respectively.
Mutual Fund Yearly Report: FY 2010 - 11 Retail Research

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Mutual Fund Yearly Report

contd…

Sector wise, consumer durables benefited the most with the BSE consumer durables index rising almost 50% during the year. Even FMCG, IT and Bankex indices each gained close to 25% during the period. BSE realty came across as the biggest loser among sectoral indices with a 29% decline during the period. On the other hand, half of the top ten gainers in terms of price belonged to banking and financial services sector. Also, five out of top ten price gainers from the mid-cap space consist companies that have commodity or agriculture focused businesses. Performance of Indices during the financial year 2010 – 11:

Mutual Fund Yearly Report: FY 2010 - 11

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Mutual Fund Yearly Report
III. Debt Market:

contd…

Indian fixed income market witnessed subdued activity from the investors’ fraternity during the financial year 2010-11. Factors such as high WPI inflation, rising interest rates, extreme tight liquidity in the banking system, high fiscal deficit, government borrowing and spending and geo political issues influenced and resulted in inching up of the yields on debt securities. Government securities market observed yields hardened over the course of the financial year and the 10 yr benchmark security reached a high of 8.23% before closing the year at 7.98% (vs last year’s year end yield of 7.85%). The Reserve bank of India (RBI) increased policy rates - Repo and Reverse Repo rates by 175 and 200 basis points respectively during the FY 2010-11. The net borrowing for the Government of India announced for financial year was Rs. 3,45,000 crore. The inflation for the year was very high with an average of 9.19%. Liquidity in the banking system was extremely tight most of the year and banks were borrowing a net average of Rs. 46,106 crore through LAF window from RBI on a daily basis. Interest rates at short end also inched up to the level of 10 to 11%. Due to the extreme liquidity crunch, banks and corporates mopped up money from secondary market where they issued CDs and CPs with higher interest rates. IV. Category returns (%): Almost all mutual fund categories (barring Equity theme – infrastructure) posted positive returns for the financial year ended March 31, 2011. Amongst, equity banking, gold ETFs and Equity FMCG were the toppers where they registered 27.64%, 25.77% and 25.76% annualized returns respectively. Equity – Infrastructure, MIP – LT and Gilt ST were the laggards where they posted annualized returns of -3.87%, 4.95% and 5.00% respectively.
Mutual Fund Yearly Report: FY 2010 - 11 Retail Research

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Mutual Fund Yearly Report
Performance of MF categories during FY 11:
35 30 25 20 15 10 5 0 -5 -1 0

contd…

25.76 17.91

25.77

27.64

16.81 13.48 5.74 5.75 6.03 6.20 6.36 6.70 7.57 8.19 8.47 8.71 9.00 11.03

4.95

5.00

5.08

5.46

5.48

- 3.87

Gilt - Medium & LT

Global Foreign MF

Equity - FMCG

MIP - ST

MIP - LT

Hybrid - Equity Ori

Hybrid - Debt Ori

Equity - Tax Plan

Floating Rate - LT

Floating Rate - ST

Equity - Pharma

Gilt Funds - ST

Income Funds

FoF - Equity

Gold - ETFs

ST Income

V. Folios: The total numbers of investors’ folios for Indian mutual fund industry has witnessed a decline of 1.95% to 4.72 crore during the financial year of 2010 – 11 (as per the SEBI data) on account of huge redemptions made on equity schemes. Though there was a notable increase of 21.1% on debt schemes folios, a shrink of 18 lakhs folios on equity schemes to 3.9 crore led to a fall in folios after six years. The total number of folios of the industry for the FY 2010 – 11 stood at 4.72 crore folios, down from 4.82 crore in the FY 2009 – 10. Equity category that comprises ELSS and other equity oriented schemes lost 4.45% or 18.28 lakhs of folios to 3.92 crore during the year 2010 – 11. The categories –ELSS and other equity oriented schemes lost 1.77% and 5.15% of folios respectively. The number of folios for the equity schemes for the previous FY 2009 -10 stood at 4.11 crore folios.

Mutual Fund Yearly Report: FY 2010 - 11

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Equity - Diversified

Ultra Short Term

Arbitrage Funds

Equity - Infotech

Equity - Banking

Equity - Index

Equity - Infra

Liquid Funds

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Mutual Fund Yearly Report

contd…

On the other hand, Debt oriented categories observed an increase of 21.09% to 45.27 lakhs folios during the financial year due to the increased risk aversion on individual investors’ fraternity. Albeit the liquid category that was preferred for steady returns in wake of current uptrend in short term interest rates, lost most during the year i.e. 19% to 1.93 lakhs folios. Banks hiked rates of their Fixed Deposits (FD) to increase the deposit growth that resulted into redemption from from liquid funds. An increase in folios in the income schemes (excluding liquid and Gilt) during FY 2010 – 11 was about 8.37 lakhs to the total of 43 lakhs. There was a commendable increase on the folios of equity ETFs and gold ETFs of around 179% and 92% to 1.03 lakhs and 3.20 lakhs respectively. It showed the growing interest among investors on passively managed funds that replicate indices and other alternate asset classes. The factors such as profit booking at higher levels by investors who invested in 2007 – 08 period and were trapped due to a big drop in the markets, increased risk aversion in wake of high volatility in equity markets resulted into pulling out investments from equity and to invest in alternate asset classes like gold, silver and real estate, diminished interest among distributors’ front to sell mutual funds because of the low commission structure and consolidation of folios influenced and contributed to reduction in folio numbers. The ban on entry load by market regulator Securities and Exchange Board of India (SEBI) for all mutual fund schemes from August 1, 2009 has impacted distributors’ earnings to a large extent. The unwillingness of the distributors’ community to sell mutual fund products due to the huge difference between commissions that they earn by selling other financial products further subdued the inflows into mutual funds.

Mutual Fund Yearly Report: FY 2010 - 11

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Mutual Fund Yearly Report
Year On Year changes on MF investors’ folios:

contd…

VI. New Fund Offers (NFOs): Indian mutual fund companies collected Rs. 1,24,890 crore during the financial year 2001by launching 518 NFOs, out of which 451 funds were Fixed maturity plans (FMPs). The corpus that was collected from NFO FMPs was at Rs. 1,13,416 crore. There were 23 equity oriented NFOs that collected Rs. 3,299 crore during the year. New funds with special features: Fund of Funds that allow SIP investments in gold for individual investors were launched by Reliance and Kotak mutual funds (Reliance gold saving fund and Kotak gold fund). Mutual funds such as Peerless and Fidelity launched child plans. HDFC AMC came up with cancer cure plan in their mutual fund segment. Funds with quant based investment style like Canara Robeco Large Cap+, Motilal Oswal MOSt Shares NASDAQ-100 ETF, Motilal Oswal MOSt Shares Midcap 100 ETF and MOSt Shares M50 - MOS ETF were launched. Funds with objective of investing in overseas markets like JPMorgan Emerging Europe, Middle East & Africa Eq Off-shore and DWS Global Agribusiness Offshore were also launched. 7 index funds and 2 thematic funds that invest primarily on infrastructure sector were also launched during the financial year 2011.

Mutual Fund Yearly Report: FY 2010 - 11

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Mutual Fund Yearly Report
MF’s net investment in equity and debt:
300000 250000 200000 150000 100000 50000 0 -50000 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

contd…

Equity

Debt

Mutual funds were net sellers for the second consecutive year in the equity spectrum to the tune of Rs 17,703.90 crore during the financial year 2011 after being the net seller of Rs. 10,161.60 crore in the financial year 2010.The net outflow during the period was a result of gross purchases Rs 1,51,450 crore and gross sales Rs 1,68,695 crore. On the debt front, mutual funds were seen as net buyers over years. MF bought debt securities worth a net Rs. 2,37,981 crore during the financial year 2011. The net inflow during the month was a result of gross purchases Rs 7,37,783 crore and gross sales Rs 5,01,548 crore. VII. News: UK Sinha as the next chairman of SEBI: The government appointed UTI AMC's chief UK Sinha as the next chairman of the Securities and Exchange Board of India (Sebi). Mr. Sinha has taken charge on February 18, for tenure of three years. He is the sixth Sebi chairman since the regulator was set up through a law in 1992. He succeeded CB Bhave as the next Chairman of Sebi.

Mutual Fund Yearly Report: FY 2010 - 11

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FY 11

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Mutual Fund Yearly Report

contd…

Mr. Milind Barve has been elected as the Chairman of AMFI: Mr. Milind Barve, Managing Director of HDFC Mutual, has been elected as the Chairman of AMFI. He succeeds U K Sinha, who is now the Chairman of SEBI. AMFI said its board has also elected Sundeep Sikka, CEO of Reliance Mutual Fund, as the Vice-Chairman of the industry body till the next AGM. KYC is mandatory from 1st April, 2011: As of 1st April, 2011, KYC norms have become mandatory for all retail investors, irrespective of the amount investing. In the past, retail investors who had invested less than Rs 50,000 had not been required to follow KYC guidelines. It is mandatory for all investors, including NRIs and NonIndividuals, to be KYC compliant as of 1st, October 2010, even if the amount is Rs 1,000. KYC is an acronym for Know-Your-Customer, a term used for Customer Identification Process. KYC was first implemented in February, 2008, for all investors investing Rs 50,000 or more in Mutual funds in order to comply with the Prevention of Money Laundering Act of 2002. Change in name of Shinsei Mutual Fund to Daiwa Mutual fund: After its stake sale to Daiwa Asset Management Co. (DAM), Shinsei Mutual Fund's name has been changed to Daiwa Mutual Fund. Change in name of LIC mutual fund to LIC Nomura Mutual Fund: LIC Mutual Fund Trustee Company Private Limited and LIC Mutual Fund Asset Management Company Limited (LIC MF) have entered into a joint venture with Nomura Asset Management Company Ltd to launch LIC Nomura Mutual Fund. Nomura has acquired 35 per cent of the fully paid-up equity share capital of both LIC Mutual Fund AMC and the Trustee Company. SEBI plans to introduce new regulations for MF sales: Capital Market regulator is planning to introduce a set of regulations to keep a check on the mis-selling of mutual fund schemes by the distributors. Taking the first step towards forming these regulations, the Securities and Exchange Board of India (Sebi) sent a note to all asset management companies (AMCs) last month, asking them to ensure that their distributors follow certain due diligence while selling MF schemes.

Mutual Fund Yearly Report: FY 2010 - 11

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Mutual Fund Yearly Report

contd…

Union Budget 2011-12 allowed foreign fund investment in mutual funds: Finance Minister Pranab Mukherjee, while presenting the Union Budget 2011-12, has allowed fund houses to tap foreign nationals for investing in equity schemes. The move is expected to lead to a lot of mid-sized foreign funds and wealthy individuals looking at the Indian equity market more seriously. Prior to this move, foreign investors needed to first register with the Securities and Exchange Board of India (Sebi) before investing in the domestic equity markets. As a result, midsized and smaller funds which did not have a significant India allocation chose alternative investment avenues, including offshore funds and participatory notes (PNs).

Analyst: Dhuraivel Gunasekaran.

(Database sources: SEBI, AMFI, NAVIndia, Ace MF & Newspaper reports)

HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435 Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional Clients

Mutual Fund Yearly Report: FY 2010 - 11

Retail Research

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