March 2011  


Dear Investor,

We are pleased to present “NRI Espresso”, a handy newsletter just for our esteemed NRI investors for the month of March 2011. It is our constant endeavour to serve your growing information, investment and servicing needs and the newsletter is created just for this purpose. This newsletter will be a collection of relevant articles of special interest to you. These include latest news, events, regulatory changes, and information on product offerings. 'NRI Corner', an exclusive section has also been created on our website for your mutual fund information and investment needs.


1. Economy News

Capital inflows likely to touch $64 b this fiscal
Capital flows into India are likely to touch $64 billion in the current fiscal, much higher than the $40-billion that the country received in the previous fiscal, Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, has said. Given the expected capital inflows, financing of current account deficit (CAD) will not be a problem, Dr Rangarajan said at the spring meeting of the Institute of International Finance (IIF).

Core sector output rises 7.1% in Jan
The output of the country’s six core infrastructure industries grew 7.1 per cent in January, on the back of healthy production of crude oil, petroleum refinery products and electricity. The six core sectors — crude oil, petroleum refinery products, coal, electricity, cement and finished steel — had expanded by 9.8 per cent in the same month last year. In December 2010, the output of these infrastructure industries rose by 6.1 per cent. The six core industries account for 26.68 per cent of the country’s total industrial output. Petroleum refinery and crude oil output grew by 8.7 per cent and 10.8 per cent respectively in January, up from 3.8 per cent and 9.8 per cent in the same period last year, a statement released by the Ministry of Commerce and Industry showed.

FIIs allowed to invest $20 b more in bonds of infrastructure cos
In keeping with its thrust on infrastructure development and also deepening the corporate debt market, the Centre has hiked the foreign institutional investors (FII) investment limit in corporate bonds to $40 billion. It represents an increase of $20 billion over the earlier limit of $20 billion under this window. The additional limit of $20 billion will be available to FIIs only for investments in corporate bonds issued by companies in the infrastructure sector, the Finance Minister, Mr. Pranab Mukherjee, said in his Budget speech.

Economy grows 8.2% in Q3 on good agri show
Indian economy expanded 8.2% in the third quarter of the current financial year on the back of robust growth in agriculture and services sectors. The growth number was in line with expectations, but lower than 8.9% growth recorded in the previous two quarters, government data showed. Farm output grew 8.9% over the year-ago period, boosted by strong monsoon rains, while the manufacturing sector experienced a slowdown at 5.6%. The decline in investments, which grew 5.99% in the quarter compared with 17.84% in the previous quarter, remained a concern.

2. Mutual Fund & NRI News

Regulatory Developments – Indian Mutual Fund

• SEBI proposed a new reporting system for mutual funds based on Extensible Business Reporting Language (XBRL) technology - a globally accepted standardised business reporting tool that enables easy dissection of bulk documents without delay.

• SEBI also issued a draft structure of the proposed XBRL system for all the regulatory filings to be made by mutual funds.

• AMFI extended the deadline for completing know- your-distributor formalities by a month to April 1.

• In the Union Budget 2011, government announced that SEBI-registered mutual funds will be allowed to accept subscriptions from foreign investors who meet the Know Your Client (KYC) requirements for equity schemes.

• The Budget also announced that money market and debt funds will now have to pay a dividend distribution tax of 30% (similar to bank fixed deposits) for investments made by firms instead of 25% earlier, but will stay unchanged at 12% for individual investors.

Financial Market

• RBI data showed that inflows through various NRI deposit schemes plunged 34% in April-December 2010 to $2.3 bn from $3.5 bn a year earlier. FCNR (B) deposits slumped to $843 mn in April-December 2010, from $1.5 bn a year earlier while NRE (RA) had outflows worth $54 mn compared with inflows worth $329 mn in the year-ago period.

• RBI said that non-resident Indians (NRIs) would not be eligible for incentives on interest on home loans of up to Rs 10 lakh.

• SBI raised interest rates on Foreign Currency Non Residential (FCNR) deposits held in sterling pound, euro and yen by up to 46 basis points with effect from February 1, 2011.

3. Market Overview

The markets were in a depressing mood at the beginning of the month of February due to concerns about macro economy, and political situation. Events in Middle-east and North Arica (MENA) leading to sharp spurt in prices of crude oil added to negative sentiments. The centre of conflict, Libya accounts for just 2% of the crude oil production, however, markets are worried about the contagion effect. High crude oil prices increases the pressure on inflation and current account deficit as India imports bulk of the crude oil requirement. It also adds to fiscal burden given the administered prices of retail fuel products.

Governance deficit and declining moral standards have been the topics of intense debate over the last few months as a series of scams and scandals got unearthed. In fact, media uproar, public outcry, role played by institutions like Supreme court have at least led to rolling of some heads this time and could act as restraint for people indulging in such practices in future. While these events have led to a halt in executive functioning and could hamper the pace of reforms for some time, we believe that it would ultimately lead to better transparency and improved governance standards in future. The Right to Information Act (RTI) was one of the big legislative reform that is manifesting itself in improving transparency standards. If one analyses results of the state government elections over the last few years, it is quite visible that governments which focused on growth and better governance have got re-elected. This gives us a reason to be optimistic about growing maturity of our democracy leading to better quality polity and good governance in times to come.

The Finance minister presented the union budget on February 28 amidst a situation of political gridlock and macro backdrop of high inflation, current account deficit and fears of slowing growth momentum. The approach of budget could be termed as incremental and growth-oriented. Budget deficit for fiscal year 2011-12 at 4.6% of GDP was lower than market expectations. The budget assumes a 14% nominal GDP growth and projects a 3.4% increase in expenditure and 18.5% growth in revenues. While revenue growth numbers look achievable, there could be risk of overshooting on the expenditure side particularly on the subsidy front. Despite higher food, fertilizers and crude oil prices, subsidy provisions for these three items for the next financial year are lower than the revised estimate for FY 2010-11. High nominal GDP growth leading to buoyant tax flows and higher receipts on account of auction of 3G telecom licenses led to fiscal deficit coming in at 5.1% of GDP compared to budgeted number of 5.5% of GDP for FY 2010-11. Finance minister re-iterated its commitment and indicated time lines for roll out of unified Goods and Service Tax (GST), Direct Taxes code (DTC), issuance of new bank licenses and move towards cash subsidies for kerosene, LPG and Fertilizers for poor section. While there were selective changes in custom and excise duties to bring them in line with proposed GST regime, services tax was kept at 10% with its scope getting widened by bringing more services into the tax net. The budget measures on taxation would be broadly neutral for most of the sectors barring few like cement and aviation which would have marginally negative impact. Auto and tobacco companies were beneficiaries as markets were expecting a hike in tax rates. The budget stayed away from any populist largesse and has taken incremental measures to boost investment into housing, infrastructure and social sector. Quantum increase in limit for FII investment in infrastructure bonds and allowing foreign investors to invest in domestic mutual funds are bold moves towards liberalizing the capital account. The budget measures would help in increasing the availability of finance for the infrastructure sector, however, the key issue is pace of execution which has lagged expectations. The finance minister took incremental measures to address the problem of food inflation, however, we believe the issue needs a far more innovative approach and urgent action from the government.

The markets typically show higher volatility around the budget time and this time was no exception. Foreign investors continued to remain net sellers in the market while there are signs of increased flows from the domestic investors. As the budget event is behind us, the market would now focus on cues from global markets and incremental economic data and corporate earnings. Given the backdrop of macro concerns, outlook on corporate earnings growth has weakened. Margins could be under pressure due to increase in raw material prices, wages and interest rates. Higher inflation, rising rates and tight liquidity could also impact discretionary spending. For these reasons, investors have preferred sectors and stocks with higher visibility of earnings like technology. While events in middle-east and domestic economy and political sphere could keep sentiments depressed for some time, we recommend investors to take advantage of volatility by gradually increasing exposure to equity markets as long term fundamentals remain intact and valuations are becoming attractive.

Given the inflation trajectory, we expect RBI to increase policy rates by 25 bps in its mid-term review of monetary policy this month. Incremental policy actions are unlikely to have much impact as RBI is behind the curve as reflected in bond yields and deposit and lending rates. G-sec yields eased towards the month end as budgeted government borrowing for next year came in at lower than market expectations and no additional borrowing was announced for the remainder of current financial year. The pressure on money market rates continued as the huge supply combined with tight liquidity resulted in funding costs moving up in the short term money markets. The 3 month bank CD rates moved up close to 60 bps over the month and traded at close to 10.10%, whereas the 1 year CDs traded at close to 10.20%. Investor sentiment in the money market remained cautious on account of tightness expected during the month of March on the back of Tax related outflows and quarter end redemptions in mutual funds. We expect the money market rates to peak out over the next few days and correct substantially as we move into April. Short term yields are at record highs and investors should take advantage by investing in accrual products like ultra short, short term funds and fixed maturity plans.

4. Fund Focus – Balanced Funds – A unique preposition of growth and safety

Balanced funds, also known as hybrid funds, invest both in equities and fixed income instruments and thus seek the best of both worlds. They are a good option for investors who want to benefit from investing in equity but at the same time seek safety of debt. These funds generally allocate 50-70% in equities and rest in debt instruments and thus provide investors with a single investment avenue that combines both growth and income objectives. The stock component of balanced funds would provide the capital appreciation while debt component would give investors the steady income.


Investing in Balanced Funds have multiple advantages mainly diversification, portfolio rebalancing and tax benefits.

1. Diversification- Portfolio diversification is required to reduce the systematic risk (market risk) and moderate the effects of individual asset class performance on portfolio value. For instance when the stocks are down the debt exposure will cushion the downside. Investors should look at a diversification at the asset class level i.e. allocation between equity and debt. Balance funds provide these attributes as they invest across equity and debt with a higher proportion towards equity.

2. Rebalancing- After deciding the asset allocation as per one’s risk profile, an investor is required to rebalance his portfolio periodically to align to this allocation. This could be tedious involving cost and tax implications. For example, one may hold equity funds and debt funds separately in different proportions. To rebalance, the investor may sell equity funds or debt funds. Equity funds will attract short-term capital-gains tax if sold within a year but no long term capital gains tax if held for more than a year. Debt funds will attract both short-term and long-term capital-gains tax. Funds will also charge an exit load on sale. These cost and tax implications may discourage investors from portfolio rebalancing.

A balanced fund could be the answer to these woes wherein the responsibility of asset allocation and portfolio rebalancing would shift to the fund manager. These funds continuously rebalance their portfolios to maintain the stated allocation. Market views on equity and debt are also taken into account. Accordingly, the allocation may hit the equity cap if the fund manager is bullish on the stock market. Thus operationally, an investor would have a portfolio of only one fund (balanced fund) instead of maintaining separate allocations in two funds (equity fund and debt fund).

3. Tax Implications- Most balanced funds in India have an average 65% exposure to equities which allows them to be taxed like equity funds (no long term capital gains tax and 15% short term capital gains tax). To avail these tax benefits, balanced funds should invest an average 65% in equities. For those funds where the average equity exposure drops below 65%, the tax treatment is similar to debt funds (income tax slabs to be used for short term capital gains tax and 10% or 20% long term capital gains tax with or without indexation respectively).

Performance of Balanced Funds
The performance of balanced funds are analysed for the period of February 2005 till February 2011. This includes a bullish as well as a bearish phase of the stock market. The equity funds are represented by the S&P CNX 500 index and the balanced funds are represented by the CRISIL BalanceEx index. The graph given below compares the returns given by these indices. In the bear phase (March 2008-March 2009), the S&P CNX 500 index plunged over 40% while the CRISIL BalanceEX retreated by 22%. The CRISIL BalanceEX has not only captured the uptrend in the stock market but has also cushioned the down fall in the bear phase. The average returns of the top 10 balanced funds were at negative 27% during the same period. In the market recovery phase, i.e., post March 2009, top 10 balanced funds returned an average 37% slightly lower than S&P CNX 500 index which has given 38% returns while CRISIL BalanceEX has given 24%.

Balanced funds are a good option for conservative investors as they combine the qualities of both equity and debt as an asset class and top the same with commensurate returns. Though the returns may not be as high as equity funds, balance funds provide a cushion through the debt investments. This should be noted by the investors when investing in balanced schemes. Further, at an asset allocation level, balanced funds have a “one size fits all” approach which may not interest investors who are looking at allocations based on individual risk profiles.

5. Feature Article – Dynamics of Wealth Management

Wealth management is a service provided by financial institutions to help individuals grow and protect their wealth, and is primarily targeted at High Net worth Individuals (HNIs) who have large amount of investible surplus.

It has emerged as an important business segment for those in the financial services space and is gaining prominence in India. Rising income levels, an upbeat economy, and rising stock markets have been some of the key factors behind the growth of wealth management in recent times.

A wide range of services are provided under wealth management based on the risk appetite and requirements of the client. They are enumerated below:-

• Investment planning - invests one’s money into various investment markets, keeping in mind the investment goals.

• Insurance planning - helps in selecting from various types of insurances depending on the income profile and other factors.

• Retirement planning –how much money would be required after retirement, and by investing where this could be achieved.

• Asset protection - helps to deal with aspects, such as volatility, inflation ] etc. so as to maintain the required lifestyle.

• Tax planning - helps in minimizing tax liabilities and allows the person to enjoy all tax exemptions so that his tax outgo is minimum.

• Estate planning - important in case of HNIs as it helps in protecting the person’s estate from creditors, lawsuits and taxes.

Products offered under wealth management generally include mutual funds schemes (under equity, debt, hybrid and money market category), stocks, PMS (Portfolio Management Services), derivatives, structured products, commodities (precious/ non-precious metals), foreign securities, insurance and unit linked insurance plans (ULIPs) besides alternate investment products such as real estate, art, venture capital and private equity. These products are classified into about 5 asset classes, viz., money market, bonds, hybrid, equity and alternate investments (scaled from low to high risk/ returns).

Once the investor’s risk appetite is decided, a model portfolio is constructed based on relevant allocations to the above 5 asset classes. An aggressive investor will have a higher allocation to high risk / high returns category, viz., equity and alternate investments while a conservative investor would have more allocation to money market funds or bonds.

The following instruments or avenues are used extensively by Wealth Management firms to meet client needs:-

Debt instruments
They provide stability and are an integral part of every portfolio. They provide liquidity and ensure a steady stream of income. They include debt based mutual funds, bank fixed deposits, government and corporate bonds, post office schemes, etc. The lower the risk profile, the higher is allocation to this component.

One can invest directly in equities or through equity mutual funds. They are a volatile asset class in the short term but deliver superior returns compared with other asset classes in the long run.

It is also important to mention that alternative asset classes which include investment in real estate, commodities (precious/ non-precious metals), art, foreign currencies, structured products, PMS, etc are also considered. They, however, suit those who are aggressive and are willing to take more risk.

Real Estate
This provides capital appreciation as well as an income stream through rentals. In India, a property can be purchased directly or investments can be done in realty portfolio management fund or in venture capital real estate funds. The more popular Real Estate Mutual Funds (REMFs) and Real Estate Investment Trusts (REITs) are yet to begin operations.

Precious Metals (Gold, Silver etc)
Adding gold / silver to a portfolio introduces an entirely different asset class. Gold / Silver are useful assets in times of economic instability and a traditional hedge against inflation. Portfolios that contain gold / silver are generally more robust and better able to cope with market uncertainties than those which do not. For gold, one can invest directly or through exchange traded funds (ETFs). Silver can be traded on commodity exchanges.

Other Alternate Assets
Indian HNIs have opened up to investments in structured products, PMS, and private equity. However, investment in Art, trading on overseas commodity bourses, etc has yet to catch up.

Summing up
An appropriate asset mix has to be established and it plays a key role in determining the portfolio's overall risk and return. A portfolio's asset mix should reflect one’s goals at any point in time. Investing across asset classes helps portfolio diversification as well as helps maximize returns given a certain risk profile and protects the investment corpus from any downside that may happen in a particular asset class. Investments in mutual funds is the most convenient for investing in various assets classes giving the benefit of professional management, transparency, quick liquidity and diversification.

Disclaimer: This Investment update is for information purpose only and is not an offer to sell or a solicitation to buy any mutual fund units/securities. These views alone are not sufficient and shouldn't be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions and estimates included in this schemes guide constitute our view as of this date and are subject to change without notice. Neither SBI Funds Management Private Limited, nor any person connected with it, accepts any liability arising from the use of this information. The recipient of this material should rely on their investigations and take their own professional advice.

Risk Factors:
Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objectives will be achieved. As with any other investment in securities, the NAV of the Magnums/Units issued under the scheme(s) may go up or down depending upon the various factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund/Scheme(s) and their affiliates do not indicate the future performance of the Scheme(s) of the Mutual Fund. The names of the scheme(s) do not, in any manner, indicate either the quality of the scheme(s) or their future prospects and returns. For scheme-specific risk factors please refer to the offer document of the scheme. Please read the offer document before investing. Investment Objective: Magnum InstaCash Fund - Cash and Dividend Plans - (An open-ended Liquid Fund) - To provide the investors an opportunity to earn returns through investment in debt & money market securities, while having the benefit of a very high degree of liquidity. Magnum InstaCash Fund is only the name of the scheme and does not in any manner indicate the quality of the scheme, its future prospects and returns. Statutory details: SBI Mutual Fund has been set up as a trust under the Indian Trusts Act, 1882. State Bank of India ('SBI'), the sponsor is not responsible or liable for any loss resulting from the operation of the schemes beyond the initial contribution made by it of an amount of Rs. 5 lakhs towards setting up of the mutual fund. Asset Management Company: SBI Funds Management Private Limited (A joint venture between SBI and Société Générale Asset Management) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company: SBI Mutual Fund Trustee Company Pvt. Ltd. Mutual Fund investments are subject to market risks. Please read the Offer Document carefully before investing.