CRISIL FUND INSIGHTS

Monthly funds newsletter from CRISIL Research

Volume – 47 March 2015

Build a nest egg with NPS, and save more tax

The buzz around the National Pension System (NPS) has increased manifold since the presentation of the Union Budget last month.

The additional tax benefit accorded to the decade-old retirement planning product has added to its attractiveness for investors.

Improving life expectancy, rising living costs and transition away from joint-family structure all make it imperative to build a retirement

corpus that can see one through the sunset years. In a country without an adequate social security net, therefore, retirement products

such as NPS become that much more indispensable.

What is NPS?

NPS is a contribution-based retirement saving scheme managed by professional fund managers that invests the corpus based on an individual’s perceived risk-return

profile (life-cycle investing approach) and provides benefits of hassle-free asset allocation, flexibility and tax efficiency. The scheme offers two types of accounts - Tier I

and Tier II. The Tier I account is eligible for tax benefits, whereas the Tier II savings account is optional. The minimum monthly contribution for Tier I account is Rs 500 and

the minimum yearly contribution Rs 6,000.

How NPS helps in lifecycle investing

The lifecycle investing approach follows the asset allocation model. It is based on the premise that investments in different asset classes should be made based on risk

profiles since an investor’s investment needs and risk-taking ability change as she or he goes through various life stages. NPS allows investors to replicate this concept.

For investment purposes, the system provides investors the flexibility to invest in a mix of three asset classes - E (equity fund), C (corporate bond fund) and G (government

securities fund). The scheme also offers flexibility with two investment choices based on the investor’s wherewithal:

Active choice individual fund: Investors aware of their risk-return objectives can choose the active option, which offers flexibility to decide asset allocation

between the three asset classes (E, C and G). However, with a view to reduce downside risk, the maximum exposure to equities is restricted to 50% of the total corpus.

Auto choice lifecycle fund: This is suitable for investors who are not well-versed with asset allocation and how to change it dynamically in sync with risk-return objectives.

It is a default option and acts as a lifecycle fund wherein the asset allocation is linked to the age of the investor and changes over the life span in a pre-determined manner.

At the lowest entry age (18 years), asset allocation would be most aggressive with 50% in E, 30% in C and 20% in G until the age of 35. The ratio of investments in E and

C decreases annually while proportion of G increases with age. At 55 years, allocation will be most conservative - G will account for 80%, while E & C will fall to 10% each.

Performance snapshot

The asset classes available for investment under NPS have managed to outperform or mirror

market returns since its inception. Table 1 provides a snapshot of their performance.

NPS vs traditional instruments

For a case study, we compared the auto choice investment option of NPS with traditional

products (FDs), based on historical returns of various asset classes. And what did we find? An

investment of Rs 16,667 every month (Rs 2 lakh per annum in total to avail maximum tax rebate)

in the NPS fund was able to generate a corpus of Rs 3.7 cr in 30 years - over Rs 1.3 cr higher

than the corpus built through traditional investments. The primary push for investment in NPS was

from the higher allocation to class E at a younger age.

Tax benefits1

NPS also helps save tax. The Union Budget granted exclusive tax

benefit to the plan. Now, in addition to the Rs 1.5 lakh exemption

allowed under Section 80CCE (which comes under the broader section of 80C) for investments in NPS, one can get a deduction under 80CCD (1B) of Rs 50,000 for

investment in NPS alone. This additional exemption enables saving Rs 5,150, Rs 10,300 or Rs 15,450 (including cess), depending on the tax bracket he is in (10%, 20%

or 30%, respectively). Further, salaried individuals can avail tax deduction under Section 80CCD (2) in addition to the Rs 2 lakh investment limit explained above if their

employers contribute to NPS. Investments under this section are, however, restricted to 10% of the basic salary plus dearness allowance.

Summing up

To be able to enjoy financial independence post-retirement, it is imperative that one works to a targeted savings and investment plan that can build a wholesome corpus.

NPS offers one of the best platforms for retirement planning with the benefits of life-cycle investing, flexibility, low cost, professional management and tax-efficiency.

1 Growth rate assumptions based on: 20-year average daily rolling returns of S&P BSE Sensex since July 1979 for equity; 10-year average daily rolling returns of CRISIL AAA Long Term Bond Index since

inception (April 2002) for corporate bonds; 10-year average daily rolling returns of CRISIL Gilt Index since inception (January 1997) for government securities; Average of term deposit interest rates (5 years &

above maturity) since 2000-01 for fixed deposits (Source: RBI)

Investment

thoughts

Table 1: Performance of NPS schemes

Scheme/ benchmark Since inception

returns (%)

Inception

date

Scheme E – Tier I* 13.66 1-May-09

CNX Nifty Index 16.54

Scheme C – Tier I* 10.66 1-May-09

NPS - Corporate Bond Index^ 8.90

Scheme G– Tier I* 9.08 1-May-09

NPS – Government Securities Index^ 6.67

Other NPS schemes

Scheme CG 10.37 1-Apr-08

NPS – Government Pattern Index^ 9.41

Scheme SG 10.26 25-Jun-09

NPS – Government Pattern Index^ 8.89

Scheme NPS Lite* 11.78 4-Oct-10

NPS – Government Pattern Index^ 9.03

Scheme Corporate CG 11.56 5-Nov-12

NPS – Government Pattern Index^ 11.24

Annualised returns as on December 31, 2014

* Returns calculated by creating equal weighted index based on underlying schemes

^ Customised benchmarks created by CRISIL for performance comparison of NPS

schemes

Launch date of first fund under respective category is considered as the inception

date for that category

Case Study: Growth of monthly investment of Rs 16,667 in NPS vs FDs

Age

Total NPS Asset allocation (%) NPS FDs

Asset

allocation (%)

FDs

Contribution

(Rs) Class E Class C Class G

Total

(Rs)

Total

(Rs)

30 years 16,667 50% 30% 20% 16,667 100% 16,667

35 years 1,000,000 50% 30% 20% 1,362,492 100% 1,223,566

40 years 2,000,000 40% 25% 35% 3,650,567 100% 3,021,387

45 years 3,000,000 30% 20% 50% 7,400,526 100% 5,662,975

50 years 4,000,000 20% 15% 65% 13,347,293 100% 9,544,334

55 years 5,000,000 10% 10% 80% 22,510,963 100% 15,247,324

60 years 6,000,000 10% 10% 80% 36,681,634 100% 23,626,887

Asset allocation is per auto choice lifecycle fund

Calculation made assuming 15%, 8% and 9% annualised growth for class E, C and G, respectively and 8% for FDs1

Fund News

Yes Bank said it will enter the mutual fund business next fiscal through either the organic or inorganic route.

Reliance Capital Asset Management (RCAM) completed the regulatory clearance process for the sale of an additional stake to Japan’s Nippon Life; Nippon Life hiked its stake in RCAM to 35% by acquiring an additional 9% stake for Rs 657 cr.

CRISIL FUND INSIGHTS

■ Indian equity indices stayed in the positive territory in February. The key benchmarks CNX Nifty and S&P BSE

Sensex rose 1.06% and 0.61%, respectively, albeit lower than 6.35% and 6.12% in January.

■ The gains were owing to several positive domestic cues including the key economic events (Union Budget and

Economic Survey) and positive GDP growth estimate (due to change in the methodology for calculating

domestic growth).

■ The market rose after the government announced several measures such as increased spending on the

country's infrastructure, deferral of General Anti Avoidance Rule (GAAR) by two years, proposed cut in

corporate tax to 25% from 30% over four years and implementation of the Goods and Service Tax (GST) from

April 2016.

■ Positive signs from India's Economic Survey including growth rate of 8.1-8.5% in FY16 on new GDP

calculation formula and medium-term fiscal deficit target of 3% of GDP also augured well for the market.

■ Among positive global cues, news of ceasefire agreement in Ukraine and optimism about Greece's debt deal

aided market gains. Investors also cheered the dovish tone of the US Federal Reserve Chief Janet Yellen after

she said that the US central bank would be patient about raising interest rates.

■ Further gains were capped due to discouraging quarterly earnings from some of the index heavyweights. Weak global cues such as disappointing Chinese trade data, Greece

debt deal uncertainty and worries about an earlier-than-expected interest rate hike in the US also pulled down the market.

■ CNX indices recorded a mixed performance in February. CNX IT index was the top gainer - up 7.06% on defensive buying and strong earnings and upbeat guidance from

Cognizant Technology Solutions.

■ CNX Metal index rose 3.45% after some companies won mines in the ongoing coal blocks auction.

■ CNX Media Index was the top laggard in the month falling 5.34% followed by CNX PSU Bank index - down 4.67%.

Market – Overview

Category returns Absolute Monthly Returns%

Feb-2015 Jan-2015

CRISIL – AMFI Large Cap Fund Performance Index -0.22 3.22

CRISIL – AMFI Diversified Equity Fund Performance Index -0.24 2.78

CRISIL – AMFI Small & Midcap Fund Performance Index 0.42 3.04

CRISIL – AMFI ELSS Fund Performance Index 0.25 3.36

CRISIL – AMFI Balance Fund Performance Index -0.09 2.30

CRISIL – AMFI MIP Fund Performance Index -0.09 1.91

CRISIL – AMFI Gilt Fund Performance Index 0.41 1.98

CRISIL – AMFI Debt Fund Performance Index 0.40 1.27

CRISIL – AMFI Short Term Debt Fund Performance Index 0.43 0.91

CRISIL – AMFI Ultra Short Fund Performance Index 0.58 0.56

CRISIL – AMFI Liquid Fund Performance Index 0.64 0.51

Gold Funds (ETFs and FoFs) -4.52 3.04

Top Stock Exposures – February 2015 Top Sector Exposures – February 2015

1. HDFC Bank Ltd. 1. Banks

2. ICICI Bank Ltd. 2. Computers - Software

3. Infosys Ltd. 3. Pharmaceuticals

4. State Bank Of India 4. Refineries/Marketing

5. Larsen & Toubro Ltd. 5. Cement

6. Axis Bank Ltd. 6. Engineering

7. Maruti Suzuki India Ltd. 7. Commercial Vehicles

8. Reliance Industries Ltd. 8. Passenger/Utility Vehicles

9. Tata Consultancy Services Ltd. 9. Power Equipment

10. ITC Ltd. 10. NBFC

Note: The month-end portfolios as of February 2015 have been considered for the report.

New Stocks Entries and Exits in Mutual Fund Portfolios – February 2015

Entries Exits

Mold-Tek Packaging Ltd.

Maestros Electronics and Telecommunication Systems

Ltd.

Take Solutions Ltd. Man Industries (India) Ltd.

Shivam Autotech Ltd. Samkrg Pistons & Rings Ltd.

Ashiana Housing Ltd. Suncity Synthetics Ltd.

AXISCADES Engineering Technologies Ltd.

Mahanagar Telephone Nigam Ltd.

BF Investment Ltd.

Hester Biosciences Ltd.

Triton Valves Ltd.

■ The Indian mutual fund industry's assets under management (AUM) rose 1.76% or

by Rs 20,840 cr to Rs 12.02 lakh cr in February 2015, according to the monthly

numbers released by the Association of Mutual Funds in India (AMFI).

■ This is the first time the industry's assets have crossed the Rs 12 lakh cr mark.

Gains were led by inflows into equity, balanced, gilt and liquid funds.

■ Positive sentiment for the underlying asset class helped equity funds attract net

inflows (Rs 5,840 cr) for the tenth consecutive month in February. The category's

assets rose 1.41% to close at a record high of Rs 3.46 lakh cr.

■ Balanced funds also continued to benefit from the upbeat sentiment in the equity

market and attracted net inflows for the ninth consecutive month. The category's

AUM was up by Rs 715 cr to Rs 26,507 cr - its record high asset tally.

■ Hopes of easing interest rates by the Reserve Bank of India (RBI) pushed gilt funds

to touch a new peak of Rs 13,180 cr in February. AUM increased 19% or by Rs

2,105 cr primarily due to inflows of Rs 2,058 cr (sixth consecutive rise) in the month.

While the RBI did not cut its interest rate in the scheduled policy review meet in the

first week of February, it cut the repo rate under the liquidity adjustment facility (LAF)

by 25 bps to 7.50% on March 4, 2015. This is the second time the central bank has

surprised the market in the current year with an in-between policy review cut; it had

cut the repo rate by 25 bps in January too.

■ Liquid/ money market funds reported net inflows of Rs 8,784 cr, giving a boost to the

total industry assets. Inflows into the category are a part of the cyclical inflows which

occur in the first two months of the quarter (January-February) before being

withdrawn for quarter-end requirements (to pay corporate advance tax) in the last

month of the quarter (March). The category's AUM rose 4.04% or by Rs 10,712 cr to

Rs 2.76 lakh cr.

■ Income funds' assets rose to a new high of Rs 5.22 lakh cr, up 0.41% or Rs 2,132

cr, due to mark-to-market (MTM) gains in the underlying assets. Open-ended and

interval schemes posted net inflows of Rs 8,486 cr and Rs 164 cr, respectively,

while closed-ended schemes posted net outflows of Rs 8,802 cr, resulting in net

marginal outflows of Rs 152 cr for the category.

■ On the regulatory front, SEBI plans to tighten its grip on mutual funds; it may cap

upfront commission to distributors.

■ AMFI has sent a proposal to all fund houses to cap the upfront commission at 1%.

■ AMFI has approached the SEBI to simplify the current MF advertising norms.

-130,000

-78,000

-26,000

26,000

78,000

130,000

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8.8

9.5

10.3

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11.8

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Net flows (RHS) Industry AUM

Market - Overview

Indices

February

28,2015

January

30, 2015

Absolute

Change

%

Change

CNX Nifty 8901.85 8808.90 92.95 1.06

S&P BSE Sensex 29361.50 29182.95 178.55 0.61

Indicators February 27, 2015 January 30, 2015

10 year Gsec 7.72% 7.69%

Monthly CPI Inflation 5.37% 5.19%

CRISIL Fund Rank 1 Schemes - Hybrid

Mutual Funds' Performance Report

Scheme Name

Point to Point Returns %

Inception

Date

Average

AUM

(Rs.Crore)

Style

Box

Std.

Deviation

(%)

Sharpe

Ratio

1

Month

3

Month

6

Month

1

Year

3

Years

Since

Inception

Balanced

HDFC Balanced Fund -1.41 5.24 14.65 52.63 23.90 17.89 11-Sep-00 2658.93

12.27 1.92

Tata Balanced Fund - Plan A 2.40 10.59 22.12 62.08 27.30 16.16 5-Jan-96 1437.90

13.15 2.15

MIP Aggressive

Birla Sun Life MIP II - Wealth 25 Plan 0.14 5.37 14.58 31.18 16.11 10.44 22-May-04 353.26

6.26 2.22

ICICI Prudential MIP 25 - Regular Plan -0.23 4.69 11.15 26.45 13.91 10.70 30-Mar-04 905.82

6.03 1.82

CRISIL Mutual Fund Ranks as of December 2014

Point to Point Returns are as on February 27, 2015

Returns are annualised for periods above 1-year, otherwise actualised

Risk Ratios are annualised; period for risk ratios is three years; risk free rate:

8.56% (average T-bill auction cut off rate during the period)

Average AUM is 3-months average number as disclosed by AMFI for the period

October-December 2014

Style Box Legend

Value Blend Growth

Large

Small & Midcap

Diversified

CREDIT QUALITY

High Medium Low

High INTEREST

RATE

SENSITIVITY

Medium

Low

(FOR MIP AGGRESSIVE SCHEMES)

Average Assets under Management - A Bird's Eye View

Mutual Fund Name

Oct - Dec

2014

(Rs.Crore)

Jul - Sep

2014

(Rs.Crore)

Change

(Rs.Crore)

%

Change

Mutual Fund Name

Oct - Dec

2014

(Rs.Crore)

Jul - Sep

2014

(Rs.Crore)

Change

(Rs.Crore)

%

Change

HDFC Mutual Fund 150468 141481 8987 6.35

PRINCIPAL Mutual Fund 4926 4754 172 3.62

ICICI Prudential Mutual Fund 136763 127664 9100 7.13

Taurus Mutual Fund 4082 4411 -328 -7.45

Reliance Mutual Fund 126069 122068 4001 3.28

BNP Paribas Mutual Fund 3697 3921 -224 -5.72

Birla Sun Life Mutual Fund 107968 102616 5352 5.22

Indiabulls Mutual Fund 3087 2905 182 6.26

UTI Mutual Fund 87390 83250 4140 4.97

BOI AXA Mutual Fund 3021 2519 502 19.94

SBI Mutual Fund 72141 72850 -709 -0.97

Union KBC Mutual Fund 2873 3192 -319 -10.00

Franklin Templeton Mutual Fund 63643 55611 8032 14.44

Pramerica Mutual Fund 1972 2060 -88 -4.30

IDFC Mutual Fund 47920 45738 2182 4.77

Mirae Asset Mutual Fund 1527 1245 282 22.66

Kotak Mahindra Mutual Fund 38796 37445 1351 3.61

Peerless Mutual Fund 1515 2494 -979 -39.27

DSP BlackRock Mutual Fund 37532 37483 49 0.13

Motilal Oswal Mutual Fund 1461 1048 413 39.45

Tata Mutual Fund 24251 24544 -293 -1.19

IL&FS Mutual Fund (IDF) 813 792 21 2.67

Axis Mutual Fund 24115 22508 1606 7.14

PineBridge Mutual Fund 589 666 -77 -11.53

Deutsche Mutual Fund 22670 22508 163 0.72

Edelweiss Mutual Fund 588 380 208 54.76

L&T Mutual Fund 21336 20673 663 3.21

Quantum Mutual Fund 545 490 55 11.28

Religare Invesco Mutual Fund 19832 17647 2184 12.38

PPFAS Mutual Fund 516 479 37 7.65

Sundaram Mutual Fund 19564 18944 621 3.28

IIFCL Mutual Fund (IDF) 320 314 6 2.07

JM Financial Mutual Fund 14240 11976 2264 18.90

IIFL Mutual Fund 280 202 78 38.77

JPMorgan Mutual Fund 14124 15380 -1256 -8.17

Escorts Mutual Fund 255 253 2 0.93

HSBC Mutual Fund 9101 8878 224 2.52

Sahara Mutual Fund 148 148 -1 -0.42

Baroda Pioneer Mutual Fund 7793 7101 692 9.74

Shriram Mutual Fund 32 29 2 8.31

LIC NOMURA Mutual Fund 7618 8158 -540 -6.62

Grand Total 1106279 1059738 46541 4.39

Canara Robeco Mutual Fund 7065 8785 -1720 -19.58

AAUM is the quarterly average number and excludes Fund of Funds Data

sorted on latest average AUM numbers Goldman Sachs Mutual Fund 6832 6498 334 5.14

IDBI Mutual Fund 6802 7097 -295 -4.16

Fund Focus

Birla Sun Life MIP II - Wealth 25 Plan (CRISIL FUND RANK 1)

Birla Sun Life MIP II - Wealth 25 Plan, launched in May 2004, has

average assets under management (AUM) of Rs 353 cr as of

October-December 2014. The fund is hybrid in nature with

predominant investments in debt designed to provide income to

investors in the form of dividends at a regular frequency. It has

been ranked CRISIL Fund Rank 1 (top 10 percentile of the peer

set) for two consecutive quarters - September and December

2014.

Investment Style

Monthly Income Plans (MIPs) are debt-oriented hybrid funds with a

portion of AUM invested in equity and the rest in debt and money

market instruments. They vary allocation between equity and debt

based on the fund managers’ views on equity and interest rates.

The risk profile of the fund falls between that of a pure debt fund

and a balanced fund (greater than 50% allocation to equity). This is

beneficial to investors looking for a small equity exposure but with

stable monthly returns. The higher debt component seeks to

provide the necessary stability in returns. Over five years, the fund

has distributed dividends in almost all the 60 months, indicating

consistency in terms of regular dividend payouts. The average

dividend yield of the fund over this period is 0.48%.

Performance

The fund has given CAGR (compounded annual growth rate)

returns of 10.4% since its inception. The performance over the last

one year has been notable with 29.1% returns vis-à-vis 17.4%

returns by the benchmark index (CRISIL MIP Blended Fund Index)

and 21.2% returns by its peers (MIP Aggressive Funds as per

CRISIL ranking – December 2014). In the long-term period of 10

years, the fund returned 10.3% vis-à-vis 8.4% by the benchmark

index and nearly 10% by peers (Chart 1).

Chart 1: Performance as on March 13, 2015

An investment of Rs 1,000 in the fund since inception (May 22,

2004) would have grown to Rs 2,921 on March 13, 2015. The

same amount invested in the peer group would have returned Rs

2,804 and in the benchmark Rs 2,346. This depicts the fund’s

growth over the long term.

Portfolio Analysis

The scheme had an average equity exposure of about 29% over

the past three years ended February 2015, the highest among its

peers (averaged 21% during the period). On the asset quality front,

the fund has maintained an average 72% of its total debt holdings

in top rated papers (AAA and P1+) and government securities. The

modified duration of the debt portfolio is nearly four years for the

three-year period ended February 2015.

Fund Manager Satyabrata Mohanty, a CA and CFA, has over 15 years of

experience in finance and research. Kaustubh Gupta, a B.Com

graduate and a CA, has over eight years of experience.

Every month, Fund Focus will feature one of the

CRISIL Mutual Fund Rank 1 or 2 Schemes

0

10

20

30

40

1 Year 3 Years 5 Years 7 Years 10 Years

An

nu

ali

ze

d R

etu

rns

(%

)

(Period)

Birla Sun Life MIP II - Wealth 25 Plan

Crisil MIP Blended Fund Index

MIP Aggressive funds

Union Budget - Scheme merger made tax neutral

Chart 1: Pre- and post-budget scenario of tax neutrality for scheme mergers

The Union Budget 2015-16 was a mixed bag for the mutual fund industry with

some positives and negatives. One of biggest positive for the industry was to

make the merger of schemes non-taxable for unit holders. However, on one

condition that the consolidation should be of two or more schemes of an

equity-oriented fund or two or more schemes of a fund other than equity-

oriented fund. As per the new regulation, the merger will not be regarded as

transfer and, hence, it will not lead to capital gains for the underlying investor.

For instance, in the earlier regime if an investor had invested in an equity-

oriented scheme, say, towards the end of 2014 and in 2015 the scheme was

merged; since the investment duration is less than one year, the short-term

gains made by the scheme would be applicable to the investor, which would

be subject to tax of 16.995% (applicable for equity-oriented schemes). Thus,

even though there was no sale of units, investor still had a tax liability.

However, under the new regime, the investor need not pay any tax in the event

of a merger. The investor will be liable to pay tax only while selling the merged

entity units on the basis of the holding period and not at the time of the merger.

This measure will help mutual funds to consolidate similar types of schemes

which, in turn, would meet the long-term aim of the regulator to reduce

duplication and confusion in investments.

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Last updated: August 2014

Contact Details

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Anjali Nataraj: +91 22 3342 8047; anjali.nataraj@crisil.com

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Investor invested money in scheme A and the same was merged with scheme B. Tax

implications

Pre-Budget

Investor’s units were

transferred from Scheme A

to Scheme B. The transfer

was considered as sale and

the gains made were

treated as capital gains for

the investor. Investor were

liable to pay capital gains

tax* based on the holding

period and the type of

scheme

Post-Budget

There will be no incidence

of capital gains for the

investor in case of merger

of Scheme A with Scheme

B. Investor doesn’t pay any

tax during merger. The sale

of merged entity units will

attract tax on the basis of

the holding period

*Equity-oriented funds

Long-term capital gains tax is nil for investments with holding period > one year

Short-term capital gains tax is 16.995% for holding period < one year

*Debt-oriented funds

Long-term capital gains tax for holding period > three years is 22.66% with

indexation

Short-term capital gains tax for investments < three years is taxed as per

individual income tax slabs of 10%, 20% and 30% respectively