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Mutual Fund Roundup: August 2011

Mutual Fund Roundup: August 2011

Market Overview

The downward bias displayed by the Indian equity markets (BSE Sensex), accentuated in the month of August 2011, as the BSE Sensex corrected by good -11.5%. The Indian equity markets seemed to be under a blanket of nervous sentiments led by the under-mentioned downbeat economic factors:

  • WPI inflation remaining sticky (9.22% in July 2011 - data released in August 2011) and over the comfort zone of Reserve Bank of India (RBI)
  • Fear of a recession gripping in the Euro zone area as economic growth rate dwindled (to mere % 0.20 in the last quarter (April 2011 - June 2011) and unemployment rate accelerated in the double-digit terrain (at 10% in July 2011)
  • Debt-overhang situation in the Euro zone led by Greece’s failure to put its public finances in place (in last week of July 2011, Standard & Poor downgraded Greece ratings by two notches to CC, with a negative outlook)
  • Downgrade of the U.S. sovereign credit rating to ‘AA+’ with a negative outlook (from the prime credit rating of ‘AAA’ earlier enjoyed), thus reflecting edgy economic recovery in the U.S.
  • Central banks in EMEs (Emerging market economies) adopting anti-inflationary monetary policy stance to combat rising cost of living (thereby dampening the consumption theme)

Even though the Index of Industrial Production (IIP) did surge to 8.8% in June 2011 (data released in August 2011) from the 5.5% plus mark registered in April and May (due to a 10% growth in manufacturing activity and 37% in capital goods); it did not enthuse the Indian equity markets as bulls were more watchful of the downbeat global economic factors. Moreover the political scene painted by Mr. Anna Hazare’s anti-corruption campaign which rocked the North Block (as the opposition too took this as an opportunity to tarnish the image of the Government in power), also infused a nervous sentiment into the Indian equity market. But later (during the last week on August 2011) when the Government in power agreed on Mr. Anna Hazare’s demands on the Jan Lokpal Bill, the Indian equity markets experienced a relief rally. Also in the U.S., Mr. Ben Bernanke’s speech at the Federal Reserve’s gathering in Jackson Hole, encouraged the Indian equity markets upsurge in the last couple of days of August 2011 as he expressed that interest rates will be kept low until March 2013, and QE3 chances will be evaluated taking into account the economic dynamics going forward.

But assessing the uncertain global economic environment as well as domestic political scenario, investors preferred to take refuge under the precious yellow metal - gold, and thus it accelerated its up-move by gaining 22.1%. Stockist too piled up their inventories ahead of festive season, and ascertaining the fact the investors are opting for gold due to its trait of being a safe haven during uncertain times and for hedging against further chances of it being bold during festive times.

As far as Brent crude oil prices is concerned, while they did witness and up-move in August 2011, the movement wasn’t accentuated (rose only by 0.6% to 113) much as seen in July 2011 (where they surged by 4.2%); since inventories piled up due to faltering demand from the U.S. - world’s largest consumer of oil.

For the bonds markets, while inflation for July 2011 (released in August 2011) did drop marginally to 9.22% (from 9.44% in June 2011), the yields for both the short-term as well as the long-term debt papers almost remained at the same level as seen in July 2011. 1-month and 3 month CDs stood at 8.75% and 9.15% respectively, while 7.80% 10-year G-sec yield stood at 8.33%.

Monthly Market Roundup

  As on Aug 31, 2011 As on July 31, 2011 Change % Change
BSE Sensex 16,676.8 18,845.9 (2,169.1) -11.5% 
S&P CNX Nifty 5,001.0 5,647.4 (646.4) -11.4% 
CNX Midcap 7,294.8 7,971.5 (676.8) -8.5% 
Gold (/10 gram) 26,815.0 21,965.0 4,850.0 22.1% 
Re/US $ 46.1 44.7 (1.4) -3.1% 
Crude Oil ($/BBL) 113.1 112.4 0.7 0.6%  
10-Yr G-Sec (%) 8.33 8.34 (0.01) 1 bps  
1-Yr FDs 7.25% - 9.25%

(Monthly change as on August 31, 2011)
(Source: ACE MF, PersonalFN Research)

Ascertaining all the aforementioned domestic and global economic uncertainties along with the political scenario in India, Foreign Institutional Investors (FIIs) too turned net sellers in the Indian equity markets to the tune of 10,834 crore, thereby deviating from their last couple of months (i.e. June and July) trend where they were net buyers to the tune of 12,602 crore ( 4,572 crore in June 2011 + 8,030 crore in July 2011).

BSE Sensex vs FII inflows


(Source: ACE MF , PersonalFN Research)

Mutual Fund Overview

The domestic mutual funds on the other hand assessing the fact that India appears to be a promising investment destination for long-term wealth creation, continued with their buying activity in the Indian equity markets. In August 2011 they net bought to the tune of 2,182 crore, thereby maintaining their trend as displayed in the last couple of months (i.e. June and July) where they were net buyers to the tune of 1,850 crore ( 1,198 crore in June 2011 + 652 in July 2011). The following economic factors encouraged them to exude confidence in the Indian equity markets:

  • Attractive valuations (markets have already corrected 26.0% from their last peak of 21,004.96 made on November 5, 2010)
  • Despite a slowdown in the Q-o-Q GDP growth rate, a promising economic outlook is revealed where so far there’s a gradual expansion of the Indian economy (8.5% in FY11, while 8.0% in FY10)
  • Robust gross capital formation (at 32.1% in Q4FY11)
  • Achievable fiscal deficit target (FY12 target of 4.6%)
  • Normal monsoon leading to better harvest (thus cooling food inflation)
  • Expectation of WPI inflation to cool down gradually due to RBI’s persistent anti-inflationary stance

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

But as far as the performances of the funds are concerned, all diversified equity funds across styles and market cap bias tripped as there underlying stocks felt the shivers of the nervous global economic sentiments. Among the sector funds, FMCG funds were also negatively impacted as inflationary pressures dampened the consumption theme to an extent. Infrastructure and banking funds too witnessed the brunt, as RBI hinted to maintain its anti-inflationary stance in monetary policy action.

Amongst the Fund of Funds (FoFs) those focusing on precious commodities – especially gold, provided luring returns to investors as the precious yellow continued its northward journey as the nervous sentiments in the global economy persisted. In the Hybrid fund category, Monthly Income Plans (MIPs) managed to deliver positive returns, while the balanced funds felt the brunt of downward pressures of the India equity markets due to their dominant exposure (generally 65%) towards equity.

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
IDFC Premier Equity-A (G) -3.09% ICICI Pru FMCG (G) -2.38% BNP Paribas Tax Adv (G) -4.76%
AIG India Equity (G) -3.42% Sundaram Energy Opp (G) -3.63% Edelweiss ELSS (G) -5.02%
Principal Smart Equity Fund (G) -3.54% Franklin FMCG (G) -3.73% Axis Tax Saver (G) -5.67%

(1-Mth returns as on August 31, 2011)
(Source: ACE MF, PersonalFN Research)

 Monthly top gainers: Open-ended Fund of Funds

Fund of Funds 1-Mth
DSPBR World Gold (G) 9.84%
AIG World Gold (G) 9.12%
ING OptiMix Financial Planning- Cautious Plan (G) 0.73%

(1-Mth returns as on August 31, 2011)
(Source: ACE MF, PersonalFN Research)

 Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds 1-Mth Monthly Income Plans 1-Mth
SBI Magnum NRI Inv-FlexiAsset (G) -3.58% Religare MIP Plus (G) 1.40%
Canara Robeco Balance (G) -3.91% Taurus MIP Advt (G) 1.10%
Birla SL Freedom (G) -4.31% Templeton India Low Dura Fund (G) 0.79%

(1-Mth returns as on August 31, 2011)
(Source: ACE MF, PersonalFN Research )

 Monthly top gainers: Open-ended debt funds

Floating Rate Funds 1-Mth Income Funds 1-Mth Gilt funds 1-Mth
Short Term   Short Term   Short Term  
Sundaram Flexible-ST (G) 0.95% Religare STP-A (G) 1.41% Canara Robeco Gilt Advantage Fund(G) 1.59%
Escorts ST Debt (G) 0.88% IDFC SSIF-ST-D (G) 1.00% Templeton India G-Sec-Treasury (G) 1.37%
Canara Robeco FRF (G) 0.82% BNP Paribas ST Income Fund (G) 0.96% Edelweiss Gilt (G) 1.30%
Long Term   Long Term   Long Term  
Tata FRF-LTP (G) 1.11% Religare Active Inc-A (G) 1.53% DWS Gilt Fund (G) 1.78%
HDFC FRIF-LT (G) 0.92% Reliance Income (G) 1.34% DSPBR G Sec (G) 1.77%
SBI Magnum Income FRP-LTP (G) 0.82% SBI Dynamic Bond (G) 1.21% UTI Gilt Adv-LTP (G) 1.71%

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Escorts Liquid Plan (G) 0.87% JM Money Mgr-Super (G) 0.82%
IDFC Ultra ST (G) 0.81% JM Money Mgr-Reg (G) 0.82%
IDBI Liquid Fund (G) 0.75% ICICI Pru Ultra ST-Reg (G) 0.82%

(1-Mth returns as on August 31, 2011)
(Source: ACE MF, PersonalFN Research )

Debt mutual funds across all categories performed well as yields of both short-term as well as long-term debt papers almost flattened, without many upswings. Moreover with Brent crude oil prices correcting from their earlier levels (as witnessed in the last six months), was a positive for the bond markets as it implied a reduction in import bill (for crude oil) as well as current account deficit. However in the Indian debt markets, domestic mutual funds deviated from their buying aggression as seen in last couple of months (i.e. June and July where they net buyers to the tune of 34,991 crore and 15,215 crore respectively), and turned net sellers to the tune of 185 crore.

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on July 31, 2011)
(Source: ACE MF, PersonalFN Research)

The graph above displays how various categories of mutual funds performed in the previous month. As revealed above, all equity funds – across categories (i.e. diversified equity funds and sector funds) and styles were faltered. Even the balanced funds felt the brunt of downward pressures of the India equity markets due to their dominant exposure (generally 65%) towards equity. But in the midst of all this, on an average gold ETFs provided stellar returns of +15.2%, thereby proving to be safe haven in time of economic turmoil. Debt funds too delivered positive returns as yield of both short-term as well as long-term debt papers almost flattened, without many upswings.

Other News and New Fund Offers

  • In order to encourage the Foreign Institutional Investors (FIIs) and foreign High Networth Individuals (HNIs), the domestic mutual fund industry is seeking a beneficial tax treatment for them. The Qualified Foreign Investors (QFIs) window opened by SEBI earlier has tax inefficiencies as there is relatively higher incidence of tax as compared to the existing India dedicated funds route. Besides this, the administrative burden of having to file tax returns also acts as a dampener for QFIs. Also, entities such as pension/endowment funds are used to differential/beneficial tax treatment in their home country.

  • Once again manifesting it pro-investor stance, the Securities and Exchange Board of India (SEBI) has put in place an elaborate framework for regulating large distributors selling mutual funds (MFs) and has thus put in place strict guidelines for Asset Management Companies (AMCs) employing these distributors.

    The regulations prescribed by the SEBI direct MFs to ensure that the large distributors do not charge anything over the prescribed charges (which is 100 per subscription of 10,000 and above; and 150 per subscription of 10,000 and above for incentivising distributors to attract new customers to mutual fund industry) in ‘execution only’ transactions. In these, if the distributor feels the product is unsuitable for the buyer, a written communication has to be sent on this along with customer confirmation, that the transaction is ‘execution only’ prior to implementation.

    We believe that such a move brought in by SEBI is in the long-term interest of investors, as this will make mutual fund distributors more accountable and responsible while rendering their service and also preclude mis-selling to a great extent. Also specifically categorising the transaction as "execution only" will enable them to get their legitimate fee, and not overcharge investors for something where there’s no logical advice provided. The separation of their sales and advisory functions would ultimately result in better services for the investors in the long-term.

  • In the recent past, SEBI had asked mutual funds to limit their exposure to derivatives in equity funds. They were also restricted from taking leveraged positions or writing options. Thus in order to have similar rules across the board, SEBI now has plans to apply the same principles to global feeder funds as well.

    However, a number of mutual fund houses are said to have asked the regulator to consider slightly more liberal guidelines for international funds. Those with an international alliance or which are completely owned by foreign asset managers have asked the regulator to consider leniency.

    In our opinion, SEBI has done the right thing in showing concerns over high derivatives exposure. We believe derivatives exposure should be used only to hedge one’s portfolio risk and not for generating speculative gains / profits. SEBI’s move of applying the same rules for global feeder funds (which have high derivative exposure) ultimately resulting in high risk for domestic investors. We believe that given the global economic turmoil led by the U.S. sovereign rating being downgraded (to AA+ with negative outlook by S&P) and debt overhang situation in the Euro zone, it would be prudent to invest your hard earned savings in diversified equity oriented mutual funds focusing on the Indian economic attributes. However, while doing so it is vital that you invest an equity mutual fund which has a good track record (across market cycles), and in one from a fund house which follows strong investment processes and systems. Remember while invest in equity oriented mutual funds, it is important that you have investment horizon of at least 3 to 5 years.

  • Now Qualified Foreign Investors (QFIs) can invest upto U.S. $3 billion in debt schemes that invest in corporate bonds of infrastructure companies. Recently, the capital market regulator - SEBI (Securities and Exchange Board of India) in consultation with the Government and RBI allowed foreign investors (termed as QFIs) who meet KYC requirements, to invest upto U.S. $3 billion in infrastructure focused debt funds. However, while doing so the capital market regulator has notified that the infrastructure bonds should have a residual maturity of at least five years. Simultaneously, the regulator also put out rules for such investors to buy directly in equity-based mutual funds for which a U.S. $10-billion limit has been fixed (a promise made in this year's budget). However, it is noteworthy that the QFI limit for debt will be within the overall ceiling of U.S. $25 billion, including FIIs, set by the central bank for corporate debt issued by infrastructure firms. Moreover, so far only FIIs and NRIs were allowed to buy units of domestic MFs.

    We believe that such a move of allowing QFIs to invest in India, would improve the depth of our bond markets, and attract long-term foreign fund flows which would benefit the infrastructure development in India. We also think, it would entice QFI’s to invest in India as at present the interest rates in the developed economies are very low (or even close to zero), as compared to India, where they may shift their focus here to obtain a better return on long-term investment. Moreover, stable rating provided by most rating agencies may encourage them to invest in our country.

  • In order to make mutual fund advertisements easy to understand for the investors, SEBI has mandated mutual fund houses to avoid giving compounded annualised growth rates (CAGR) - expressed percentage terms, and instead mention the amount in figures for better understanding. Moreover, SEBI has also mandated that the performances of schemes must be measured against the Sensex or the Nifty, the two most popularly followed equity indices in India or against a Government of India security in case of a debt fund. Also, any scheme's advertisement will need to be accompanied by the performance of all the schemes managed by the same fund manager.

    We believe that such a move brought in by SEBI, will help in effective and easy dissemination of information (through advertisements) by most mutual fund houses. We agree (to SEBI's view) that it becomes difficult for investors to understand financial jargons, and thus the “connect” to common man is necessary. Moreover, the directive to measure the performance of the equity funds with BSE Sensex or the Nifty, is good as it will make evaluation of performance easy for a layman.