Mutual Fund Roundup: October 2011

Mutual Fund Roundup: October 2011

Market Overview

After displaying downward pressure from July 2011 to September 2011, the Indian equity markets (BSE Sensex) witnessed an ascending move as the markets ended the month of October 2011 in green by gaining +7.6%. There were a series of impulse and correction resulting in a "see-saw" movement throughout the month as blanket of nervous economic sentiments did persist, which in turn also resulted in bulls becoming cautious and preferring to book profits at every uptick in the Indian equity markets.

While WPI inflation did mellow marginally to 9.72% (from 9.78% in August 2011) in September 2011- data released in October 2011, it didn’t enthuse the markets much, as it indicated that the RBI would stick to its anti-inflationary stance (in its 2nd quarter review of monetary policy 2011-12) even by compromising on the economic growth rate. Moreover, with the Government announcing an increase of 52,500 crore of extra Government borrowing for the second half of the year than budgeted; remained a concern for the Indian equity markets as it implied fiscal deficit target of 4.6% for fiscal year 2011-12 may be difficult to meet. But nonetheless, bulls cautiously did exude confidence in the Indian equity markets as:

  • Index of Industrial Production (IIP) recovered marginally to 4.1% in the month of August 2011 (data released in October 2011) after plumping in the last couple of months
  • Valuations appeared appealing
  • Economic growth prospects for India still looked robust over the 7.0% mark (GDP growth rate at 7.7% for Q1FY12) when compared to the other developed economies
  • Robust gross capital formation (at 31.2% in Q1FY12)

But on the Muhurat trading session of Diwali 2011sentiments were sombre as the BSE Sensex ended Samavat 2068 with moderate gains (of only 34.0 points). However on Thursday - October 27, 2011 as the European leaders agreed on a crucial plan to rescue Greece from its situation of debt-overhang, the Indian equity markets surged smartly as this was a major relief to the global economy which is reeling under a fear of a recessionary phase. Spain’s sovereign rating was downgraded earlier during the month by two notches from Aa2 to Aa1 by Moody’s, as it (Spain) remained vulnerable to market stress and event risk, but this negative news was cascaded due to European leaders promising crucial plans laid out to rescue Greece. Meanwhile in the U.S. GDP growth rate accelerated from mere 1.3% (in the second quarter of calendar year 2011) to 2.5% (in the third quarter of calendar year 2011), but interestingly the consumer confidence dampened as unemployment rate continue to remain stiff at 9.1% in September 2011.

Speaking about the political scenarios in India, in the 2G spectrum row the special CBI court framed charges against 17 accused including former Telecom Minister A. Raja and DMK MP Kanimozhi for their alleged roles in the 2G spectrum allocation. This in turn also helped in releasing tension in the political corridors as earlier lack of cohesion appeared since present Finance Minister and the Home Minster got into a combat mode over the 2G spectrum allocation. The market too took this as a positive and paved its path.

The precious yellow metal - gold displayed an ascending move (gained 4.7%) as global economic uncertainty prevailed for most part of the month (with Euro zone worries swirling around), along with festive demand supporting the rally. Stockist too piled up their inventories ahead of the festive and marriage season to meet demand.

Brent crude oil price also after showing a corrective phase in September 2011 (descended by 5.9%), once again rose by 4.1% in last month as OPEC output fell in October 2011 as reduced supplies from Iraq, Nigeria, Saudi Arabia and Angola offset rising Libyan supply. Moreover, the expectation that the U.S. dollar’s strength may not last for long also helped crude oil prices to ascend once again.

For the bonds markets, the fear of the Government being unable to meet its fiscal deficit target of 4.6% (due to faltering tax revenue in the face of sharp slowdown in the economic activity), and RBI’s anti-inflationary policy stance led to yields of short-term papers remaining flat but elevated (1-month and 3-month CDs stood at 8.95% and 9.30% respectively), but the 7.80% 10-year G-sec yield wash pushed by 52 basis points to 8.87%.

Monthly Market Roundup

  As on Oct 31, 2011 As on Sept 30, 2011 Change % Change
BSE Sensex 17,705.0 16,453.8 1,251.3 7.6%  
S&P CNX Nifty 5,326.6 4,943.3 383.4 7.8%  
CNX Midcap 7,267.2 7,094.0 173.2 2.4%  
Gold (/10 gram) 27,220.0 25,995.0 1,225.0 4.7%  
Re/US $ 48.7 49.0 0.2 0.4%  
Crude Oil ($/BBL) 110.8 106.4 4.4 4.1%  
10-Yr G-Sec (%) 8.87 8.35 0.52 52 bps  
1-Yr FDs 7.25% - 9.40%

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

Ascertaining all the aforementioned developments in domestic and global economy along with a relatively stable political scenario in India, Foreign Institutional Investors (FIIs) too this time exuded confidence in the Indian equity markets and net bought aggressively to the tune of 1,677 crore thereby snapping with the last months (i.e. September 2011) activity where they were net sellers to the tune of 158 crore.

BSE Sensex vs FII inflows


(Source: ACE MF , PersonalFN Research)

Mutual Fund Overview

But unlike FIIs, domestic mutual funds turned net in the Indian equity markets to the tune of 212 crore as some investors preferred to redeem and book profits. Moreover, domestic mutual funds were wary about the following factors are preferred to book profits:

  • Euro zone worries swirling around for most part of the month
  • RBI compromising on economic growth rate, while adopting its anti-inflationary monetary policy stance
  • Fiscal deficit (of 4.6%) may not be met by the Government due to faltering tax revenue impeded by slowdown in the economic activity

Hence this result in domestic mutual funds following their September 2011 trait, where they were net seller in the Indian equity markets to the tune of 731 crore.

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

As far as the performances of the funds are concerned, diversified equity funds - across market capitalisation delivered positive returns for their investors, but the ones having a large cap bias accentuated gains. Similarly amongst sector funds, the ones focusing on the Information Technology (IT) theme gained as the depreciation of the Indian Rupee during earlier part of the month as well as in September 2011, resulted in IT companies (especially those which are export oriented) delivering earnings as expected by the markets.

Amongst the Fund of Funds (FoFs) equities oriented ones focusing on the Latin American region, global agribusiness and emerging markets managed to occupy the top-3 position. In the Hybrid fund category, balanced funds led by the impulse in the Indian equity markets provided luring returns to investors.

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
Reliance Quant Plus (G) 8.88% Franklin Infotech (G) 10.40% Religare AGILE Tax (G) 7.20%
ICICI Pru Top 100 (G) 8.25% ICICI Pru Technology (G) 9.98% Bharti AXA Tax Adv-Eco (G) 6.74%
IDFC Equity-A (G) 7.67% Birla SL New Millennium (G) 9.09% Bharti AXA Tax Adv-Reg (G) 6.73%

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

 Monthly top gainers: Open-ended Fund of Funds

Fund of Funds 1-Mth
ING Latin America Equity (G) 20.54%
DWS Global Agribusiness Offshore (G) 16.52%
HSBC Emerging Mkts (G) 15.07%

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

 Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds 1-Mth Monthly Income Plans 1-Mth
LIC Nomura MF Systematic Asset Alloc (G) 6.59% ICICI Pru Multiple Yield-D (G) 2.48%
Sundaram Balanced Fund (G) 5.63% ICICI Pru Multiple Yield-A (G) 1.97%
JM Balanced (G) 5.09% LIC Nomura MF Floater MIP (G) 1.79%

(1-Mth returns as on October 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  
Escorts ST Debt (G) 0.83% Axis Income Saver (G) 0.95% Daiwa Govt Sec-STP (G) 0.65%
L&T FRF (G) 0.81% JPMorgan India ST Income (G) 0.85% Birla SL Gilt Plus-Liquid (G) 0.63%
Principal NT Fund-Moderate Plan (G) 0.78% Pramerica ST Income (G) 0.85% DSPBR Treasury Bill (G) 0.63%
Long Term   Long Term   Long Term  
SBI Magnum Income FRP-LTP (G) 0.80% Escorts Income Bond(G) 1.88% Taurus Gilt (G) 0.82%
Birla SL FRF-LT (G) 0.76% Peerless Income Plus Fund-Reg(G) 1.24% Sahara Gilt (G) 0.66%
HDFC FRIF-LT (G) 0.76% Escorts Income Plan(G) 0.83% Mirae Asset GILT-Inv (G) 0.60%

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Escorts Liquid Plan(G) 0.83% JM Money Mgr-Reg (G) 0.84%
Baroda Pioneer Liquid-Reg(G) 0.79% Taurus Ultra ST Bond-Reg (G) 0.84%
Daiwa Liquid-Reg(G) 0.79% JM Money Mgr-Super (G) 0.84%

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

Debt mutual funds too delivered moderate gains in the month gone by as RBI maintained its anti-inflationary monetary policy stance and expected inflation to mellow down in the next couple of months. But nonetheless the debt markets were wary of the fact that fiscal deficit (of 4.6%) may not be met by the Government due to faltering tax revenue impeded by slowdown in the economic activity, and this thus resulted in domestic mutual funds buying net to tune of 15,155 crore as against their aggressive buying activity seen in September 2011 where they net bought to the tune of 22,955 crore.

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on October 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 thematic funds) styles fared well, but TECk funds delivered the most stunning returns as the depreciation of the Indian Rupee during earlier part of the month as well as in September 2011 resulted in IT companies (especially those which are export oriented) resulted in delivering earnings as expected by the markets. Even balanced funds performed well as relief rally in the Indian equity markets help them accentuate returns of the equity portfolio. Gold ETFs too reported bold gains as the precious yellow metal continued with its northward journey.

In the debt mutual fund category, barring long-term gilt funds all other performed moderate returns; but the debt market continued to be wary of the fact that fiscal deficit (of 4.6%) may not be met by the Government due to faltering tax revenue impeded by slowdown in the economic activity.

Other News and New Fund Offers

  • In its latest stint on tightening screws on mutual funds, the Securities and Exchange Board of India (SEBI) under the mutual fund committee constituted is planning to extend a "Marked-to-Market" (MTM) basis of bond valuations to debt papers below 91 days. The committee is worried about the concentration of investments in liquid funds which invest in real short-tenured instruments.

    This is the second time in eight months liquid funds have come under the scanner of SEBI and its advisory committee. In July 2010 the capital market regulator had asked mutual fund houses to value their bond portfolios over 91 days maturity on a MTM basis, thus attempting to reduce "carry portfolios".

    In our opinion the move to bring liquid funds under MTM valuation could infuse in volatility in an otherwise risk-averse debt mutual fund investment category. Moreover corporate treasuries - which are amongst the largest investors in liquid funds, could get upset as the change in portfolio valuation from accrual basis (by following weighted average method) to MTM may not be taken lightly by institutions. Also a noteworthy point is that, many any corporate treasuries don't have the mandate to invest in MTM-based instruments.

    At present retail investors too, who wish to invest their very short-term funds prefer liquid mutual funds, as they are relatively risk-free and are not subject to wild movements. But if the MTM basis of valuation is adopted, returns on their portfolio could be subject to unwarranted volatility.

    Hence we believe SEBI should re-think on the proposal of getting the liquid funds category under MTM valuation method, and help investors keep volatility at bay.

  • The norms issued by SEBI, on advertising fund performance are keeping mutual fund houses busy with the new method of reporting its performance. In its recent drive (vide circular dated August 22, 2011) to enhance disclosure quality and educate investors, the capital market regulator asked for schemes more than a year old to display one-year performances for as many unique one-year periods there are, going back from the calendar quarter preceding the date on which the performance is to be published. The returns have to be given in percentage form and also in terms of how 10,000 has grown during these one-year time periods.

    The new rules also state that the equity schemes are meant to be benchmarked against Sensex or Nifty indices, a long-term debt fund must be benchmarked against 10-year Government Securities (G-Sec) and a short-term debt fund needs to be benchmarked against one-year treasury bill, a Government of India security.

    We believe that the norms issued by the capital market regulator, would certainly enhance the quality of disclosure and thus enhance transparency. We recognise the fact expediting this matter is not an easy task, but fund houses should at least disclose their performance against the broader indices (cite above for each asset class and categories for products therein), and also exhibit the value of 10,000 over respective time frames. This will enable investors to gather reasonable inference on the performance of respective funds and aid them to make an investment decision.

  • SEBI had proposed a minimum investment size for Alternative Investment Funds (AIFs) at 1 crore for High Networth Individuals (HNIs). This would help to channelize HNI money to mutual fund houses as a lot of HNIs with an investment corpus of less than 1 crore now would not be able to invest in investment avenues that come under the purview of AIF regulations.

    We believe that while the mutual fund (MF) industry is set to benefit from the change in the regulations governing AIFs, the MF industry should aim at creating awareness about the benefits of investing in mutual funds through various investor education programmes. Moreover, MF houses should come with easy to understand products and not vie for garnering more AUMs.

  • IDBI Mutual Fund, launched its commodity fund - "IDBI Gold Exchange Traded Fund" (IGETF) (which is be available for subscription from October 19, 2011 until November 2, 2011); which focuses on investing in the precious yellow metal - gold (through physical buying) thereby aiming to replicate the performance of gold in the physical market and reduce the tracking error.

    As per its offer document, the fund’s investment objective is "invest in physical gold with the objective to replicate the performance of gold in domestic prices. The ETF will adopt a passive investment strategy and will seek to achieve the investment objective by minimising the tracking error between the Fund and the underlying asset." As far as allocation of its assets is concerned, the fund invests 95% - 100% of its total assets in physical gold and the rest (i.e. upto 5%) in debt and money market instruments.

  • HDFC Mutual Fund introduced a gold savings fund - "HDFC Gold Fund"; a gold fund of fund scheme which is mandated to invest its corpus into the underlying fund - "HDFC Gold Exchange Traded Fund" (HGETF). The Fund is launched especially considering the requirements of those who want to buy gold in a paper form but do not have a demat account.

    As per its offer document, the fund’s investment objective is "seek capital appreciation by investing in units of HDFC Gold Exchange Traded Fund (HGETF)." Though every endeavour will be made to achieve the objective of the scheme, the AMC / Sponsors / Trustees do not guarantee that the investment objective of the scheme will be achieved. No guaranteed returns are being offered under the scheme. As far as allocation of its assets is concerned, the scheme invests 95% - 100% of its total assets in units of HGETF and the rest (i.e. upto 5%) in debt and money market instruments.

  • Axis Mutual Fund too launched its first gold fund of funds scheme - "Axis Gold Fund" (AGF). The fund will invest its corpus in Axis Gold ETF (AGETF). The Fund is launched especially considering the requirements of those who want to buy gold in a paper form but do not have a demat account. As per its offer document, the fund’s investment objective is "to generate returns that closely correspond to returns generated by Axis Gold ETF". The scheme invests 95% - 100% of its total assets in units of AGETF and the rest (i.e. upto 5%) in money market instruments.

  • Tata Mutual Fund introduced a retirement savings fund - "Tata Retirement Savings Fund"; an open ended scheme comprising of three plans which are:

    • Progressive Plan (an open ended equity scheme) - (TRSFP)
    • Moderate Plan (an open ended equity scheme) - (TRSFM)
    • Conservative Plan (an open ended debt scheme) - (TRSFC)

    Thus TRSF aims to provide an investment tool for retirement planning of individual investors, where depending upon their risk appetite and age groups they can select from the aforementioned plans. Moreover, the fund also offers an auto switch / SWP (Systematic Withdrawal Plan) facility wherein one can automatically switch from one plan to the other; based on attainment of the predetermined age by the investor.

    As per its offer document, the fund’s investment objective is "to provide a financial planning tool for long term financial security for investors based on their retirement planning goals. However, there can be no assurance that the investment objective of the fund will be realized, as actual market movements may be at variance with anticipated trends." The fund allocates its assets between equity and debt in different proportions for the aforementioned plans.

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