After depicting a descending move in the last couple of months i.e. February 2013 and March 2013, the Indian equity markets (i.e. the S&P BSE Sensex) exhibited a good impulse, gaining +3.5% (or 668.41 points) in April 2013.
The beginning of the month gone by until mid-April 2013, saw pessimism gripping Indian equities as focus of foreign investors shifted to U.S. economy, as signs of economy vigour seemed evident with a 2.5% GDP growth rate clocked by them in Q1 of 2013. Likewise amongst the BRIC economies with growth continuing to be below trend in China, Russia and India, while acceleration seen in Brazil and South Africa; had a negative impact on Indian equities as foreign investors seemed to have allocated assets in such economies. Also growing concerns over ballooning Current Account Deficit (CAD) also posed concern and the International Monetary Fund (IMF) too in its World Economic Outlook, projected India's CAD only a tad lower to 4.9% than 5.1% in the previous year. Similarly the industrial activity which has been depicting a 'see-saw' movement for quite some time with tepid growth also exhibited setback on Indian equities as it did not portray a healthy picture of the economy as growth languished.
However, when the Wholesale Price Index (WPI) inflation data for March 2013 was released (on April 15, 2013) it revived sentiments of the Indian equity markets; since the data instilled hopes of a rate cut from the Reserve Bank of India (RBI) in annual monetary policy 2013-14 (held on May 03, 2013) in order to reinvigorate economic growth. Likewise statements from the Finance Minister, Mr P. Chidambaram saying that CAD could be halved in 1 or 2 years, inflation would be contained and reform initiatives would be taken in next two-four months in order to boost economic growth; also help to infuse positive sentiments. As far as controlling CAD is concerned, it seems to have been acknowledged by the market in light of falling prices of gold, Brent crude oil and strengthening Indian rupee. Thus in the last 10 trading sessions of the month of April 2013, the Indian equity markets ascended by good +6.9%. However going forward, how gold and Brent crude oil move, along with political environment (which seems tainted and uncertain at present) would decide the course for the markets.
The precious yellow metal - gold in the month gone by, after descending gradually until mid-April 2013, fell rather violently and ended the month with a loss of -8.3%. Frantic sell-offs pushed the price below Rs 29,000 per 10 grams mark. On the global front, the yellow metal came under heavy selling pressure from exchange-traded funds, following upbeat jobless claims data in Europe and amid speculation that Cyprus might sell excess gold to tide over its financial crisis. However not ruling out that uncertainty yet persists in the global as well as domestic economy smart investors continued to take refuge under precious yellow metal and thus towards the tail of the month, we witnessed a truncated recovery after a corrective move.
Speaking about Brent crude oil, prices eased considerably (by -5.1%) as outlook for global oil demand growth dimmed with lower-than-expected demand from the United States and China. It is noteworthy that the global supply too rose with growth in oil production from the U.S. and Canada. But going forward with signs of steady economic recovery shown by the U.S., and political turmoil, prices may once again move up.
For the bond markets, they waited to see what policy stance the RBI will take in its annual monetary policy 2013-14, after IIP showed a lull in industrial activity and WPI inflation for March 2013 too mellowed down to 5.96%. The bond markets on hopes of at least a 25 basis points (bps) rate cut rallied as yields softened. It is noteworthy that yields of 1-month and 3-month CDs mellowed by 155 bps and 75 bps respectively, placing them at 7.95% and 8.20% respectively; while the 8.15% 2022 (10-Yr) G-Sec ended the month at 7.71% (down by 19 bps) as WPI inflation relaxed and corrective move in gold and Brent crude oil brought in hopes that CAD would indeed be contained. Going forward now that RBI has cut policy rates in accordance to market expectations, PersonalFN is of the view that it may not lead to much easing in short-term yields, while the longer tenure papers, would take cues from how the country manages the twin deficit problem and inflation data.
*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on April 30, 2013)
(Source: ACE MF, Personal FN Research)
As far as participation of Foreign Institutional Investors (FIIs) in the Indian equity market is concerned, while it was heartening to see them continue to buy into Indian equities, in the month gone by they tuned cautious and slowed paced by being net buyers to the tune of Rs 5,414 crore, as against net buying of Rs 9,124 crore in the month of March 2013. It is noteworthy that first two months of the calendar year 2013, FIIs had net bought aggressively, aggregating to the tune of Rs 47,314 crore.
S&P BSE Sensex vs. FII inflows
(Source: ACE MF, Personal FN Research)
The main reasons for them to turn cautious while buying into Indian equities seem to be:
Political uncertainty (which has put the country to risk on early election);
Policy logjam and interrupted session of the Parliament
Scam stories (viz. coal allocation and 2G spectrum allocation)
Structural bottlenecks in mining and infrastructure space
Slowdown in economic growth rate; and
RBI hinting in its 4th quarter mid-review of monetary policy 2012-13 that headroom for further
monetary easing remained quite limited
Also with the U.S. economy showing signs of economic vigour and other Emerging Market Economies being on investment radar of FIIs for host fundamental reasons; they seemed to have allocated assets in such economies, which in turn led to reduction of India's share of foreign flows.
Mutual Fund Overview
Contrary to the cautious participation of Foreign Institutional Investors, domestic mutual funds (MFs) continued to be net sellers in the Indian equity markets yet again. With redemption pressures building in with every up-move of the Indian equity markets in an uncertain economic and political environment, they net sold to the tune of Rs 1,423 crore in the month of April 2013, as against net selling worth Rs 1,767 crore in March 2013. It is noteworthy that for the period January to April of the current calendar year, domestic mutual funds have been on a selling streak, with Rs 8,772 crore of Indian equities being net sold.
The fund managers too seemed to be worried about:
Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
Intermediate inflationary pressures (emanating from food inflation);
Slowdown in economic growth rate;
Indications from RBI hinting that headroom for further monetary easing remains quite limited;
Political uncertainty; and
Global economic headwinds
S&P BSE Sensex vs. MF inflows
(Source: ACE MF, Personal FN Research)
As far as the performance of various categories of mutual funds is concerned, in the diversified equity funds category, those with a mandate to invest predominantly in large caps topped the list, followed by those investing in mid & small cap segments of the market. Likewise mutual fund schemes following a flexi and opportunities style of investment also did well, enabled by their mandate which allowed them to take exposure across market capitalisations and sectors. So broadly in the diversified equity funds gains were seen across market capitalisation bias and investment styles, aided by the upward streak of the markets.
Among the sector funds, those investing in banking & financial services and defensive sectors such as pharma and FMCG delivered stunning returns. Likewise since consumption story in India is yet strong and the Government giving emphasis to fund the infrastructure story, mutual fund schemes focusing on investing in these respective themes also did end the month gone by in green with luring returns, and of course well supported by the up-move in the Indian equity markets. However technology funds eroded gains as seen in March 2013, and ended the month gone by deep in red as the Indian rupee too appreciated vis-a-vis the U.S. dollar; which kept underlying stocks in their portfolio (especially the export oriented ones) under pressure.
As far as ELSS funds are concerned (which follow fluid investment style), all of them ended the month of April 2013 in green, thereby recovering from the dismal gains or in most cases a wealth erosion witnessed in the month of March 2013.
In the Fund of Fund (FoF) category, some of those focusing on investing the world markets (in real estate and emerging markets) reported gains and so did those focusing on investing in domestic equities, aided by ascending move the markets and performance of their underlying mutual fund schemes. Likewise asset allocation funds and financial planning funds which are structured as FoFs ended the month in green. However in the FoF category, the ones investing in world agribusinesses, mining (including gold mining) and gold saving funds ended the month in red with negative undercurrents for the respective businesses and / or asset class.
Speaking about the hybrid funds; the performance of balanced funds revived as they ended the month gone by in green after exhibiting negative returns in the month of February 2013 and March 2013. The debt portion of their Assets Under Management (AUM) did well with softening in yields on expectations that RBI would reduce policy rates in the annual monetary policy 2013-14. Thus Monthly Income Plans (MIPs), which invest a dominant portion of its assets in debt securities across maturities, also did well aided by rally in bond markets. A well-managed equity portfolio and the ascending movement of the Indian equity markets too seemed to have helped in delivering better returns than in the month of March 2013.
(1-Mth returns as on April 30, 2013)
(Source: ACE MF, Personal FN Research)
As far as performance of debt mutual fund schemes are concerned, with short-term CD yields having mellowed noticeably (as cited above) debt mutual fund schemes with a mandate of holding shorter maturity papers did well. Luring returns were seen in short-term floating rate funds, short-term income funds and short-term G-sec funds - which performed better than in the month of February 2013 and March 2013. Since yields of longer maturity paper also softened with WPI inflation mellowing and after it exhibited signs of moderation along with reducing pressure on CAD (due to correction in price of gold and Brent crude oil); the long-term debt fund category also performed well (than in the month of February 2013 and March 2013), with appealing returns exhibited by long-term floating rate funds, long-term income funds and long-term gilt funds.
Similarly, liquid funds and liquid plus funds (also known as ultra-short-term funds) also did well with positive undercurrents in the Indian debt markets.
Going forward, now that RBI has cut policy rates in accordance to market expectations, PersonalFN is of the view that there may not lead to much easing in short-term yields, while the longer tenure papers, would take cues from how the country manages the twin deficit problem and inflation data. Also in the guidance from the monetary policy, RBI has enunciated that headroom for further monetary easing remains quite limited and monetary policy action alone cannot revive growth. It has put the onus on the Government by saying that growth needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation.
It is noteworthy that in the Indian debt market, both FIIs and domestic mutual funds continued to be net buyers; with FIIs having bought net to the tune of Rs 5,334 crore thereby slightly slowing pace from March 2013's net buying worth Rs 5,795 crore. But comparatively domestic mutual funds participated rather in a roaring manner having net bought to the tune of Rs 51,885 crore, as against Rs 75,005 crore net buying in the month of March 2013.
Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on April 30, 2013)
(Source: ACE MF, Personal FN Research)
The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, banking & financial services sector funds took the lead followed by defensive sectors such as Pharma and FMCG funds which are generated luring returns. Likewise infrastructure funds also did well with positive undercurrents for the theme with Government giving emphasis for infrastructure development. However technology funds took the maximum beating with the appreciation of the Indian rupee vis-a-vis the U.S. dollar, which kept underlying stocks in their portfolio (especially the export oriented ones) under pressure. From market capitalisation perspective, large cap funds outperformed the mid cap ones, while from a fund management style perspective flexi and opportunities style funds outperformed the ones a value style of investing.
Tracing the descending move in the precious yellow metal - gold, Gold ETFs exhibited negative returns for investors (on average -8.4%).
In the debt mutual fund category, those with a mandate to invest in shorter maturity instruments displayed slightly better returns than in the month of February 2013 and March 2013, as yields of short-term debt papers mellowed down noticeably. Likewise with yields of longer maturity papers also easing, gains were seen in long maturity debt mutual funds.
Other News and NFOs:
In the Union Budget 2013, the finance minister clarified that the returns from Pass-Through Certificates (PTCs) are exempt from tax. The clarification came in as the mutual industry body - the Association of Mutual Funds in India (AMFI) approached the finance ministry last year after the Income-tax (I-T) department maintained that income from instruments such as PTCs is taxable.
But now again the I-T department has sent fresh notices to mutual fund houses, asking them to pay tax on income from PTCs (which is a securitised product), despite Bombay High Court in March 2012 having quashed the I-T department's demand for tax on income from mutual funds' investments in securitised instruments such as PTCs, in response to an appeal filed by UTI Mutual Fund.
As many of you may be aware that the financial year gone by has been the toughest for the Indian mutual fund industry to garner more Assets Under Management (AUM). The turbulence in the Indian capital markets, downbeat sentiments in both global and domestic economy along with political uncertainty have kept investors away from risky asset classes and investment avenues therein.
But it is evident that domestic mutual fund houses are leading the race of garnering more AUMs when compared to their foreign counterparts. In the last quarter of the financial year gone by, domestic mutual fund houses could manage to garner AUM to the tune of Rs 7.24 lakh crore - an increase of +23.6%, while foreign mutual fund by 17.6%. However persistent turbulence in the Indian capital markets has attributed to tepid growth in AUM on an annual basis. It is noteworthy that in the last financial year, the growth in AUM for domestic mutual fund houses and their foreign counterpart has been mere 8.4% and 10.0% respectively.
Many of you may be aware that in the Union Budget 2013, it was proposed to reduce the
Securities Transaction Tax (STT) as under (and the revised rates be applicable from June 01, 2013):
On Equity futures: from 0.017% to 0.01%
On Mutual Fund/ETF redemptions at fund counters: from 0.25% to 0.001%
On Mutual Fund/ETF purchase/sale on exchanges: from 0.1% to 0.001%, only on the seller
Thus at present until May 31, 2013, if you transact in the aforesaid securities the old rate of <>STT applies - which is higher than the one proposed.
Ascertaining this fact, even mutual fund houses are awaiting the reduction in STT rate to merge their schemes in the current financial year. Thus far in the present financial year (i.e. FY14) two mutual fund houses are looking at merging schemes. LIC Nomura Mutual Fund has already announced the merger of four of its schemes - LIC Nomura MF Top 100 Fund, LIC Nomura MF Systematic Asset Allocation Fund, LIC Nomura MF Vision Fund and LIC Nomura MF Opportunities Fund (merging schemes) with LIC Nomura MF Equity Fund (merged scheme), an open ended growth scheme. Likewise IDFC Mutual Fund is looking at merging a couple of its equity schemes, but is waiting for STT to reduce with effect from June 01, 2013.
It is noteworthy that every time a scheme is merged, the mutual fund house bears the STT and is not passed onto to you investors in the process of sale of units by "merging scheme" and purchase of the same by the "merged scheme". At present some mutual fund houses are waiting to merge some of their schemes, since reduced STT (with effect from June 01, 2013) would help reduce their cost of merging the schemes considerably with the aforementioned proposal.
Motilal Oswal Mutual Fund launched its first actively managed mutual fund scheme named
"Motilal Oswal MOst Focused 25 Fund (MF25)" mandated to invest in a concentrated portfolio of 25 stocks and limiting is sectoral exposure to higher of 25% or 1.5 times the weight of sector in the benchmark index. M25 follows CNX Nifty Index as its benchmark and is positioned as an aggressive fund focused on long term growth of capital. As per the offer document, the investment objective of M25 is, "to achieve long term capital appreciation by investing in upto 25 companies with long term sustainable competitive advantage and growth potential."
IDFC Mutual Fund launched an equity opportunities fund named "IDFC Equity Opportunities Fund (IEOF)" - a close-ended scheme, mandated to invest 60-80 stocks without being biased to any particular market capitalisation. IEOF follows S&P BSE 500 Index as its benchmark and as per its offer document, the investment objective is "to seek to provide long-term capital appreciation from a portfolio that is invested in equity and equity-related securities. The fund will invest in either growth stocks or value stocks or both without any capitalization bias. As and when the fund manager is of the view that the investment has met its desired objective, the same shall be liquidated and distributed by way of dividend. However, there can be no assurance that the investment objective of the scheme will be realized".
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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