After depicting an impulse in the month of September 2012, the Indian equity markets moved sideways for most part of the month of October 2012, governed by the inauspicious period of Shradh. An exhaustion along with nervous sentiments also seemed evident in the month gone by, and thus by the end of the month, the market descended by -1.4% (or 257.36 points).
During the beginning of the month, although Mr Ben Bernanke's (Chairman of Federal Reserve) defence for maintaining stimulus measures to bolster U.S. economic growth did infuse positive sentiments in the market, it didn't guide the Indian equity market upwards due to lacklustre participation during the inauspicious period of Shradh, and due to uneasiness over concerns over consequent asset bubbles developing in emerging nations. Likewise while the Government of India (GoI) unveiled a five-year fiscal consolidation roadmap to contain the fiscal deficit, and move ahead with taxation and expenditure management reforms; the markets seemed unconvinced over the fiscal deficit target (of 5.3% for fiscal year 2012-13) could be achieved when uncertainty is looming around and political consensus is deficient. During the month, although the Index of Industrial Production data announced for the month of August 2012 (data released in October 2012) did jump to +2.7%, it lacked appeal for the market as the trend in the preceding months was rather "see-saw" due to crippling effect of the downbeat sentiments prevailing in the global and domestic economy. While it was expected that the Reserve Bank of India (RBI) would reduce policy rates in order to augment growth and take considerate stance, the Wholesale Price Index (WPI) inflation data for the month of September 2012 (data released in September 2012) at 7.81% acted as deterrent, for the central bank to reduce policy rate since the inflation bug continued to remain over the comfort zone (of 6.00% - 7.00%). And thus in its 2nd quarter review of monetary policy 2012-13, the central bank refrained from reducing policy rates and merely flushed liquidity amounting to Rs 17,500 crore vide a Cash Reserve Ratio (CRR) cut of 25 basis points (bps).
In the global markets, although U.K.'s Q3 GDP growth emerged from its nine-month recession in the July to September quarter, by posting a growth rate of 1.0% (as against market consensus forecast of 0.6%); its manufacturing PMI (Purchasing Manager Index) in October, as posted by Chartered Institute of Purchase & Supply (CIPS) fell to 47.5 from a downwardly revised 48.1 in September, dipping further below the 50 mark which separates growth from contraction. It depicted that companies received few orders as export demand too dwindled, and the country isn't out of the woods. Moreover, with the Spanish economy contracting further in Q3 to -0.3% (although marginally better than -0.4% contraction in the previous quarter) was worrisome, because the Government has already imposed harsh austerity measures amid a deep recession. A very high unemployment rate (of 25.0%) also remained a cause of concern as it precluded elevation of domestic demand. So, the Euro zone fourth largest economy is hovering on the edge of a sovereign bailout, even after securing rescue loan of up to €100 billion. Likewise, with Greece's debt-overhang situation worsening, the problems in the Euro zone are getting grave. The U.S. economy however, accelerated in the Q3 by reporting a growth rate of 2.0%, well supported by step-up in consumer spending, which accounts for about 70% of U.S. economic activity. However, it failed to make a dent in the unemployment rate and offer cheers to White House, ahead of Presidential elections. So a gamut of all domestic as well as global economic and political factors, did lead the Indian markets to show exhaustion and get wary.
As far as the precious yellow metal - gold is concerned; it too underwent a corrective phase (lost -1.3%) after an emboldened move witnessed in the last few months. Elevated prices held back investors from buying into gold and the inauspicious period of Shradh also refrained investors from buying gold. However, going forward with Diwali round the corner and Christmas (along with wedding season as well), the demand is likely to accelerate, and thus stockists are increasing their inventory. It is noteworthy that traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year.
Speaking about Brent crude oil, the flaccid economic growth in the global economy also pulled down prices (by -2.7%). But having said that, we think going forward the impact of Sandy storm in the U.S. is likely to stoke-up oil prices, although now it is consolidating at U.S. $108 per barrel on account of dismal global economic growth.
For the bond markets, the month of October 2012 saw the liquidity situation tightening ahead of festive season and thus as result, the Reserve Bank of India (RBI) in its 2nd quarter review of monetary policy 2012-13 reduced the CRR by 25 bps (from 4.50% to 4.25%) thereby infusing liquidity amounting to Rs 17,500 crore. However since the RBI action came in only towards the tail of the month (i.e. October 30, 2012), the 1-month and 3-month CD yields had already inched up marginally by 10 bps and 5 bps respectively. Likewise 8.15% 2022 (10-Yr) G-Sec yield too intensified to 8.19% (up by 5 bps) on concerns over stiff WPI inflation (it being over the comfort zone of RBI), fiscal deficit may not be met amid timid growth and weakening Indian rupee. Going forward, the bond markets are likely to take cue from a slew of reform measures to be adopted by the Government and how fiscal deficit is indeed achieved amid political hogwash and graft charges.
*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on October 31, 2012)
(Source: ACE MF, Personal FN Research)
As far as foreign Institutional Investors (FIIs) participation in the Indian equity market is concerned, it was quite heartening to see the ascending trend continuing. However while exuding confidence they were cautious as they net bought to the tune of Rs 11,365 crore, thereby decelerating from their September 2012's buying activity (where they net bought to the tune of Rs 19,262 crore).
It seems that although the political uncertainty persists, they evinced interest in the Indian economy backing the reform measures adopted by the Government and believed that Indian could post good economic growth rate in the long-term.
BSE Sensex vs. FII inflows
(Source: ACE MF, Personal FN Research)
Also, the easy money policy adopted by the central bankers in the developed economies pushed money flows into attractive investment destinations in the Emerging Market Economies (EMEs), and India was one of them.
Mutual Fund Overview
However contrary to the participation of FIIs, domestic mutual funds continued to be net sellers in the Indian equity markets. They net sold to the tune of Rs 2,520 crore; but a noteworthy point is that their selling streak reduced as compared to September 2012 where they net sold to the tune of Rs 3,008 crore.
Fund managers seemed worried about the political uncertainty and graft charges emerging against every political party, which has tainted the political canvas. They also seemed to be cautious ahead of the U.S. Presidential and their impact on the Indian equity markets.
BSE Sensex vs. MF inflows
(Source: ACE MF, Personal FN Research)
As far as the performance of various categories of mutual funds is concerned, mid and small cap funds, those betting on emerging businesses and the one's following a growth style of investing were front runners due to momentum in the mid and small cap space and growth stocks, despite an exhaustion seen in the markets.
Among the sector funds, media & entertainment funds and those investing in the banking & financial services theme managed to deliver positive returns, while those betting on infrastructure, energy, and technology theme, eroded investors wealth. As far as ELSS funds are concerned, only a handful of them managed to deliver positive returns.
In the Fund of Fund (FoF) category, the offshore ones manifesting interest in the Chinese economy and other EMEs in South Asia and Latin America took the lead, as emerging market seemed to an attractive investment destination for investors in the developed economies.
Speaking about the hybrid funds; amongst the balanced funds only a few of them managed to deliver positive returns as the exhaustion in the Indian equity markets and yields remaining stiff with a slight upward bias had a detrimental impact for their portfolio. Likewise gains in Monthly Income Plans (MIPs) category too were restricted on account of yields of debt papers across maturity tilting slightly upward due to contraction in liquidity and worries of stiff WPI inflation (it being over the comfort zone of RBI), fiscal deficit and weakening Indian rupee.
(1-Mth returns as on October 31, 2012)
(Source: ACE MF, Personal FN Research)
However debt mutual funds, across categories and tenure showed a decent performance in the month gone by, although the aforementioned concerns did prevail for the bond market. But longer duration funds seemed to look more attractive as interest rates have peaked-out and is now expected to ease from the new calendar year onwards.
It is noteworthy that both FIIs and domestic mutual funds continued to be net buyers in the Indian debt market; but this time the FIIs were aggressive in participating as they net bought to the tune of Rs 7,852 crore (as against Rs 623 crore in September 2012) taking a view on the interest scenario. But contrary to the FII participation, domestic mutual funds net bought only to the tune of Rs 16,998 crore as against their roaring participation in the month of September 2012, where they net bought to the tune of Rs 48,693 crore.
Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on September 30, 2012)
(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, infrastructure funds and tech funds took a beating due to detrimental undercurrents for both the sectors, while defensive themes such as consumption and healthcare delivered positive returns. In the diversified equity fund category, the ones betting on the mid and small cap space did well with favourable momentum in the mid and small cap segment. However the large cap funds ended the month in red, led by exhaustion in the market. From fund management style perspective barring the one following growth style, all others such value and flexi faltered on performance.
Tracing with corrective phase of prices of precious yellow metal - gold, Gold ETFs too exhibited negative returns for investors (losing -1.0%). But debt mutual funds across categories had a decent performance to exhibit.
Other News & New Fund Offers
Parag Parikh Financial Advisory Services made its debut into the Indian mutual fund industry, and intends to give deep fee discounts to investors in its equity scheme (to be launched in January 2013) by charging an asset management fee of only 2.0%. Likewise, mid-sized private lender - Yes Bank, too received board approval to foray into the mutual funds business.
We are of the view that, in times when exiting mutual fund houses are striving to get every penny from investors there are some who are exploring opportunities in the asset management business due to high savings rate in the country. But given the fierce competition in the industry, we may even witness consolidation and even few exiting the space.
While investing in mutual funds, we recommend that you invest in mutual fund scheme from fund houses which have been in existence from at least three years and which have a proven track led by strong investment processes and systems followed. It is imperative to ascertain your investment object and invest in mutual fund schemes prudently.
The Indian mutual fund industry saw their investor base erode by over 11,000 equity folios a day in the first half of the fiscal year 2012-13. The September rally in the stock markets has proved disastrous for the Indian mutual fund industry as far as their hard-earned retail investors' base is concerned. On account of profit booking at every upswing in the equity markets, the mutual fund industry received redemption request worth Rs 6,741 crore as against fresh investments of a mere Rs 3,182 crore (as seen in September 2012). With this, equity investors' base for fund industry got shrunk by over 2 million in just six months, which interestingly is higher than what was witnessed in the entire previous financial year.
Citing this plight of the mutual fund industry, the industry lobby - Association of Mutual Funds in India (AMFI) has set up a committee to recommend on pension scheme products by mutual fund houses in order to attract long-term money. AMFI may further speed up the process of developing pension schemes under the mutual fund banner. To know our view on this news, please click here.
After successful buyout of Fidelity Mutual Fund by L&T Mutual Fund, Fidelity Mutual Fund has now kept open a 30-day window from October 15, 2012 to allow unit holders (uncomfortable with the new fund management team) to redeem their holdings without any exit load. Moreover, post the buyout L&T Mutual Fund proposed to merge, change name and features of Fidelity Mutual Fund Schemes. To know more about what should be your strategy for your investments in Fidelity schemes (now L&T schemes), please click here.
From October 01, 2012, investing in mutual funds has got simpler and safer as the mutual fund industry has been directed by the capital market regulator - the Securities and Exchange Board of India (SEBI) some wide range of reform measures to be followed by the fund houses, which are:
Exhaustive disclosures in order to protect the interest of investors
Shift to the one plan per scheme model (moving away from the present practice of cluttering one scheme with numerous plans)
Charge expense ratio based on the penetration to small cities
Set aside a portion of their assets (AUMs) for investor education and awareness
In addition to the above measures, SEBI has also allowed the fund houses to levy brokerage and transaction costs, which is incurred for the purpose of execution of trade and is included in the cost of investment, with a ceiling of 0.12% in case of cash market transactions and 0.05% in case of derivatives transactions. However, the amount incurred as expense on account of inflows from cities (other than top-15 cities) would have to be credited back to the scheme in case the said inflows are redeemed within a period of one year. To know our view on this news, please click here.
UTI Mutual Fund launched UTI Credit Opportunities Fund (UCOF), aiming to utilise opportunities present across different maturities and credit ratings, as is available for investing until November 8, 2012. The timing of the fund seems appropriate as there is a remote possibility of interest rates moving northward here onwards, at least until WPI inflation depicts signs of mellowing down. UCOF has a flexibility to vary its exposure to various debt instruments depending on the interest rate scenario and the liquidity position in the system. The fund endeavours to take advantage of yield spreads between the debt instruments of different credit qualities. Also UCOF would invest across the maturity curve.
Goldman Sachs Mutual Fund added to its product line an actively managed diversified equity fund, named Goldman Sachs India Equity Fund (GSIEF). The fund is linked to S&P CNX 500 index as its benchmark and has the freedom of investing across stocks and sectors within the universe of the S&P CNX 500 index, without holding a bias towards any market capitalisation segment. The fund will attempt to identify companies, which are fundamentally sound or are depicting improving fundamentals; and to do so the fund will resort to fundamental research. Also in order to hedge the fund's portfolio from time to time, derivatives may also be used. While investing the fund will allocate 80% - 100% of its total assets to equity and equity related securities and the rest (i.e. upto 20%) in debt and money market securities.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.