»5 Minute Wrap Up by Equitymaster

On This Day - 30 JANUARY 2012
Are large cap mutual funds safer than the others?

In this issue:
» Food security gives nightmares to the govt
» Banks prefer the best but won't give their best
» Budget to help make EPF attractive?
» India still attractive FDI destination
» ...and more!

---------------------------------------------------- Global Crisis Update ----------------------------------------------------

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But what should really be of concern to you is that this global crisis may actually turn into a local crisis.

So, is your portfolio insulated from this crisis? How can you do that? Click here for details...


There is a popular quote that says "bigger is better". This quote gains popularity in the stock markets particularly when the times are tough. Due to the high risks inherently associated with the mid and small cap stocks, investors generally tend to flock to the large cap companies. The latter have proven business models, good managements, larger probability to withstand tough times, etc. But does this theory hold true for mutual funds too?

Ideally it should. After all mutual funds are nothing but a collection of stocks in a particular category. So a large cap mutual fund is expected to do better than the other categories of funds simply because it holds large cap stocks. Unfortunately this theory does not always hold true.

A leading daily carried out a study on the performance of mutual funds in 2011. In a year that was marked by high volatility, the mid cap and small cap funds delivered negative returns of about -25%. However, during the same period, the BSE Mid Cap and BSE Small Cap indices were down by nearly 31% and 42% respectively. Therefore, the mutual funds focused on the same indices outperformed the benchmark indices. Only 14% of the funds underperformed the benchmark in this category.

Jump to the performance of the large cap funds. Nearly 33% of the funds underperformed the BSE-Sensex during the same period. As a result, it is obvious that just holding on to the universe of large caps does not necessarily mean that your investment portfolio will deliver superior results. This study brings us back to the same point. It is not the size of the company that determines whether it is a good investment or not. It is its fundamental strength that determines its investment value. Therefore, it is essential that the investors study the fundamentals and compare it to the valuations of the company or mutual fund in question. Simply going for the largest, may not really be the wisest move.

Do you think the large cap mutual funds are safer than the others? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The Indian pharma sector has a reason to cheer. During the period from April to August 2011, the pharma exports from India registered a 30% growth as compared to the same period in the previous year. Today's chart of the day shows the growth in the top 5 export destinations for the Indian drugs during the period. Though the growth in the top market of US appears to lag that in the other markets, however it is just due to the larger base effect. US continues to be the top destination for drug exports and accounts for nearly 23% of total drugs exported from India.

Data source: Business Standard
* Data for the period April to August 2011

Now, this is yet another indicator of how politics tends to ride rough shod over economics. The food security bill that is supposed to do for the Government this time what NREGA (National Rural Employment Guarantee Act) did in 2009, is believed to be giving some serious headaches to the finance ministry. A leading business daily points out how the bill could put additional subsidy burden on the Government's finances. Not only this, the extra grains that the Government agencies will have to buy in order to fulfill the bill could also put pressure on prices.

All of this goes to show how populist politics could be at the centre of creation of such a bill rather than a concern for the fiscal situation of the country. Besides, the Government could have done the nation a huge favour by trying to find out how successful the previous social scheme like NREGA have been before coming out with the food security bill.

It should be noted that NREGA has not been the success story that it was intended to be. In fact, a lot of people are of the view that instead of improving employment situation in the country, NREGA has actually led to inflation of wages and has encouraged leisure and not hard work. We won't be surprised at all if the food security bill too backfires. After all, if financial aid and social security schemes were the answers to a country's economic woes, Africa would perhaps have been the richest region in the world.

It's good to note that bankers are keeping a keen eye on asset quality and are being more careful in acquiring new customers. According to a study by Credit Information Bureau India (Cibil), the share of people who have taken home loans with a credit score of over 800 rose to 62% in 2011. This is a huge leap from just about 23% in 2008. A Cibil score of 900 is the least risky while a score of 300 is extremely risky. Over 88% of new home loan borrowers in 2011 had a score of 750 and above. Thus bankers seem to only be picking the cream from the milk.

But while developed countries offer lower rates or better terms if their credit scores are high, this is not the case in India. Indian customers continue to pay high interest rates despite having good credit scores. But we believe that a strong system for spotting errors and identifying defaulters needs to be in place first. Only then can bankers think about a differential rate system. So till then we will have to continue to deal with high interest rates. We will just have to wait for the Reserve Bank of India (RBI) to cut policy rates.

With interest rates firming up, provident funds are also looking to dole out higher interest in line with the rates on other saving instruments. Thus, with bank fixed deposits offering 9% on an average, the PPF (public provident fund) also increased its interest rate to 8.6%. So, it is hardly surprising that there are similar expectations from the EPFO (Employees Provident Fund Organisation) as well. Based on its surplus, the EPFO proposed an 8.25% rate of interest for 2011-12 in a meeting of its Central Board of Trustees (CBT) in December, as against 9.5% given in 2010-11. However, trade unions have demanded the interest rate to be similar to what was doled out in FY11, which was on the higher side. The finance ministry is likely to take a final call in this matter. First, the ministry will determine whether the EPFO can offer interest from its own resources. If not, chances are that the EPFO will receive support from the finance ministry in the Budget. Whatever the case may be, in a rising interest rate environment, these funds will have to keep up with the market in terms out handing out interest if they want to ensure more deposits in the future. If that happens, Indian employees have some more to cheer about.

We all know that India is facing some very critical problems like corruption, political paralysis, slow reforms, poor infrastructure etc. But despite all of this, there is one thing that no one takes away from India, that is, the immense potential for growth. And wherever there is growth potential, capital will always follow. As per a report by Ernst & Young (E&Y), foreign direct investment (FDI) in India is set to rise in the years to come. In fact, in 2011 FDI in India showed a rise for the first time in the last 3 years. While the total number of projects rose by 25% year-on-year (YoY) to 864 during the first 11 months of 2011, the total FDI increased by 13% YoY to US$ 50.81 bn.

In the meanwhile, the Indian stock markets continued to languish after opening the day on a weak note. At the time of writing, the BSE Sensex was 256 points (1.5%) below the dotted line. Nearly all the sectoral indices were in the red with the stocks in the capital goods and banking sectors leading the pack of losers. Barring Taiwan, nearly all the other stock markets in Asia closed the day on a weak note. European markets have opened in the red as well.

 Today's Investing Mantra
"Wall Street people learn nothing and forget everything." - Benjamin Graham

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