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Mutual Fund Roundup: December 2012 - Outside View by PersonalFN
 
 
Mutual Fund Roundup: December 2012

Market Overview

In the month of December 2012 the Indian equity markets continued to ascend as they did in the month prior (i.e. November 2012) too. But this time, the BSE Sensex didn't depict a strong impulse, as it registered a gain of mere +0.4% (or 86.81 points) in the month gone by.

The Q3FY13 GDP growth rate of 5.3% revealed that the slump in the economic growth rate has been rather protracted and confirmed slowdown in the Indian economy. The Index of Industrial Production data for October 2012 (announced in December 2012) did show a smart bounce back, but the markets didn't react positively on the date of announcement of the data since it was only the favourable base effect and increase in production to meet festive demand which helped IIP to depict a sharp up-tick. Moreover, the trend remained quite "see-saw" and it was expected that in the ensuing months of the calendar we may see a dip, as industrial output generally tapers down after meeting festive demand. The WPI inflation data for November 2012 (data released in December 2012) however changed the mood in the markets as inflation fell to 7.24%, and it elevated hopes that the Reserve Bank of India (RBI) may reduce police rates. In the 3rd quarter mid-review of monetary policy 2012-13 the RBI did not reduce rates nor did it reduce the Cash Reserve Ratio (CRR), because Open Market Operations (OMOs) helped to inject primary liquidity into the market, and the central bank indicated that core inflation is becoming comforting there was likelihood of steady moderation in inflation. The guidance from monetary policy said, "In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards.. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards." And this statement helped in reviving sentiments in the market. The passage of Banking Laws Amendment Bill and Companies Bill in the winter session of the Parliament also helped as it showed signs of commitment to reforms on the part of the Government. But towards the tail of the month, worries over U.S. fiscal cliff (whether the deal will be passed by the U.S. Senate or not) gripped the Indian equity markets, because if the cliff were to be triggered, it could drag most economies into a recession. Also a statement from Ms Angela Merkel saying, the Euro zone crisis is far from over even though reform measures designed to address the roots of the problem are beginning to bear fruit; sent shivers across the global economy. Our Current Account Deficit (CAD) widened to 5.4% in the second quarter of the current fiscal year, and that too was a concern for the markets.

As far as the precious yellow metal - gold is concerned; it underwent a corrective phase in December 2012 (lost -3.1%). Elevated prices refrained investor from buying the precious yellow metal. Moreover, lack of right catalysts for gold, led to its corrective. In the Euro zone with a bailout package doled out for Greece (€40 billion aimed at bringing an immediate 20% reduction to the country's debt) and Spanish bank loans restructuring approved (expected to inject around € 37 billion into the Euro zone), immediate fear receded. It is noteworthy that in mid-December 2012 Standard & Poor's (S&P) hiked Greece's ratings by 6 notches upgrading the country to 'B-' (the highest grade it has given Greece since June 2011), and said the rating reflected its view that the other 16 European Union countries using the euro are determined to keep Greece inside the currency union. The precious yellow metal also experienced a corrective because there were high expectations that U.S. Senate would pass the deal to avert a fiscal deal. So receding intermediate fears and cautious optimism surrounding growth and illusionary reduction in need for safe havens also resulted in lack of further momentum buying. But some smart investors continued to take refuge under gold for its trait of being a safe haven during uncertain times.

Speaking about Brent crude oil, the uplift in sentiments due to bailout package doled out for Greece, Spanish bank loan restructuring approved, likelihood that the U.S. Senate would pass the fiscal deal and Chinese economy showing signs of recovery; all helped Brent crude oil prices to remain stiff. Prices reduced merely by U.S. $0.28. Steep piling of inventory (as revealed by the data from the U.S. Energy Information Administration) and only a slight lag in demand was also a support for price not to fall vehemently.

For the bond markets, liquidity remained tight in the third quarter of the present fiscal year due to large Government balances with the Reserve Bank of India (RBI) and the widening wedge between deposit and credit growth. But with a view to contain the liquidity deficit at reasonable levels, the central bank has conducted OMOs with a view of injecting primary liquidity. Thus in its 3rd quarter mid-review the RBI neither reduced policy rates nor Cash Reserve Ratio (CRR). The short-term CD yields ended the month rather stiff, with 1-month and 3-month CD yields at 8.2% and 8.4% respectively, a mere change of 1 basis points (bps) each from the level seen on December 1, 2012. However taking guidance from the monetary policy, the 8.15% 2022 (10-Yr) G-Sec yield mellowed by good 6 bps to end the month at 8.11%.

Going forward, since inflationary pressures are evident for about of couple of months, RBI would have reasons to be cautious in its monetary policy stance. The positive news over the past 15 days has been the ease in liquidity situation in the system; which is now below 1 lakh crore levels (the comfort zone of RBI is Rs. 60,000 crore). While this has been partially addressed by the liquidity released by re-purchase of bonds by RBI; the gap still remains too wide to be bridged with OMOs. The liquidity deficit in the system and expectation to see a rate cut by RBI gives rise to investment opportunities at both the ends of the yield curve. However one needs to be cautious while selecting their investment in G-secs as the gains on such instruments will very much depend on the firm step taken by the RBI. Markets may be factoring in a 25 bps (0.25%) cut in repo. Anything in excess of that would trigger a sharp rally in government securities.

Monthly Market Roundup
  As on Dec 31, 2012 As on Nov 30, 2012 Change % Change  
BSE Sensex 19,426.71 19,339.90 86.81 0.4%
S&P CNX Nifty 5,905.10 5,879.85 25.25 0.4%
CNX Midcap 8,505.10 8,139.80 365.30 4.5%
Gold (Rs /10 gram) 30,490.00 31,475.00 (985.00) -3.1%
Re/US $ 55.00 54.27 (0.73) -1.3%
Crude Oil ($/BBL) 110.84 111.12 (0.28) -0.3%
8.15% 2022 (10-Yr) G-Sec Yield (%)* 8.11 8.17 (0.06) 6bps
1-Yr FDs  7.50% - 9.00%
*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on December 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. Under the background of the aforementioned global and domestic economic factors they net bought to the tune of Rs 25,088 crore in the month of December 2012, as against net buying worth Rs 9,577 crore in November 2012.

In the year gone by (i.e. calendar year 2012), FIIs bought net to the tune of Rs 1,28,361 crore, although for most part of the year there was policy paralysis, reforms measures were delayed, tainted political canvas and an unfavourable investment climate. When reform measures were pushed and P. Chidambaram took over as the Finance Minister in August 2012, the FIIs participated in rather a roaring manner.

BSE Sensex vs. FII inflows
(Source: ACE MF, Personal FN Research)

Moreover, the easy monetary policy adopted by the central bankers in the developed economies aided 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 roaring participation of FIIs, domestic mutual funds continued to be net sellers in the Indian equity markets - they net sold to the tune of Rs 2,699 crore, as against Rs 1,273 crore in November 2012. In the year gone by (i.e. calendar year 2012) too, they stood to be net sellers to the tune of Rs 20,654 crore because they seemed to be worried about widening CAD, how the fiscal deficit target would be achieved (although the Government is quite ambitious on its path of fiscal consolidation), risk of sovereign rating downgrade and political turbulence ahead of 2014 general elections. The ascending move of the Indian equity markets in the month gone by, also built-up redemption pressures (as investors have preferred to either book profits, or are wary of the markets), although slew of reform measures have been announced by Government in the winter session of the Parliament.

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, gains were seen across styles and market capitalisations. However mid and small cap funds, those betting on emerging businesses and the one's following a value style of investing performed well due to better momentum in the mid and small cap space and better value picking.

Among the sector funds, certain funds investing in themes such as infrastructure, banking & financial, energy and consumption, generated luring returns in the month gone by, well supported by positive undercurrents in the respective themes. However, funds investing in technology sector and FMCG eroded investors' wealth in December 2012. As far as ELSS funds are concerned, most of them created wealth for their investors well supported by their fluid investment style and up-move in the market.

In the Fund of Fund (FoF) category, those focusing on investing in European markets, Middle East, Latin America and Emerging Market Economies (EMEs) were front runners in the FoF category. Likewise other funds focusing on domestic equity and global assets also delivered positive returns. But a few world energy funds and the ones in gold mining, eroded investors' wealth.

Speaking about the hybrid funds; amongst the balanced funds most of them (barring a couple of them) managed to deliver positive returns, treading with upward movement of the Indian equity markets. Likewise the debt portion of their portfolio also gained with gradual softening of yields. Thus Monthly Income Plans (MIPs), which invest a dominant portion of its assets in debt securities, gained from descending move depicted by yields across maturities, but gains were more prominent in the medium to long-term debt papers since they benefited from more reduction in yields. The equity portfolio of MIPs also helped MIPs to perform well with the ascending move of the Indian equity markets.

Monthly top gainers: Open-ended Equity Funds
Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
SBI Magnum Emerg Businesses Fund (G) 5.88% HDFC Infrastructure Fund (G) 5.01% SBI Tax advantage Fund-II (G) 3.86%
SBI Magnum MidCap Fund (G) 5.65% Sundaram Fin Serv Oppor (G) 4.68% Birla SL Tax Plan (G) 3.43%
Birla SL Midcap Fund (G) 5.02% Reliance Banking Fund (G) 4.35% Birla SL Tax Relief '96 (G) 3.39%
(1-Mth returns as on December 31, 2012)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Fund of Funds
Fund of Funds 1-Mth
JPMorgan Emerg Eur Mid East & Afr Eq Off-shr Fund (G) 6.87%
HSBC Emerging Mkts Fund (G) 6.65%
ING Latin America Equity Fund (G) 6.24%
(1-Mth returns as on December 31, 2012)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Hybrid Funds
Balanced Funds 1-Mth Monthly Income Plans 1-Mth
HDFC Prudence Fund (G) 3.83% HDFC MIP-LTP (G) 2.07%
L&T India Prudence Fund (G) 2.87% ICICI Pru Multiple Yield-D (G) 2.00%
HDFC Balanced Fund (G) 2.20% ICICI Pru Multiple Yield-C (G) 1.87%
(1-Mth returns as on December 31, 2012)
(Source: ACE MF, Personal FN 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  
UTI FRF-STP (G) 0.75% Escorts ST Debt (G) 0.98% HSBC Gilt-ST-Reg (G) 1.47%
DSPBR Income Opportunities Fund (G) 0.75% UTI ST Income-Reg (G) 0.94% Edelweiss Gilt Fund (G) 1.09%
Principal Debt Opp Fund-Cons Plan (G) 0.75% Axis Income Saver Fund (G) 0.94% IDFC G Sec-STP-A (G) 0.96%
Long Term   Long Term   Long Term  
HDFC FRIF-LT (G) 0.73% Tata Dynamic Bond Fund-Plan A (G) 1.72% UTI Gilt Adv-LTP (G) 1.82%
Kotak Floater-LTl (G) 0.72% Tata Income Plus Fund - Plan A (G) 1.60% ICICI Pru Gilt-Invest (G) 1.75%
Birla SL FRF-LT-Ret (G) 0.72% SBI Magnum Income(G) 1.54% SBI Magnum Gilt-LTP (G) 1.75%
(1-Mth returns as on December 31, 2012)
(Source: ACE MF, Personal FN Research)

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Escorts Liquid Plan (G) 0.80% Pramerica Ultra ST Bond-Reg(G) 0.77%
Principal Retail Money Mgr (G) 0.74% Indiabulls Ultra Short Term Fund(G) 0.77%
Union KBC Liquid (G) 0.72% JM Money Mgr-Reg(G) 0.75%

Since short-term yields showed a petite reduction in yields, short-term floating rates funds and short-term income funds displayed restricted gains. However gilt funds focusing on investing in the shorter end of maturity comparatively exhibited better returns in the month gone by as well as when compared to a month prior (i.e. November 2012). Debt funds mandated to invest in the longer maturity papers (i.e. medium to long) performed better as yields on medium to long-term debt papers displayed good drop. Thus long-term floating rate funds, long-term income funds and long-term gilt funds did well in the month gone by, and the performance was better than in the month November 2012. Going forward if the RBI reduces rates and shows consideration for growth, long-term debt funds are expected to perform even better.

It is noteworthy that in the Indian debt market, both FIIs and domestic mutual funds continued to be net buyers in the Indian debt market. In the month gone by, FIIs bought net to the tune of Rs 1,704 crore (as against mere Rs 292 crore in November 2012) while domestic mutual funds to the tune of Rs 43,625 crore (as against Rs 26,014 crore in November 2012). In the calendar year 2012, FIIs and domestic mutual funds bought net to the tune of Rs 34,989 crore and Rs 4,55,327 respectively.

Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on December 31, 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, the ones mandated to invest in the infrastructure, banking & financial services and pharma performed well, while FMCG funds and tech funds eroded investor wealth in the month gone by. In the diversified equity fund category, mid cap funds were frontrunners, when compared to large caps. From a fund management style perspective, flexi style funds and value style funds, did well by citing opportunities in the market.

Tracing with the descending move in the precious yellow metal - gold, Gold ETFs exhibited negative returns for investors (on average -3.3%). In the debt mutual fund category, those with a mandate to invest in shorter maturity benefit displayed restricted gains due to petite fall shown by short-term yields, while those with a mandate to invest in longer maturity debt instruments gained more with a better drop in yields of longer maturity papers.

Other News:
  • A little over a couple of months back we wrote on how opting for "direct plans" offered by mutual funds could help you enhance your returns. We said that an extra mile travelled, could earn you an extra buck! It was certainly a good move by the Securities and Exchange Board of India (SEBI) intended to help long-term investors, as the direct plans enunciated for a lower expense ratio and no commissions to be paid for such plans.

    But now it seems that mutual fund houses are aligning their business strategy, intended to protect themselves as well as their beloved mutual fund distributors, who help them win the race of garnering large Assets Under Management (AUM). Very recently some mutual fund houses have imposed steep charges on investors who wish to move on from their existing plan (i.e. distributor supported) to "direct plans" (which are effective from January 01, 2013). They have raised their "exit loads" as high as 3% for exits / switches made within six months.

  • Many of you may have encountered horrendous experience of financial products being mis-sold, in times where financial innovation is galore and competition in the financial services industry is severe. Fragmented knowledge on financial products on part of investors often causes this mis-selling to occur and this evil has been prevalent since quite some time now, especially in case of mutual funds and insurance products.

    But now to crack the whip on the practice rampant mis-selling in mutual funds, the Securities and Exchange board of India (SEBI) has decided to to bring such activities under the ambit of fraudulent trade practices. The capital market regulator has recently brought in an amendment to the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, to include mis-selling of units of a mutual fund scheme under its ambit.

    Thus now you could book your mutual fund distributor / agent under a case of fraud, if the he's "mis-selling" a mutual fund scheme to you.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

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