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Mutual Fund Roundup: March 2013 - Outside View by PersonalFN
 
 
Mutual Fund Roundup: March 2013

The descending move of the Indian equity markets (i.e. the S&P BSE Sensex) witnessed in the month of February 2013 continued in the month of March 2013 as well. However, unlike the month of February 2013 where the markets corrected by -5.2% or 1,033.44 points, this time, in the month gone by, the markets fell by mere -0.1% or -25.77 points.

Initially at the beginning of the month, the Union Budget 2013 failed to pep-up the Indian equity markets despite the Government making an attempt to bring back fiscal prudence. The announcement over keeping Securities Transaction Tax (STT) unchanged for cash transaction was a disappointment for the market. Moreover, a statement in the budget saying, if an FII or a non-resident wants to avail of tax treaty benefits, then a tax residency certificate (TRC) alone would not be sufficient; spooked the foreign institutional investors (FIIs). But a couple of days after the budget being presented, a clarification from from the Finance Minister on TRC announcement saying that that there was no intention to question tax residency certificate holders and TRCs will be accepted as evidence of residence; has helped to restore confidence of FIIs towards Indian equity market. Likewise with the U.S. economy showing steady recovery which aided bolster investors' appetite for risk also helped confidence to be imbued and shrug-off worries of debt crisis in the Euro zone.

But later with the markets evaluating the domestic macroeconomic data - which appeared rather worrisome, the markets started eroding some gains seen earlier. The Q3FY13 GDP growth rate of India came in at 4.5%, depicting a slowdown and the Index of Industrial Production (IIP) data too continued its 'see-saw' movement with series of contraction and expansion evident. The Wholesale Price Index (WPI) inflation for February at 6.84%, nonetheless brought in some sigh of relief as it imbued high probability of rate cut from the Reserve Bank of India (RBI). The markets expected the RBI to cut rates at least by 25 basis points (bps) in its 4th quarter mid-review of monetary policy 2012-13 (held on March 19, 2013); and indeed when the RBI did cut rates matching expectations, it didn't have a positive impact on the Indian equity markets because the expectations were already discounted when WPI inflation for February 2013 was released. Also the hint from RBI that headroom for further monetary easing remained quite limited and that the Government has to play a key role in reinvigorating growth also made the markets rather nervous. In the meanwhile, concern of Cyprus (which accounts for just half of a per cent of the Euro region's economy) also made the markets nervous in the intermediate until a deal to bailout the debt-ridden island was planned out amounting to €10 billion (or U.S. $13 billion). Without the agreement the European Central Bank (ECB) said it would have cut off emergency funds to the banks, triggering a meltdown of Cyprus's banking system and potentially pushing the small country out of the euro currency bloc.

The political scenario in the country too was a concern for the market since earlier the Dravida Munnetra Kazhagam (DMK) party pulled out of the United Progressive Alliance (UPA) Government (over the issue of alleged human rights violations of Tamils in Sri Lanka) and thereafter a political backlash from the Samajwadi Party (SP) brought the Government under a threat of early elections.

As far as the precious yellow metal - gold is concerned; after undergoing a corrective phase as seen in the last few months, it once again reported gains (of +0.3%) in the month gone by, although the gold prices ended the month of March 2013 below Rs 30,000 mark.Fall in prices as witnessed in the previous months, nudged smart investors to buy into gold with uncertainty looming around in the global economy (especially the Euro zone), intermediate inflationary pressures yet imminent, slowdown in economic growth and Indian rupee remaining under pressure due to widening CAD. While the Government did slam a 6% import duty on gold, raising it from 4% earlier in an attempt to curb widening country's Current Account Deficit (CAD), assessing the fact that the country remains the largest consumer of gold and later the RBI working group recommending setting up of gold banks and introduction of gold-backed financial products, it hasn't helped reduce India's insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. In fact smuggling in gold has increased. The government has seized 174.62 kg of gold during April-February 2012-13, up 8.5% from 2011-12.

Speaking about Brent crude oil, prices eased marginally (by -0.4%) thereby following the sharp descending move as seen in the month of February 2013.Increased supplies from the North Sea and concerns about Euro zone economy help to keep a check on Brent crude oil prices. But going forward with signs of steady economic recovery shown by the U.S., prices may lead moving up once again.

For the bond markets, the RBI in its 4th quarter mid-review of Monetary Policy 2012-13 cut policy rates in line with expectations. To manage the liquidity situation, while the RBI refrained from reducing the Cash Reserve Ratio (CRR) unchanged, it mentioned that it intends manage liquidity situation actively through various instruments, including OMOs (so as to ensure adequate flow of credit to productive sectors of the economy). This in turn led to short-term CD yields mellowing down towards to end of the month, with 1-month and 3-month CD yields placed at 9.50% and 8.95% respectively. But on the other hand, the 8.15% 2022 (10-Yr) G-Sec yield rose by 2 bps placing it at 7.90% on concerns over slowdown in economic growth rate, RBI hinting that headroom for further monetary easing remained quite limited and now it putting the onus on the Government for reviving growth rate. Political instability amid fiscal reforms and year-end portfolio realignment also led to the 10-Yr G-Sec being placed at the aforesaid level. Going forward with fresh allocation to be made in the new financial year, we may witness a rally although the macroeconomic economic and fiscal outlook yet appears cautious.

Monthly Market Roundup
  As on March 31, 2013 As on Feb 28, 2013 Change % Change  
S&P BSE Sensex 18,835.77 18,861.54 (25.77) -0.1%
CNX Nifty 5,682.55 5,693.05 (10.50) -0.2%
CNX Midcap 7,401.60 7,540.35 (138.75) -1.8%
Gold (Rs /10 gram) 29,610.00 29,520.00 90.00 0.3%
Re/US $ 54.28 54.36 0.08 0.1%
Crude Oil ($/BBL) 109.27 109.74 (0.47) -0.4%
8.15% 2022 (10-Yr) G-Sec Yield (%)* 7.90 7.87 0.03 2bps
1-Yr FDs 7.25% - 9.00%
*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on March 31, 2013)
(Source: ACE MF, Personal FN Research)

As far as participation of Foreign Institutional Investors (FIIs) in the Indian equity market is concerned, it was quite heartening to see them continue to buy into Indian equities despite political uncertainty, slowdown in economic growth rate, lull in industrial activity, intermediate inflationary pressures evident (due to hike in prices of diesel and freight) and global economic headwinds in play (especially from the Euro zone, with risk of Cyrus banking system melting down being a fresh issue).However a noteworthy point is that, unlike the month of February 2013 where they net bought aggressively to the tune of Rs 24,439 crore; in the month of March 2013 they turned cautious and slowed pace in their net buying activity with Rs 9,124 crore of Indian equities being purchased.

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);
  • Slowdown in economic growth rate; and
  • RBI hinting that headroom for further monetary easing remained quite limited and now it putting the onus on the Government for reviving growth rate
Also with 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. And this time with redemption pressures building in with an uncertain economic and political environment, the magnitude of net selling was greater with Rs 1,767 crore equities being net sold, vis-a-vis Rs 848 crore of equities net sold by them in the month of February 2013.
The fund manager too seemed to have being concerned on account of:
  • Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
  • Probability of derailment from the path of fiscal consolidation;
  • Twin deficit problem;
  • Intermediate inflationary pressures (due to hike in prices of diesel and freight);
  • Slowdown in economic growth rate;
  • RBI hinting that headroom for further monetary easing remained quite limited and now it putting the onus on the Government for reviving growth rate; and
  • Political uncertainty
  • 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, only few funds mandated to invested in large cap equities and some betting on opportunities across market capitalisation segments and sectors managed to end the month in green, while the rest manifesting interest in emerging equities and mid & small caps report losses for investors. Likewise, value funds which ended the month of February 2013 in green also eroded investors' wealth.

Among the sector funds, those investing in defensive sector such as FMCG and Pharma delivered positive returns. Likewise mutual funds betting on the entertainment opportunities also ended the month gone by in green. Technology funds also did well in the month gone by aided by the persistent weakness in the Indian rupee for most part of the month, which helped the underlying stocks in their portfolio (especially the export oriented ones) performed well. However, infrastructure funds, PSU funds, banking and financial services and those betting on the power sector theme reported losses led by the negative undercurrents prevailing in the respective sectors.

As far as ELSS funds are concerned (which follow fluid investment style), again only handful of them managed to deliver positive returns, while the rest eroded investors wealth the descending move of the market.

In the Fund of Fund (FoF) category, some of those focusing on investing the world markets - in energy, real estate, gold, agribusinesses and emerging markets reported gains. Likewise few asset allocation funds and financial planning funds which are structured as FoFs ended the month in green, while the rest in this category ended the month in red. The domestic equity FoFs, generated negative returns in the month gone by with the gradual slide in the market.

Speaking about the hybrid funds; most of the balanced funds like the month of February 2013 continued to deliver negative returns, treading with downward movement of the Indian equity markets. The debt portion of the Assets Under Management (AUM) remained under pressure with advance tax obligations until mid-March 2013, which had an effect of tightening liquidity and placing short-term CD yields above 9.0% until mid-March 2013. Likewise, lack of positive guidance on future rate cuts from the RBI has pulled down market sentiment towards longer duration instruments. Thus Monthly Income Plans (MIPs), which invest a dominant portion of its assets in debt securities across maturities, were also under the influence of all these factors (related to debt markets), but they performed a little better than in the month of February 2013. A well-managed equity portfolio also seemed to have helped in delivering slightly better returns than in the month of February 2013.

Monthly top gainers: Open-ended Equity Funds
DiversifiedEquity Funds 1-Mth SectorFunds 1-Mth ELSS 1-Mth
ReligareAGILE Fund (G) 3.13% ICICIPru FMCG Fund-Reg (G) 3.07% ReligareAGILE Tax Fund (G) 2.84%
BirlaSL India Opportunities Fund (G) 1.72% SBI FMCGFund-Reg (G) 2.67% Union KBC TaxSaver Fund (G) 1.19%
AxisEquity Fund (G) 1.42% Sundaram SelectOppor (G) 2.37% AxisLT Equity Fund (G) 0.58%
(1-Mth returns as on March 31, 2013)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Fund of Funds
Fundof Funds 1-Mth
DSPBRWorld Energy Fund-Reg (G) 3.12%
INGGlobal Real Estate Fund (G) 3.02%
PineBridgeWorld Gold Fund (G) 2.64%
(1-Mth returns as on March 31, 2013)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Hybrid Funds
BalancedFunds 1-Mth MonthlyIncome Plans 1-Mth
Baroda Pioneer Balance Fund (G) 0.03% PrincipalDebt Savings Fund (G) 0.91%
BirlaSL '95 Fund (G) -1.00% LICNomura MF MIP (G) 0.88%
CanaraRob Balance Scheme-Reg (G) -0.68% DWS IncomeAdvantage Fund (G) 0.80%
(1-Mth returns as on March 31, 2013)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Debt Funds
FloatingRate Funds 1-Mth IncomeFunds 1-Mth Giltfunds 1-Mth
Short Term   Short Term   Short Term  
RelianceFRF ST (G) 0.92% BirlaSL ST Opportunities Fund (G) 1.12% ICICIPru Gilt-Treasury-Reg (G) 0.86%
DSPBRIncome Opportunities Fund-Reg (G) 0.89% Sundaram SelectDebt-STAP (G) 1.10% DSPBRTreasury Bill Fund-Reg (G) 0.74%
SBIMag. Income FRP-Sav Plus Bond-Reg (G) 0.77% TempletonIndia ST Income Plan (G) 1.06% IDFC GSec-STP-Reg (G) 0.70%
Long Term   Long Term   Long Term  
KotakFloater-LT (G) 0.93% BirlaSL Medium Term Fund (G) 1.21% JMG-Sec Fund-Reg (G) -0.53%
Principal Debt OppFund-Corp Bond Plan (G) 0.89% BarodaPioneer PSU Bond Fund (G) 1.08% Religare GiltFund - LDP (G) -0.35%
SBIMagnum Income FR-LTP-Reg (G) 0.74% TempletonIndia Income Fund (G) 1.02% IDBIGilt Fund(G) -0.29%

LiquidFunds 1-Mth LiquidPlus funds 1-Mth
TataLiquidity Mgmt (G) 0.87% IDFCMoney Mgr-IP-Reg (G) 0.99%
PrincipalRetail Money Mgr (G) 0.84% DWSMoney Plus Fund (G) 0.96%
TataLiquid Fund - Plan A (G) 0.77% ICICIPru Ultra Short Term Plan (G) 0.94%
(1-Mth returns as on March 31, 2013)
(Source: ACE MF, Personal FN Research)

As far as performance of debt mutual fund scheme is concerned, with short-term CD yields having mellowed down a little, liquid funds, liquid plus funds (also known as ultra-short-term funds), short-term floating rated debt funds and short-term income funds performed better than the month of February 2013. In the long-term debt funds category, long-term floating rate funds did well, however, long-term income funds and long-term gilt funds came under pressure due to lack of positive guidance on future rate cuts from the RBI.

Going forward, with banks discharging funds back in the system, the markets are expected to see some ease in liquidity, which may be short lived. These funds will find their way towards newly issued bonds and fund the government borrowing, which in turn would put pressure on liquidity, and push rates of shorter maturity instruments up. It is noteworthy that, the Government has already announced a gross borrowing of Rs 3,49,000 crores (59% of the full year's budgeted borrowing) in the first half of 2013-14 and is expected to start with its borrowing for this fiscal.

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 5,795 crore thereby accelerating from February 2013's net buying worth Rs 4,001 crore. But domestic mutual funds participated rather in a roaring manner in the Indian debt markets by being net buyers net to the tune of Rs 75,005 crore, thereby accelerating from the net buying activity worth Rs 40,092 crore in February 2013.

The mutual fund industry's Asset Under Management (AUM) for the quarter January 2013 to March 2013, stood at Rs 8,16,402 crore thereby reporting a jump of +3.8% from the previous quarter i.e. October 2012 to December 2012. HDFC Mutual Fund retained its top slot with AUM of Rs 1,01,720 crore, followed by Reliance Mutual Fund (Rs 94,580 crore), ICICI Prudential Mutual Fund (Rs 87,835 crore), Birla Sun Life Mutual Fund (Rs 77,046 crore) and UTI Mutual Fund (Rs 69,450 crore) in the top five list.

Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on March 31, 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, infrastructure took the maximum beating followed by banking and financial services sector funds. However sector funds mandated to invest in defensive sectors such as FMCG and pharma delivered positive returns for their investors. Likewise technology funds aided by the persistent weakness in the Indian rupee for most part of the month, which helped the underlying stocks in their portfolio (especially the export oriented ones) performed well. From market capitalisation perspective, both large cap funds as well as mid cap funds eroded investors wealth and so did flexi-cap funds. Similarly from a fund management style perspective, value funds ended the month gone by in red.

Tracing ascending move in the precious yellow metal - gold, Gold ETFs exhibited positive returns for investors (on average +1.5%).

In the debt mutual fund category, those with a mandate to invest in shorter maturity instruments displayed slightly better returns as compared to those seen in February 2013, as yields of short-term debt papers mellowed down a bit. However gains were restricted in long maturity debt mutual funds due to lack of positive guidance on future rate cuts from the RBI.

Other News and NFOs:
  • Starting the process of setting up Self-Regulatory Organisation (SRO) for mutual fund distributors, the Securities and Exchange Board of India (SEBI) has begun to invite applications from groups of intermediaries interested in forming such an oversight body.

    The move follows notification of norms by SEBI in January 2013 to set up an SRO for regulation of distributors of mutual fund and portfolio management products.

  • Recently, a month back we wrote to you investors whether should your investment decision in mutual funds be based on their colour codes, after the Association of Mutual Funds in India (AMFI) put forth a proposal to the capital market regulator - SEBI, that colour codes be applied to mutual fund products (across equity and debt schemes).

    And now SEBI has finally honoured this proposal and issued guidelines on "product labelling and colour coding" for mutual fund schemes, whereby it has been decided that product labels carrying details of the scheme be disclosed on the front page of initial offering application forms and they be also placed in common application forms and advertisements.

  • In a move that can be a step ahead in protecting the interest of investors in mutual funds, the capital market regulator - Securities and Exchange Board of India (SEBI) has showed its desire to limit the rights of the asset managers to charge fund management fees, for which they can be eligible only if they are able to perform. This move can stop money losing mutual fund schemes from charging fees to the investors who might have already lost a portion of their money by being invested in underperforming funds.

  • Until recently, some influential investors in debt mutual fund schemes made a quick buck by using a loophole in debt mutual fund investing to their advantage. As per the guidelines, investors investing a sum of money below Rs 2 lakh in a debt mutual scheme, enjoy the NAV of the date of application of the scheme, although the cheque takes couple or more days to clear. This had encouraged rich investors to participate in debt mutual funds for the short-term, where they were induced even to exit their investments even without their application money leaving their bank account. Moreover, those who wanted to invest a lump sum amount over Rs 2 lakh too preferred to split their investment to obtain the benefit of same day benefit.

    But now to crack the whip, the Association of Mutual Funds in India (AMFI) vide a circular has told mutual fund houses that, for deciding the Net Asset Value (NAV) for amounts lower than Rs 2 lakh, they should club investments through multiple applications in debt funds by an individual or an entity, on the basis of the Permanent Account Number (PAN) of the investor for aggregation.

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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