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

Market Overview

The impulse depicted by the Indian equity markets (i.e. the S&P BSE Sensex) in the month of April 2013, continued to protract in the month of May 2013 as well. But towards the tail of the month, there was a contraction seen in earlier sharp gains, causing the S&P BSE-Sensex to end the month with a gain of +1.3% (or 256.12 points).

The month gone began with positive mood, aided by gush in global liquidity and signs of economic vigour shown by the U.S. However amid the month, there was turbulence as well. At the beginning of the month while the Reserve Bank of India (RBI) reduced policy rates by 25 basis points (bps) in its annual monetary policy 2013-14 (held on May 03, 2013) in attempt to reinvigorate economic growth, aided by mellowing WPI inflation and moderation therein; it did not galvanise the market much on the date of announcement of policy because, first, the rate cut was as per market expectation and second, the central banks reiterated limited space for further monetary easing. But recognising the fact that the central bank is doing its small bit to provide an impetus to economic growth; in the ensuing six trading sessions thereafter the Indian equity market continued to depict it upward move. On May 13, 2013 however, the S&P BSE Sensex reported its maximum fall of -2.1% (or -430.65 points) in the month gone by, as India's trade deficit data for April 2013 (released in May 2013) surged to U.S. $17.8 billion (from U.S. $10.31 billion in March 2013) and spooked investors. Moreover, the news of global liquidity likely to slowing down infused concerns in a global liquidity driven market. Federal Reserve Chairman, Mr Ben Bernanke had said, the central bank could reduce asset purchases in coming months if U.S. economic data improves.

It is noteworthy that in the world markets buoyed by easy monetary policy adopted by central banks, any hint of reversal the markets react adversely - and that's exactly what happened on May 13, 2013 along with news of India's trade deficit aggravating it.

However, when the Wholesale Price Index (WPI) inflation data for April 2013 was released (on May 14, 2013) it once again brought respite to the Indian equity markets since it fell to a 41-month low of 4.89% (after plateauing over the 7.00%+ mark for quite some time) and instilled hopes of a rate cut from the RBI once again in its 1st mid-quarter review of monetary policy 2013-14 (scheduled on June 17, 2013). But it is noteworthy that the fear of pace of global liquidity would slowdown was persisting. In between, towards the tail of the month gone by, in the backdrop of global liquidity concerns Japan's stock markets also plunged sharply (after depicting a bull rally earlier), which rattled the Indian equity markets as well with a second largest fall of -1.9% (or 387.91 points) on May 23, 2013. However in the ensuing trading sessions the Indian equity markets did regain with positive news from Reliance on significant gas findings in KG D-6 basin and also news of progress of a monsoon, which is expected to be normal. But on the last day of the month gone by, with Q4FY13 GDP data being announced at sub 5.0% (i.e. at 4.8%) the markets went into a tizzy as GDP for full fiscal year 2012-13 was at a decade low of 5.0% (as compared to 6.2% in the previous fiscal). Hence while on the same day (i.e. May 31, 2013) the fiscal deficit data for fiscal year 2012-13 was announced, which depicted an improvement by coming in at 4.9% of GDP vs. 5.2% of GDP - the revised estimates; it did not enthuse the markets with submissive economic growth being reported.

The precious yellow metal - gold in the month gone by, after losing sheen in the month of April 2013, ended the month with marginal gains of 0.2%. It is noteworthy that rise in prices almost towards the tail of the month gone by helped the precious yellow metal to end in green. But selling pressure kept prices below Rs 29,000 per 10 grams mark. Even on the auspicious gold buying muhurat - Akshaya Tritiya, gold fell by Rs 390 (to Rs 26,985) in Mumbai; although retail physical gold purchase was quite robust aided by reduced prices. Going forward too, not ruling out that uncertainty yet persists in the global as well as domestic economy smart investors would continue to take refuge under precious yellow metal and global liquidity would be supportive of this asset class well. It is noteworthy that according to the World Gold Council (WCG) shipment of gold to India is expected to reach at around 900 tonnes level in calendar year 2013 due to rise in demand following lower prices. Last year (i.e. in calendar year 2012), India imported 860 tonnes of the precious metal, while demand stood at 864 tonnes in the same year.

Speaking about Brent crude oil, prices continued to slip as they did in the month of April 2013. But it is noteworthy that this time the fall was timid -1.6%, unlike the month of April 2013 where slippage of -5.1% was witnessed. Concerns over outlook for global oil demand from the United States and China, amid already slowing down consumption in Europe pulled prices lower. Also strong U.S. dollar also led to Brent crude oil mellow.

For the bond markets, a 25 bps reduction in policy rates aided by moderation in WPI inflation led to a rally with softening of yields across maturities. In fact when the WPI inflation data for April 2013 was released the rally was further powered as it initiated hopes of another rate cut from RBI. It is noteworthy that yields of 1-month and 3-month CDs mellowed further in the month of May 2013 by 31 bps and 11 bps respectively, placing them at 7.64% and 8.09% respectively. Likewise, the yield of 8.15% 2022 (10-Yr) G-Sec (which is the old 10-yr G-Sec paper) also softened by 25 bps, ending the month at 7.46%. The new 10-Yr G-Sec (2023) which was issued at cut-off of 7.16%, however witnessed rise in yields due to concerns over yawning Current Account Deficit (CAD) and ended the month at 7.24%.

Monthly Market Roundup
  As on May 31, 2013 As on April 30, 2013 Change % Change  
S&P BSE Sensex 19,760.30 19,504.18 256.12 1.3%
CNX Nifty 5,985.95 5,930.20 55.75 0.9%
CNX Midcap 7,821.80 7,818.60 3.20 0.0%
Gold (Rs /10 gram) 27,200.00 27,150.00 50.00 0.2%
Re/US $ 56.51 53.81 (2.70) -5.0%
Crude Oil ($/BBL) 102.02 103.72 (1.70) -1.6%
8.15% 2022 (10-Yr) G-Sec Yield (%) 7.46 7.71 (0.25) 25bps
7.16% 2023 (10-Yr) G-Sec Yield (%)* 7.24 N.A. - - -
1-Yr FDs 7.25% - 9.00%
*7.16% 2023, new 10 Yr G-Sec issued on May 17, 2013
at a cut of 7.16%; trading in secondary mkt started on May 20, 2013 8.15% 2022,
new 10 Yr G-Sec started on June 9, 2012; but 1st trading from June 11, 2012
8.79% 10 Yr G Sec started on Nov 4, 2011; but 1st trading from Nov 8, 2011
7.80% 10-Yr G-Sec Yield (%) 8.75 as on Nov 30, 2011


As far as participation of foreign institutional investors (FIIs) in the Indian equity market is concerned, it was heartening to see them buying aggressively in the Indian equity markets with total net buying amounting to Rs 22,169 crore; which is in stark contrast to cautious buying seen in the last month (with Rs 5,414 crore equity being net bought). Even in the month prior i.e. March 2013 they were on a cautious footing with Rs 9,124 crore worth Indian equities being net bought.

FIIs seem to have participated in Offer for Sale (OFS) and may continue to do so until such offers are on sale and they find them attractive.

S&P BSE Sensex vs. FII inflows
(Source: ACE MF, PersonalFN Research)

Also FIIs seems to have shrug-off some of the factors mentioned below which they were concerned in the earlier months.
  • Political uncertainty (which has put the country to risk on early election);
  • Policy logjam and interrupted session of the Parliament
  • Scam stories unveiling
  • Structural bottlenecks
  • Slowdown in economic growth rate; and
  • Ballooning CAD

Also aided by global liquidity, Emerging Market Economies (EMEs) have also been on the investment radar of FIIs for host of fundamental reasons, which in turn has benefited Indian equities.

Mutual Fund Overview

Contrary to the aggressive participation of FIIs, 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 3,490 crore in the month of May 2013, as against net selling worth Rs 1,423 crore in the month of April 2013 and net selling worth Rs 1,767 crore in March 2013.

The fund managers 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);
  • Policy logjam
  • Slowdown in economic growth rate;
  • Ballooning CAD limiting a scope of rate cut;
  • Political uncertainty; and
  • Global economic headwinds

S&P BSE Sensex vs. MF inflows
(Source: ACE MF, PersonalFN Research)

As far as the performance of various categories of mutual funds is concerned, in the diversified equity funds category, the mid and small cap funds outperform the large caps ones; while from a fund management style perspective flexi and opportunities style funds did a little better than the value style funds.

Among the sector funds, those investing in technology stocks took the lead, well supported by the underlying fundamental, whereby weakness in the Indian rupee during the month helped the underlying stocks in their portfolio (especially the export oriented ones) to do well. Likewise Pharma and FMCG funds which invest in the said defensive sectors as per their mandate also delivered appealing returns. Similarly, mutual funds schemes broadly following the consumption theme also created wealth for investors. However, most banking & financial services sector funds, infrastructure funds, Private Sector Units (PSU) sector funds and those betting on the power sector theme ended the month in red after reporting gains in the of April 2013.

As far as ELSS funds (which follow fluid investment style) are concerned, barring a few funds which ended the month in marginal red; the rest created wealth for investors - and some of them rather magnificently. This was quite in contrast to April 2013 where all of them ended the month in green.

In the Fund of Fund (FoF) category, some of those focusing on investing the world markets in themes such as world energy , agriculture, commodities and real estate did well aided by positive newsflashes for the underlying themes and intermediate upbeat sentiments in the global economy. Likewise the asset allocation funds and financial planning funds which are structured as FoFs also end the month in green aided by the ascending move in the market and performance of their underlying mutual fund schemes. However some of the domestic equity FoFs reported marginal losses attributed by lag in performance of underlying mutual fund schemes held.

Speaking about hybrid funds; the performance of balanced funds was quite satisfactory abetted by ascending move in Indian equities, although they did not report much magnificent gains as seen in the month of April 2013. Softening in yields also benefitted debt portion of their Assets Under Management (AUM) to do well. 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 continued to help in delivering luring returns.

Monthly top gainers: Open-ended Equity Funds
Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
ICICI Pru US Bluechip Equity Fund (G) 6.43% Franklin Infotech Fund (G) 6.49% Edelweiss ELSS Fund (G) 4.15%
Edelweiss Select Midcap Fund (G) 4.69% SBI Infotech Fund-Reg (G) 5.62% Axis LT Equity Fund (G) 3.53%
Franklin India Smaller Cos Fund (G) 4.39% SBI FMCG Fund-Reg (G) 4.77% Religare AGILE Tax Fund (G) 2.68%
(1-Mth returns as on May 31, 2013)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Fund of Funds
Fund of Funds 1-Mth
DSPBR World Energy Fund-Reg (G) 7.04%
DWS Global Thematic Offshore Fund (G) 6.20%
DSPBR World Agriculture Fund-Reg (G) 4.93%
(1-Mth returns as on May 31, 2013)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Hybrid Funds
Balanced Funds 1-Mth Monthly Income Plans 1-Mth
SBI Magnum Balanced Fund-Reg (G) 2.88% FT India MIP (G) 2.86%
FT India Balanced Fund (G) 2.52% FT India MIP-B (G) 2.86%
Tata Balanced Fund (G) 2.45% IDBI MIP (G) 2.42%
(1-Mth returns as on May 31, 2013)
(Source: ACE MF, PersonalFN 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  
DSPBR Income Opp Fund-Reg (G) 1.12% ICICI Pru Banking & PSU Debt -Ret (G) 2.07% Edelweiss Gilt Fund (G) 2.66%
Canara Rob Floating Rate-Reg (G) 0.97% Sundaram Select Debt-STAP (G) 1.42% HSBC Gilt Fund (G) 2.55%
Reliance FRF ST (G) 0.81% Morgan Stanley ST Bond-Reg (G) 1.40% ICICI Pru Gilt-Treas.-Reg (G) 2.19%
Long Term   Long Term   Long Term  
ICICI Pru Corporate Bond Fund-Reg (G) 1.31% Morgan Stanley Active Bond-Reg (G) 3.40% JM G-Sec Fund-Reg (G) 4.17%
Principal Debt Opp -Corp. Bond Plan (G) 1.11% Canara Rob Dynamic Bond Fund-Reg (G) 3.29% SBI Mag. Gilt-LTP-Reg (G) 4.07%
Kotak Floater-LT (G) 0.80% JM Income (G) 3.19% Indiabulls Gilt (G) 3.96%

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Religare Overnight (G) 1.82% PineBridge India Total Return Bond-Ret(G) 2.03%
IDFC Ultra Short Term Fund-Reg (G) 0.75% DWS Money Plus-Reg (G) 0.91%
Escorts Liquid Plan (G) 0.73% Templeton India Ultra Short Bond-Ret (G) 0.76%
(1-Mth returns as on May 31, 2013)
(Source: ACE MF, PersonalFN Research)

As far as performance of debt mutual fund schemes are concerned, with short-term CD yields having mellowed further (as cited above), debt mutual fund schemes with a mandate of holding shorter maturity papers did well. Luring returns were seen in short-term income funds and short-term G-sec funds - which performed better than in the month of March 2013 and April 2013; but short-term floating rate funds saw returns tapering. Since yields of longer maturity paper also softened with WPI inflation mellowing further, the long-term debt fund category also performed well (than in the month of March 2013 and April 2013), with appealing returns exhibited by 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 it remains to be seen whether policy rates are indeed reduced, although WPI inflation is at a 41-month low; because there may be apprehension over yawning CAD while RBI takes its policy stance. It is noteworthy that debt fund managers are significantly lowering their exposure of G-Secs from bond and income funds after the central bank introduced the new 10-year bond maturing in 2023 at a coupon rate of 7.16%. Moreover, now that yields therein have risen they seem to be cautious ahead of the 1st mid-quarter mid-review of monetary policy 2013-14. Thus ascertaining the risk-reward relationship in the present interest rate scenario, debt fund managers are preferring shorter maturity papers as the yields therein haven't fallen much. On the other hand, the rally in G-Secs has been rather strong with a 75 bps reduction in policy rates thus far in calendar year 2013. PersonalFN is of the view that, it would be best to refrain investing in longer maturity debt papers in the aforesaid backdrop, and instead prefer shorter maturity debt papers.

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 5,969 crore thereby slightly accelerating pace from April 2013's net buying worth Rs 5,334 crore. But comparatively domestic mutual funds participated rather in a roaring manner having net bought to the tune of Rs 26,957 crore. But when compared to the month of April 2013 they slowed pace as they had net bought to the tune of Rs 51,885 crore.

Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on May 31, 2013)
(Source: ACE MF, PersonalFN Research)


The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, infrastructure funds took the maximum beating followed by banking & financial services sector funds. Tech funds did well supported by the underlying fundamentals for the theme, whereby weakness in the Indian rupee during the month helped the underlying stocks in their portfolio (especially the export oriented ones) to do well. Likewise sector funds focusing on investing in defensive sectors such as Pharma and FMCG created wealth for investors. Amongst the diversified equity fund, from a market capitalisation point of view, mid cap funds did better than large cap ones. From a fund management style perspective flexi and opportunities style funds outperformed the ones following a value style of investing.

Tracing the descending move in the precious yellow metal - gold, Gold ETFs exhibited negative returns for investors (on average -0.6%).

In the debt mutual fund category, gains were seen across categories. But those with a mandate to invest in longer maturity papers performed better than those investing in shorter maturities as yields of longer maturity papers fell more than the shorter maturity ones.

Other News and NFOs:

  • In order to bring in uniformity in the way debt securities are valued by mutual fund houses, the Association of Mutual Funds in India (AMFI) has asked its members to work with third-party entities, thereby aiming to increase transparency.

    It is noteworthy that currently, debt securities are valued by mutual funds as under:

    - Traded securities: On the basis of weighted average price

    - Untraded securities: On the basis of parameters set-up by an Asset Management Company's (AMC's) valuation committee.

    But now, going forward the instructions from AMFI would bring in consistency across AMCs the way debt securities would be valued. It is said that, the data on these securities would be sent to rating agencies, who will then compile the data for both traded as well as untraded securities. It is noteworthy that at present, valuation of Government securities is on the basis of average price released by Crisil and ICRA - the two agencies approved rating agencies for this purpose. But now going forward, rating agencies are likely to aid in valuation of all debt securities and such a norm is likely to be implemented from July this year. PersonalFN is of the view that this would thus infuse objectivity and independence, along with help standardise valuation for debt securities by mutual fund houses.

  • With the India's Current Account Deficit (CAD) for Q3FY13 having widened to a record high of 6.7%, the RBI in the week issued a circular to curb gold imports. The central bank's circular said, "to moderate the demand for gold for domestic use, it has been decided to restrict the import of gold on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellery." And such a circular from the central bank could impact gold Exchange Traded Funds (ETFs). It is likely that growth of Assets Under Management (AUM) of gold ETFs in quantity terms may be impeded and so would the liquidity. This is because as per RBI's new rule, Authorised Participants (APs) - who create and redeem units backed by gold will have to pay the bank funds in advance before taking delivery of gold, which could result in delays in creating new units and eventually reduce liquidity of gold ETFs as well. It would be very much unlike the recent past practice, where an AP could take delivery of gold from banks and fix the price within 11 days during which it would sell the gold to fund houses and get units in return which were traded on stock exchanges. PersonalFN is of the view that since supply is restrained gold ETFs volumes could be hurt and Net Asset Value (NAV) calculation may also be a problem with delay in creation of new units as explained above.

  • A new entrant in the mutual fund industry, PPFAS Mutual Fund launched its first diversified equity named "PPFAS Long Term Value Fund" (PLTVF) mandated to invest in companies on their fundamental merits, ignoring the broader macro-economic trends. PLTVF also applies behavioural finance strategy while managing the fund. It is noteworthy that behavioural studies effects of human psychology on assets prices and resource allocation. PLTVF follows CNX 500 Index as its benchmark and follows a bottom-up approach to stock picking. As per the fund's offer document, the investment objective is, "to seek to generate long-term capital growth from an actively managed portfolio primarily of equity and Equity Related Securities."

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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