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

Market Overview

The impulse depicted by the Indian equity markets (i.e. the S&P BSE Sensex) in the month of April 2013 and May 2013, waned in the month gone by (i.e. June 2013) as S&P BSE Sensex descended by -1.8% (or -364.49 points) amid turbulence.

The month gone by began on a fretful mood as the HSBC manufacturing PMI reading for May 2013 came in at 50-month low of 50.1, just a tad above the mark of 50.0 which separates expansion and contraction. Moreover earlier during the month, the talk of the U.S. Federal Reserve may wind down its monthly bond-buying programme and are mapping out a strategy thereto; also kept markets nervous. While Fitch (a rating agency) upgraded India's outlook from negative to stable, it failed to bring any respite to the Indian equity markets. The lull in industrial activity, drop in core sector growth and slow capex cycle were the factors which the markets were weighing.

However, when the Wholesale Price Index (WPI) inflation data was released (on June 14, 2013) the Indian equity markets on that day ended the trading session posting gains of +1.9% (or +350.77 points) over the previous day. Moreover, the statement from the Finance Minister, Mr P. Chidambaram to consider measures to support the Indian currency and also boost investment and growth in the economy; enthused the markets. Thus on the date of 1st mid quarter review of monetary policy 2013-14 (held on June 17, 2013) while the Reserve Bank of India (RBI) refrained from cutting policy rates or reduce CRR amidst weakness in the Indian rupee and yawning Current Account Deficit; the Indian equities did not descend - in fact rose, as the falling Indian rupee had diminished expectations of a rate cut from RBI. But when India's trade deficit data for May 2013 was released, the markets in the ensuing few trading sessions gave up some gains of the immediately preceding two trading sessions i.e. June 14, 2013 and June 17, 2013. And when the news of U.S. Federal Reserve pointing out to winding down the monthly $85-billion bond-buying programme came in, where Mr Ben Bernanke, Chairman of Federal Reserve said, "The committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,"; it sent shivers down the spine of the markets as they ended trading session on June 20, 2013 down -2.7% (-526.41 points) over the previous day, clubbed with news of China's PMI hitting a 9-month low in June 2013 (48.3 in June from 49.2 in May 2013) on account of weak demand. In the meanwhile, weakness in the Indian rupee - which crossed over Rs 60 against the U.S. dollar, made no compelling reason to buy Indian equities. It was only towards the tail of the month when the CAD data for March-quarter was announced which came in at U.S. $18.1 billion or 3.6% of GDP, lower than expected and below the $21.7 billion deficit a year earlier; the markets depicted a sharp impulse. It is noteworthy that in the last two trading sessions the markets ascended by +4.5% (or +843.69 points). However, what it important to recognise that CAD for the complete fiscal year 2012-13 touched a record high of 4.5% (at U.S. $87.8 billion), which is much above the central bank's comfort level of 2.5% of GDP.

The precious yellow metal - gold in the month gone by, after showing a marginal up-move in May 2013 (of +0.2%), depicted a downward move yet again losing -5.2%. The statement from U.S. Federal Reserve over winding down of bond buying programme, led to investors dumping gold. This is because the statement from Mr Ben Bernanke, Chairman of U.S. Federal Reserve was against the backdrop of signs of economic vigour depicted by the U.S., which encouraged investors to look at U.S. equities and dump gold. Also there was no intermediate risk emanating from the Euro zone which resulted in correction in gold prices. Sluggish demand in the domestic market due to off marriage and festive season also had an influence on gold prices. But having descending below Rs 27,000 - the earlier psychological mark and even below Rs 25,000 during the month, encouraged some smart investors to invest in gold at dips. Going forward, demand is expected to build up as smart investors would make use of correction in prices to buy before the ensuing festive season. 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, while it ended the month with a marginal up-move (+0.1%) prices remained rather docile after the Organization of the Petroleum Exporting Countries (OPEC) slightly lowered its 2013 global demand outlook in key export markets. Moreover, the fears that the central banks would gradually withdraw their stimulus also had a bearing on Brent crude oil prices. Also strong U.S. dollar led to Brent crude oil remain meek.

For the bond markets, a status quo from RBI on policy rates and CRR amid weak Indian rupee and widening CAD, notwithstanding moderation in WPI inflation kept pressures on yields. It is noteworthy that yield of 1-month CD inched-up by 9 basis points (bps), while that of 3-month CDs mellowed by 18 bps in June 2013. The yield of 8.15% 2022 (10-Yr) G-Sec (which is the old 10-yr G-Sec paper) ascended by 17 bps, ending the month at 7.63%, while the new 10-Yr G-Sec (2023) (which was issued at cut-off of 7.16% on May 17, 2004), also inched-up by 22 bps (on concerns of pressure on Current Account Deficit (CAD) and weak Indian rupee) ending the month at 7.46%.

Monthly Market Roundup
  As on June 30, 2013 As on May 31, 2013 Change % Change  
S&P BSE Sensex 19,395.81 19,760.30 (364.49) -1.8%
CNX Nifty 5,842.20 5,985.95 (143.75) -2.4%
CNX Midcap 7,342.40 7,821.80 (479.40) -6.1%
Gold (Rs /10 gram) 25,775.00 27,200.00 (1,425.00) -5.2%
Re/US $ 59.39 56.51 (2.88) -5.1%
Crude Oil ($/BBL) 102.16 102.02 0.14 0.1%
8.15% 2022 (10-Yr) G-Sec Yield (%) 7.63 7.46 0.17 17bps
7.16% 2023 (10-Yr) G-Sec Yield (%)* 7.46 7.24 0.22 22bps
1-Yr FDs 7.25% - 9.00%
*The 7.16% 2023 is the new 10-Yr benchmark which was introduced by on May 17, 2013
(Monthly change as on June 30, 2013)
(Source: ACE MF, Personal FN Research)

As far as participation of Foreign Institutional Investors (FIIs) (FIIs) in the Indian equity market is concerned, they turned net sellers to the tune of Rs 11,027 crore in the month gone by after exuding confidence in Indian equities in the earlier months. It is noteworthy that in the month of May 2013, they had net bought aggressively to the tune of Rs 22,169 crore. The net selling by FIIs occurred in Indian equities as they preferred to invest in U.S. equities with signs of economic vigour evident there.

S&P BSE Sensex vs. FII inflows
Data as on June 28, 2013
(Source: ACE MF, Personal FN Research)

Also FIIs seemed to be concerned about the following factors in play in the domestic economy:
  • Pressure on India's CAD
  • Slowdown in economic growth rate
  • Policy logjam
  • Political uncertainty (which has put the country to risk on early election);
  • Scam stories unveiling; and
  • Structural bottlenecks
While the Securities and Exchange Board of India (SEBI) brought in reforms (towards the tail of the month gone by) aimed at including creation of an umbrella class of investors that will do away with the separate category for FIIs and approving doing away with the current practice of FIIs and their sub-accounts requiring a prior direct registration of the regulator to operate in Indian markets; it did not turn them to be net buyers even during the tail of month gone by.

Mutual Fund Overview

Like FIIs, domestic mutual funds (MFs) too were net sellers in the Indian equity markets in the month gone by to the tune of Rs 101 crore, thereby maintaining their trend of being net sellers as seen in the past. However a noteworthy point is, in the month of June 2013 fund managers seemed to have demonstrated selective buying in domestic equities since the net selling was far less as compared to earlier months, albeit worries that yet persist, which are:
  • 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;
  • Pressure on CAD limiting a scope of rate cut;
  • Weak Indian rupee
  • Political uncertainty; and
  • Global economic headwinds
Turbulent markets are proving to be nip in the bud for the mutual fund industry. The equity oriented schemes have seen closure of about 17 lakh folios this calendar year of which massive 7 lakh folios were lost in May 2013 alone. The overall equity base has shrunk to about 3.2 crore accounts to take the industry back to the levels seen in 2007-08. What's more, as per the data published by SEBI, only about 1 crore folios are active. This means only about 1/3rd of the folios regularly see transactions.

S&P BSE Sensex vs. MF inflows
Data as on June 28, 2013
(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 two funds, Birla Sun Life India Opportunities (G) and Religare Invesco Equity Fund (G) following opportunities and a multi cap investment style respectively, managed to deliver positive returns amid turbulent market conditions. The rest of the funds irrespective of the style and market capitalisation bias faced the brunt of turbulence in the Indian equities and ended the month eroding investors' wealth.

Among the sector funds, those investing in technology stocks ended the month in green, well supported by the underlying fundamentals, wherein weakness in the <>Indian rupee during the month helped the underlying stocks in their portfolio (especially the export oriented ones) to do well. But otherwise as a result of turbulence in Indian equities even defensive sector funds such as pharma and FMCG, ended the month in red. Most banking & financial services sector funds, infrastructure funds, PSU sector funds, and power sectors funds ended were hurt most in the turbulence of the Indian equity markets.

As far as ELSS funds (which follow fluid investment style) are concerned, all of them ended the month with losses as a result of the descending move of the Indian equity markets.

In the Fund of Fund (FoF) category, some of those focusing on investing the world markets in themes such as world energy, agriculture, and real estate did well aided by positive newsflashes for the underlying themes; but otherwise most other FoF schemes ended the month gone by eroding investors' wealth.

Speaking about hybrid funds, the performance of balanced funds took a hit due to a descending move in Indian equities. With yields moving upwards, their debt portfolio also came under pressure. Likewise in case of Monthly Income Plans (MIPs) too, (which invest a dominant portion of its assets in debt securities across maturities), barring a handful which ended the month in green, the rest eroded investors' wealth with yields moving upwards and turbulence in Indian equities.

Monthly top gainers: Open-ended Equity Funds
Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
Birla SL India Opportunities Fund (G) 2.17% Franklin Infotech Fund (G) 2.80% IDFC Tax Saver (G) -1.19%
Religare Invesco Equity Fund (G) 2.17% ICICI Pru Technology Fund (G) 2.70% Tata Tax Advantage Fund-1 -1.37%
Reliance NRI Equity Fund (G) 0.14% DSPBR Technology.com Fund (G) 2.45% ING RetireInvest Fund-I (G) -1.67%
(1-Mth returns as on June 30, 2013)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Fund of Funds
Fund of Funds 1-Mth
ING Global Real Estate Fund (G) 3.50%
DSPBR World Energy 1Fund-Reg (G) 1.37%
DSPBR World Agriculture Fund-Reg (G) 1.13%
(1-Mth returns as on June 30, 2013)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Hybrid Funds
Balanced Funds 1-Mth Monthly Income Plans 1-Mth
LIC Nomura MF Balanced Fund (G) -0.46% Sahara Classic (G) 0.57%
Escorts Balanced Fund (G) -0.58% Birla SL MIP (G) 0.57%
JM Balanced Fund (G) -1.37% SBI Magnum MIP-Floater Plan (G) 0.47%
(1-Mth returns as on June 30, 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  
Sundaram Flexible-STP-Ret (G) 0.71% Birla SL ST Oppor Fund (G) 1.31% Birla SL G-Sec-ST (G) 0.47%
Principal Debt Opp Fund-Conserv Plan (G) 0.68% Peerless Short Term Fund - Reg (G) 0.72% Birla SL Gilt Plus-Liquid (G) 0.46%
Kotak Floater-ST (G) 0.67% Taurus ST Income (G) 0.70% SBI Magnum Gilt-STP (G) 0.44%
Long Term   Long Term   Long Term  
SBI Magnum Income FR-LTP-Reg (G) 0.74% Birla SL Medium Term Fund (G) 1.09% Sundaram Gilt Fund (G) 1.78%
HDFC FRIF-Long Term Plan (G) 0.66% IDFC Banking Debt Fund-Reg (G) 0.69% Escorts Gilt (G) 0.54%
Kotak Floater-LT (G) 0.63% IDFC All Seasons Bond Fund-Reg (G) 0.57% Sahara Gilt (G) 0.52%


Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Escorts Liquid Plan (G) 0.74% DWS Cash Oppor Fund-Reg (G) 0.72%
IDFC Ultra Short Term Fund-Reg (G) 0.69% Tata Treasury Mgr-RIP (G) 0.70%
SBI Magnum InstaCash-Cash (G) 0.68% DWS Treasury-Invest Plan-Reg (G) 0.69%
(1-Mth returns as on June 30, 2013)
(Source: ACE MF, Personal FN Research)


As far as performance of debt mutual fund schemes are concerned, with yields coming under pressure on account of downbeat domestic macroeconomic backdrop gains were restricted. Short-term floating rate funds, short-term income funds and short-term gilt funds, which in the month of May 2013 delivered luring performance, came under pressure in June 2013 with rise in yields on receding expectations of a rate cut from RBI in its 1st mid-quarter review of monetary policy 2013-14 as concerns over CAD and weak Indian rupee persisted. Likewise, since yields of longer maturity papers also moved up, long-term floating rate funds, long-term income funds and long-term gilt funds reported timid gains as compared to those seen in the month of June 2013.

Similarly, liquid funds and liquid plus funds (also known as ultra-short-term funds) also exhibited restricted gains due to the undercurrents for the Indian debt markets.

Going forward it remains to be seen whether policy rates are indeed reduced, albeit moderation in WPI inflation. In the last guidance from monetary policy 2013-14, the RBI has clearly enunciated that monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead. As mentioned earlier, although CAD data for March-quarter came in at 3.6% of GDP, for the complete fiscal year 2012-13 it has touched a record high of 4.5% (at U.S. $87.8 billion), which is much above the central bank's comfort level of 2.5% of GDP. So, until pressure on CAD is reduced and rupee, the RBI may refrain from reducing policy rates in its 1st quarter review of monetary policy 2013-14 (scheduled on July 30, 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 turned net sellers in the Indian debt markets. FIIs net sold to the tune of Rs 33,135 crore, while domestic mutual funds to the tune of Rs 63,923 crore. This is in stark contrast to the month of June 2013, where FIIs net bought to the tune of Rs 5,969 crore, while domestic mutual funds net bought to the tune of Rs 26,957 crore.

Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on June 30, 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, banking & financial services sector funds took the maximum beating followed by infrastructure funds and FMCG funds. Only 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. Amongst the diversified equity funds, irrespective of their investment style and market capitalisation bias, they eroded investors' wealth.

Tracing the descending move in the precious yellow metal - gold, Gold ETFs too exhibited negative returns for investors (on average -7.3%).

In the debt mutual fund category, although it depicts a mixed picture, the returns of longer maturity debt instruments were truncated with detrimental undercurrents in play for the Indian debt markets.

Other News:
  • Mutual fund distributors handle large volume of mutual fund transactions. While their earning, by way of commissions has reduced (ever since entry loads have been banned); the cost of business has not reduced proportionately. As a result many of them are being forced to shut their shop. In order to reduce complexities, avoid duplication of work and also help distributors reduce costs Securities and Exchange Board of India (SEBI) has allowed to set up a Self-Regulatory Organisation (SRO) for all distributors. Besides above mentioned benefits, SRO would also help various regulators have a better oversight of the industry.

    In another move SEBI has also been thinking about allowing distributors to access the stock exchange platforms by granting them "limited purpose membership" of stock exchanges. As clarified by SEBI, the compliance related requirements would be lenient and there would be lesser financial burden to use infrastructure of Stock Exchanges for distribution & redemption of mutual fund.

    To reduce the financial and compliance burden on these limited purpose members requirements such as SEBI registration, compliance as member of stock exchange, paid up capital and Base Minimum Capital etc, would not be applicable. However stock exchanges may prescribe suitable eligibility criteria in this regard including net worth requirements, membership fee etc. This limited purpose membership would be granted on the basis of ARNs, granted to Mutual Fund Distributor by Association of Mutual Funds in India (AMFI). Further to address the possible risk of default by these limited purpose members, they will not be allowed to handle pay in and pay out of funds as well as units on behalf of investor. Pay in & pay out of funds & units would be directly from and to the account of the investors.

  • Four mutual fund houses viz. DWS, DSP BlackRock and Reliance have launched FMPs (which are close-ended) investing in a combination of debt and equity; having a maturity period of three years. The launch of these FMPs come at a time when there are downbeat economic sentiments prevail in the domestic economy, which in turn have made Indian equities look relatively attractive and yields in longer maturity debt papers have risen.

  • Target oriented advisers have been mis-selling mutual funds to gullible investors, of whom many are the first timers. Such practices have resulted in fizzling interest of retail investors in taking mutual fund route. Being concerned over this, the Securities and Exchange Board of India (SEBI) has decided to come down heavily on those who mis-sell. In September 2012, SEBI issued an order to Association of Mutual Funds in India (AMFI) to allot unique identification number to all employees, relationship managers and all other salesmen who sell mutual fund products. Till now it was relatively difficult to catch hold of the one who really perpetrated the mis-selling. And now, June 2013 has been the deadline for complying with the requirement of allotting Employee Unique Identification Number (EUIN).

    By introducing EUIN, SEBI has taken a one more step in the direction of rooting out mis-selling. Early this year, SEBI had issued (Investment Advisers) Regulations, 2013 enunciating requirements related to obtaining a certificate of registration, qualification, capital adequacy, period of validity of the certificate, and has also mentioned other general obligations and responsibilities on the part of investment advisors.

  • Owing to relentless redemptions from equity schemes and intense competition, mutual fund houses are having a tough time. Thus, industry has been in a consolidating phase where bigger players are acquiring businesses of smaller players who are finding it difficult to sustain operations. Diawa is the latest in the list of mutual fund houses that have put their assets on the block. SBI Mutual Fund has acquired assets of Diawa for an unknown value. However, it is believed that SBI Mutual Fund is acquiring just assets and not the full-fledged asset management company.

    PersonalFN is of the view that the acquisition may help SBI achieve greater penetration while it would provide investors an opportunity to benefit from the fund management skills of SBI Mutual Fund which has a decent performance record.

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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