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

Market Overview

The Indian equity markets (i.e. the S&P BSE Sensex) encountered turbulence in the month of July 2013, and ended the month with a loss of -0.3%, thereby continuing to descend as it did in June 2013.

There were host of macroeconomic variables that traced the movement of the Indian equity markets. The month began on a fretful mood with HSBC's Purchasing Managers' Index (PMI) data for India's manufacturing coming in at 50.3 in June 2013 (data released in July 2013); barely above the 50-month low of 50.1 made in the previous month (i.e. May 2013) and a tad above the mark of 50.0 which separates contraction from expansion. Likewise the HSBC PMI data for services was also quite disappointing, as it fell to 51.7 in June 2013 (data released in July 2013) from three-month high of 53.6 in May 2013. Also the lull in the industrial activity continued and thus it became evident that the economic growth was slowing down and gripping.

The Indian rupee also sent shivers down the spine of the Government and the central bank as the rupee fell against the U.S. dollar hitting an all-time low of Rs 61.21 (on July 8, 2013), which in turn forced the Reserve Bank of India (RBI) to step in and take measures to control the movement of the rupee vide a hike in short-term rate and contraction in liquidity. It is noteworthy that, first in mid-July 2013 (on July 15, 2013), RBI raised the Marginal Standing Facility (MSF) and Bank Rate by 200 basis points (bps) placing them at 10.25% each. Also it limited LAF borrowing by a bank to 1.0 per cent of the Net Demand and Time Liabilities (NDTL) of the banking system (capping it at Rs 75,000 crore). But recognising that it was exhibiting a limited relief to rupee and to check undue speculation adding to undue volatility, the RBI took the second move (on July 23, 2013) by limiting access to LAF for each individual bank to 0.5% of its own NDTL (thereby capping it as Rs 37,000 crore). Moreover, banks were asked to maintain Cash Reserve Ratio (CRR) of 99% (of 4% i.e. about 3.96%) with effect from July 27, 2013 on daily basis as against the earlier minimum requirement of 70%. While such measures did defend the rupee for a very short span of time, weakness persisted and it ended the month gone by at Rs 60.37 against the U.S. dollar.

In the intermediate while there were positives as well, such as statement from Federal Reserve Chairman, Mr Ben Bernanke saying that the U.S. central bank might not roll back its stimulus programme earlier than expected, India's trade deficit data for June 2013 falling to U.S. $12.2 billion from U.S. $20.1 billion in May 2013 and moderation in WPI inflation; it did not enthuse the Indian equity markets for long. In fact concerns of falling rupee which has implication of rise in prices and impact on Government's expenditure budget, encouraged rating agency Moody's to bring back downgrade warnings. Moreover, country's Current Account Deficit (CAD) remained a concern in times where weakness in the Indian rupee persisted. And due to the aforesaid reasons, even the RBI refrained from reducing policy rates - kept them unchanged, which again did not go too well with the Indian equity markets.

Speaking about gold, it traced a bold move by ascending by good +10.7%. So the descending move (of -5.2%) in June 2013 was well-recovered in the month gone by. The statement from Federal Reserve Chairman hinting that it would not withdraw the U.S. $85 billion per month bond-buying programme earlier than expected in its on-going effort of bolstering the economy (which is facing challenge from federal budget-tightening, weak growth overseas and yet high unemployment rate), was supportive for gold as tensions yet prevailed. Also worries in the Euro zone, encouraged smart investors to evince interest in gold to take refuge in the backdrop of an uncertain economic environment. In India, gold demand rose in July (although the Government intervened to stifle it). Stockist piled up their inventories to meet demand ahead of the festive season (which runs from August to November). Going forward too, demand is going to build-up as we approach the 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.

As far as Brent crude oil is concerned, prices escalated by +5.6% as oil outages in Iraq, South Sudan, Libya and Iran have collectively aided Brent crude oil prices to be well above U.S. $100 a barrel mark this month, thereby partly refuting worries about demand from China on account of slowdown (which is world's number 2 oil consumer). Moreover with the Federal Reserve hinting that it would not withdraw the stimulus, had a bearing on the commodity.

The bond markets encountered volatility after RBI's move on increasing short-term rates and contracting liquidity. So, it sent shivers down the spin of many investors; where on July 16, 2013 even liquid funds witnessed heavy redemption pressure leading to a sharp fall in their NAV. The short-term CD rates increased more than 300 basis points (bps) from their previous months closing (after such a measure from RBI to contain the rupee), placing the 1-month CD and 3-month CD yields at 11.03% each respectively as on July 31, 2013. The 7.16% 10-Yr G-Sec yield too was pushed upwards (by 67 bps) ending the month at 8.13%. Going forward too, the pressure would be felt in the Indian debt market until the RBI maintains it stance to contain the rupee. In the 1st quarter review of monetary policy 2013-14, the Indian rupee, global risk and CAD have already taken the centre stage. So now the central bank stands all ready to use all available instruments and measures at its command to respond proactively and swiftly to any adverse development.

Monthly Market Roundup
  As on July 31, 2013 As on June 30, 2013 Change % Change  
S&P BSE Sensex 19,345.70 19,395.81 (50.11) -0.3%
CNX Nifty 5,742.00 5,842.20 (100.20) -1.7%
CNX Midcap 6,872.95 7,342.40 (469.45) -6.4%
Gold (Rs /10 gram) 28,525.00 25,775.00 2,750.00 10.7%
Re/US $ 60.37 59.39 (0.98) -1.7%
Crude Oil ($/BBL) 107.83 102.16 5.67 5.6%
7.16% 2023 (10-Yr) G-Sec Yield (%)* 8.13 7.46 0.67 67 bps
1-Yr FDs 7.00% - 8.75%
*The 7.16% 2023 is the new 10-Yr benchmark which was introduced by on May 17, 2013
(Monthly change as on July 31, 2013)
(Source: ACE MF, PersonalFN Research)

As far as participation of foreign institutional investors (FIIs) (FIIs) in the Indian equity market is concerned, Foreign Institutional Investors (FIIs) continued to be net sellers in the Indian equity markets to the tune of Rs 6,086 crore. Cumulatively in the June and July 2013, they have net sold in equities to the tune of Rs 17,113 crore - a five-year high!

S&P BSE Sensex vs. FII inflows
Data as on July 31, 2013
(Source: ACE MF, PersonalFN Research)

Apart from the aforementioned macroeconomic variables, FIIs seemed to be concerned about the following factors which are in play in the domestic economy:
  • Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
  • Lack of consensus on policies;
  • Deteriorating state of governance;
  • Scam stories unveiling; and
  • Structural bottlenecks
While the Securities and Exchange Board of India (SEBI) brought in reforms (towards June-end) 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 to operate in Indian markets; it did not turn them to be net buyers in July 2013.

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 2,169 crore, thereby maintaining their trend of being net sellers as seen in the past. Cumulatively in June and July 2013, they have net sold in equities to the tune of Rs 2,270 crore. Turbulence persisting in the Indian equity markets, encouraged many to put in redemption requests, and fund managers too were wary selectively on stock, sectors and following factors in play.

  • Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
  • Slowdown in economic growth rate;
  • Pressure on CAD limiting a scope of rate cut;
  • Weak Indian rupee;
  • Hike in short-term rates;
  • Contraction in liquidity;
  • Deteriorating state of governance;
  • Scam stories unveiling;
  • Structural bottlenecks; and
  • Global economic headwinds

S&P BSE Sensex vs. FII 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, barring a few funds following an opportunities style of investing, large cap funds and those adopting a multi cap and flexi cap approach; rest all others fell the brunt of turbulence in the Indian equity markets and ended the month gone by in red. Mid and small cap funds took the maximum beating with maximum damage done by HSBC Small Cap Fund (which ended the month with a loss of -11.3% on an absolute basis in the month gone by).

Among the sector funds, those investing in technology funds well supported by the good corporate earning numbers for their underlying stocks and weakness in the Indian rupee, delivered stunning returns in the month gone. However the banking & financial services sector funds were affected by the detrimental under currents for the sector such hike in short-term rates by RBI, hike in CRR and rising Non-Performing Assets (NPAs); resulting in them eroding investors' wealth. Likewise, infrastructure funds, PSU sector funds, and power sectors funds were also hurt by the turbulence of the Indian equity markets.

As far as ELSS funds (which follow fluid investment style) are concerned, most of them descended tracing the movement of the Indian equity markets and only a handful of them managed to end the month of July 2013 with petite gains.

In the Fund of Fund (FoF) category, those investing in world gold funds, domestic gold funds, world mining funds, world energy, global commodities and other emerging markets delivered did quite well aided by positive undercurrents thereto. But the domestic equity FoF schemes felt the pressure due to turbulence in the Indian equity markets, resulting in eroding investors' wealth.

Speaking about hybrid funds, the performance of balanced funds took a hit due to a descending move in Indian equities. Also 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 couple of them 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 July 31, 2013)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Fund of Funds
Fund of Funds 1-Mth
DSPBR World Gold Fund-Reg (G) 20.85%
Reliance Gold Savings Fund (G) 13.22%
PineBridge World Gold Fund (G) 12.31%
(1-Mth returns as on July 31, 2013)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Hybrid Funds
Balanced Funds 1-Mth Monthly Income Plans 1-Mth
Escorts Balanced Fund (G) -0.44% Sahara Classic (G) 0.57%
LIC Nomura MF Balanced Fund (G) -0.49% LIC Nomura MF MIP (G) 0.47%
L&T India Prudence Fund (G) -0.75% Religare Invesco MIP Plus (G) -0.08%
(1-Mth returns as on July 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  
SBI Mag InstaCash-Liquid Floater (G) 0.63% Taurus ST Income (G) 0.65% DSPBR Treasury Bill Fund-Reg (G) 1.83%
SBI Mag Income FRP-Sav Plus Bond (G) 0.61% Mirae Asset ST Bond Fund (G) 0.62% Religare Invesco Gilt Fund - SDP (G) 1.51%
UTI FRF-STP (G) 0.58% GS ST-Ret (G) 0.60% Birla SL Gilt Plus-Liquid (G) 0.66%
Long Term   Long Term   Long Term  
SBI Mag Income FR-LTP-Reg (G) 0.78% Canara Rob InDiGo Fund-Reg (G) 1.70% Sundaram Gilt Fund (G) 1.81%
Tata FRF-LTP (G) 0.66% BNP Paribas Inc & Gold Fund (G) 1.23% Sahara Gilt (G) 0.63%
JM Floater Long Term Fund-Reg (G) 0.60% ICICI Pru LTP -Ret (G) 0.56% Escorts Gilt (G) 0.55%

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Religare Invesco Overnight Fund (G) 0.77% Mirae Asset Ultra ST Bond-Reg (G) 0.63%
Daiwa Liquid Fund (G) 0.69% Sahara ST Bond (G) 0.59%
Mirae Asset Cash Management-Reg (G) 0.65% Daiwa Treasury Advantage Fund (G) 0.51%
(1-Mth returns as on July 31, 2013)
(Source: ACE MF, PersonalFN Research)

As far as performance of debt mutual fund schemes is concerned, measures taken by RBI to contain the Indian rupee (by increasing short-term rates and contracting liquidity), widening CAD, persistent weakness in the rupee and RBI maintaining a status quo on policy rates (due to these factors), led to rise in yields across the curve impacting performance of debt mutual fund schemes. 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 and July 2013 due to aforesaid backdrop for interest rates. Likewise, since yields of longer maturity papers also moved up, long-term floating rate funds, long-term income funds and long-term gilt funds also came under pressure.

It is noteworthy that when the RBI took its first move on June 15, 2013, even liquid funds felt a knee-jerk reaction leading to a sharp fall in their NAV on account of heavy redemption pressure. Nonetheless they ended the month gone by in green. In the liquid plus fund category (also known as ultra-short-term funds), most of them delivered positive returns, but some ended the month in red; thereby depicting a mixed picture.

Going forward, longer maturity papers would remain under pressure until the aforesaid macroeconomic risks are in play. Already the measures taken by RBI to contain the Indian rupee have brought in volatility in the Indian debt markets; where duration funds and gilt funds have witnessed rather a violent fall in their NAVs thereby impacting their returns as a result of ascending yields. The RBI in its recent guidance (in the 1st quarter review of monetary policy 2013-14) has mentioned that India is currently caught in a classic 'impossible trinity' trilemma, where the risk emanates from external sector concerns, volatility in foreign exchange and CAD. Moreover, the investment climate remains weak and risk aversion continues. In such a scenario, the central bank stands all ready to use all available instruments and measures at its command to respond proactively and swiftly to any adverse development. So given that, 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 12,038 crore (as against net selling worth Rs 33,135 crore in June 2013), while domestic mutual funds to the tune of Rs 23,740 crore (as against net selling worth Rs 63,923 crore in June 2013).

Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on July 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, banking & financial services sector funds took the maximum beating followed by infrastructure funds. Whereas FMCG and pharma (which are considered defensive in nature), delivered positive returns. Technology funds, well supported by the good corporate earning numbers for their underlying stocks and weakness in the Indian rupee, delivered stunning returns in the month gone. Amongst the diversified equity funds, on an average basis, irrespective of their investment style and market capitalisation bias, wealth erosion was seen. Passively managed equity index too ended the month in red, led by the turbulence in the Indian equity markets.

Tracing the ascending move in the precious yellow metal - gold, Gold ETFs exhibited luring returns for investors (on average +12.0%).

In the debt mutual fund category, on an average basis, barring short-term floating rate funds and liquid funds, the rest ended the month in red, where those having a higher maturity profile were impacted more due to the measures taken by the RBI to contain the rupee in a downbeat economic scenario.

Other News and New Fund Offers:
  • Securities and Exchange Board of India (SEBI) is playing the old tune again which was once turned down by its own panel. Recently, the market regulator has hinted at raising the minimum net worth requirement for mutual funds. In 2010, mutual fund advisory committee on "Review of Eligibility Norms" headed by Ms Roopa Kudva, MD & CEO, Crisil had recommended to increase the minimum net worth to Rs 50 crore. However, it was later rejected by the panel appointed by SEBI. At present the minimum capital requirement to set up a mutual fund in India is Rs 10 crore. The topic is again up for the discussion.

    This time, reasons cited by SEBI for raising capital requirement limits have not been very different than those brought up by the committee in 2010. SEBI wants to close all doors to non-serious players. It believes more the capital invested in business better it would serve the purpose of attaining higher market penetration. Higher capital is also perceived to protect investor's interest.

  • Are you bugged with filling same details over and over again while investing in mutual fund schemes? You would soon be able to save lot of time as Association of Mutual Funds in India (AMFI) is mulling over plans of launching an online transaction portal, MF Utility (MFU). To benefit from the new initiative taken by AMFI, investors are expected to create a Common Account Number (CAN) with their distributor and submit their Know Your Clients (KYC) acknowledgment to MFU. Once MFU platform is launched, separate forms of every individual fund house would be done away with and a common application form would replace them.

    The biggest advantage of using this platform is convenience it may give in transacting and managing investments. Now one may through a distributor, buy mutual fund units even at a last minute of the cut off time. Scanned copy of an application form and the cheque uploaded on MFU portal would suffice to invest on that particular day. Although the physical delivery would still be needed, that can be done later. MFUs would have pan India presence to handle physical forms. It is speculated that Registrar and Transfer Agents (RTAs) such as Karvy Computershare Ltd and Computer Age Management Services are likely to be appointed as Point of Sales (PoS) for MFU. Now you may consolidate your holdings across all mutual fund houses which would give you a better view of your portfolio.

    PersonalFN is of the view that the new initiative which is likely to be taken by AMFI would help distributors serve their clients better. However, lack of clarity on giving access of the portal to individuals may limit the benefits. Furthermore, speed and efficiency of the portal may decide its success.

  • JPMorgan Mutual Fund launched an off-shore equity fund named "JPMorgan US Value Equity Off-shore Fund (JUVEOF)" an overseas fund of funds scheme is positioned to take advantage of investments in world's largest economy, the United States of America (U.S.), by investing in units of the underlying fund - "JPMorgan Funds - US Value Fund (JF-UVF)" known as the underlying parent fund. So, JUVEOF is in the nature of a feeder fund and carries with it risks such as economic risk, currency risk and political risk. JUVEOF follows Russel 1000 Value Index (Total Return Net of 30% withholding tax) as its benchmark and as per the offer document its investment objective is, "to seek to provide long term capital growth by investing predominantly in the JPMorgan Funds - US Value Fund, an equity fund which invests primarily in a value style biased portfolio of US companies. However, there can be no assurance that the investment objective of the Scheme will be realised."

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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