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Mutual Fund Monthly Round-up: September 2012 - Outside View by PersonalFN

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Mutual Fund Monthly Round-up: September 2012
Oct 11, 2012

Market Overview

After exhaustion in the Indian equity markets in the last couple of months (i.e. July 2012 and August 2012), the markets depicted an impulse in the month of September 2012 as the BSE-Sensex gained by good +7.6% (or 1,333.18 points), although there was a mix of positive as well as negative news flows.

Primarily, the news of General Anti-Avoidance Rules (GAAR) proposed to be deferred until 2016, helped boosting the investment sentiments, since it implied that the Government in power was going a little easy with the advance instrument of tax administration (which is one of deterrence, rather than for revenue generation), and trying to make the investment climate in the country conducive after foreign investors were petrified with retrospective tax provisions. But the Indian equity markets peculiarly moved sideways for first 4 trading sessions of the month gone as worries prevailed in the Euro zone. It is noteworthy that the manufacturing sector weakened in the Euro zone as Markit's Purchasing Managers' Index (PMI) for manufacturing, fell from an earlier flash reading of 45.3 to 45.1 in August 2012 (data released in September 2012)- it being a 13th month low below the 50 mark separating growth from contraction. As a result, the Euro zone also witnessed a contraction in economic growth rates since the Gross Domestic Product (GDP) contracted to -0.2% in the second quarter of their fiscal year. This in turn drove the rating agency- Moody's Investors Service to lower the outlook for the European Union's (EU's) "Aaa" long-term bond rating to negative (from stable) thereby reflecting risk to Germany, France, U.K. and Netherland (which accounts 45% of the group's budget revenue). But in order to save the paining Euro zone, when the European Central Bank (ECB) President Mr Mario Draghi announced a bond-buying programme (termed as Outright Monetary Transaction) attempting to curb the rise in bond yields; the global markets gained confidence. Thus during the month, although the Index of Industrial Production data announced for the month of July 2012 (data released in September 2012) remained submissive (at 0.1%) and WPI inflation for August 2012 (data released in September 2012) inched up (over the comfort zone of the Reserve Bank of India (RBI)) the Indian equity markets shunned the domestic worries. Moreover, the announcement from the Government of India on:

  • increase in diesel prices by Rs 5 and cut in subsidised LPG to 6 cylinders;

  • increase in multi-brand retail Foreign Direct Investment (FDI) upto 51%; and

  • increase in FDI civil aviation upto 49%
aided in uplifting the market sentiments, as it construed that the Government was determined on path of fiscal consolidation and putting reforms on the forefront, after bouts of backlash for policy paralysis from opposition and rating agencies. Also with the Government reducing the withholding tax to 5% (from 20% earlier) on interest earned by overseas holders of Indian debt and formalising a scheme with tax sops for equity investments, helped to make the investment climate more conducive and enabled cheaper and easier for India Inc. to access overseas funds. The RBI too in its 2nd quarter mid-review of monetary policy 2012-13, adopted a congruent stance after liquidity being infused in the system after ECB's bond-buying program and reforms being put on the forefront with focus on the path of fiscal consolidation. The central bank reduced the Cash Reserve Ratio (CRR) by 25 basis points - i.e. from 4.75% to 4.50% (but kept the policy rates unchanged), consequentially injecting around Rs 17,000 crore of primary liquidity into the banking system. In the U.S., the Federal Reserve too launched another aggressive stimulus program whereby U.S. $40 billion of mortgage-backed debt would be bought (until the outlook for job improves substantially as long as inflation remains contained); also renewed the sentiment in the global markets and paved an upward path for the Indian equity markets.

As far as the precious yellow metal - gold is concerned it continued to look bold (as it gained by +2.1%), as smart investors preferred to take refuge under it, thereby not ruling out the fact although stimulus measures have been provided by the central banks of the world to provide an impetus to sagging economic growth, uncertainty yet persists. Moreover, physical demand for gold also improved with the beginning of the festive season. Going forward too, with the festive season continuing with Dusshera (in October 2012), Diwali (in November 2012) and Christmas (along with wedding season as well), the demand is likely to accelerate, barring some slack in the period of Shradh in October 2012. It is noteworthy that traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year.

Speaking about Brent crude oil, after prices accelerating at an aggressive pace in the month of July 2012 and August 2012 over supply concerns from the North Sea and Iran in the month gone by, there seemed a loss in upside momentum due to flaccid economic growth in the global economy. This going forward is likely to put downward pressure on Brent crude oil prices as it may reduce orders by some of the major oil importing countries.

For the bond markets the month gone was filled with sufficient liquidity, as the RBI did reduce the CRR which in effect infused around Rs 17,000 crore of primary liquidity into the system. Thus the short-term papers witnessed some drop in yields, whereby the 1-month CD yield mellowed by 10 basis points (bps) while the 3-month CD yield level remained unchanged at August 2012's level. However during the month of September 2012, with slew of measures adopted by the Government (such as increasing the price of diesel by Rs 5 and reducing the subsidised LPG cylinders to 6, along with reform measures being put in the forefront through FDI limit increased in multi-brand retail and civil aviation), which highlights their focus on fiscal consolidation, the 8.15% 2022 (10-Yr) G-Sec yield started mellowing (reduced 9 bps) after a phase of upward movement in the last three months. Going forward too, the bond markets are likely to take cue from a slew of reform measures to be adopted by the Government which may help in narrowing down the fiscal deficit. We think that if the capital formation in the country if increased could help the bond markets.

Monthly Market Roundup
  As on Sept 30, 2012 As on Aug 31, 2012 Change % Change  
BSE-Sensex 18,762.74 17,429.56 1,333.18 7.6%
S&P CNX NIFTY 5,703.30 5,258.50 444.80 8.5%
CNX Midcap 7,840.55 7,065.85 774.70 11.0%
Gold (Rs /10 gram) 31,350.00 30,720.00 630.00 2.1%
Re/US $ 52.86 55.53 2.67 4.8%
Crude Oil ($/BBL) 113.36 113.36 - 0.0% =
8.15% 2022 (10-Yr) G-Sec Yield (%)* 8.14 8.23 (0.09) 9bps
1-Yr FDs 7.50% - 8.75%
*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on September 30, 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. It seems that with reforms measures taken by the Government and focus on fiscal consolidation, they exuded confidence in India. In the month gone by net bought to the tune of Rs 19,262, thereby accelerating from their August 2012's buying activity (where they net bought to the tune of Rs 10,804 crore).

(Source: ACE MF, Personal FN Research)

Thus it seems that the stimulus measure adopted by the central bankers in the developed economies led to a period of "risk-on" and infused 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 participation of foreign Institutional Investors (FIIs), domestic mutual funds continued to be net sellers in the Indian equity markets. They net sold to the tune of 3,008 crore thereby nearly doubling from their August 2012's net selling activity (where they net sold to the tune of Rs 1,543 crore). Although, the Government did bring in slew of reform measures as mentioned above, fund managers seemed to be cautious about the valuations of the Indian equity markets and the quick run-up which occurred. Also the political uncertainty prevailing due to some opposition parties not being comfortable with the measures adopted by the Government, refrained them from being net buyers in the Indian equity markets.

(Source: ACE MF, Personal FN Research)

As far as the performance of various categories of mutual funds is concerned, luring returns were generated for investors with the upward movement of the Indian equity markets. In the diversified equity fund category, gains were seen across market capitalisation and styles of investing. Thus even the ELSS funds which adopt a fluid style of investing, also did well in the month gone by.

Among the sector funds, infrastructure, banking & financial services and few of those following progressive themes delivered stunning returns as the underlying reform story aided their wealth creation path. But with the period of "risk-on" being reinstated, the defensive ones such as pharma and FMCG funds took a backseat by delivered petite returns.

In the Fund of Fund (FoF) schemes, the domestic equity funds and the offshore ones focusing on gold mining delivered luring returns as investors preferred to flock to equity and gold as an asset class in the period of "risk-on".

Speaking about the hybrid funds; the balanced funds reported striking gains in the month gone by well supported by the upside movement in the equity markets and drop in yields in the bond markets, which benefited their debt portfolio. Likewise gains were seen in Monthly Income Plans (MIPs) category, aided by drop in yields of debt papers across maturity due to sufficient liquidity in the system and focus on fiscal consolidation on the part of the Government.

Monthly top gainers: Open-ended Equity Funds
Diversified Equity Funds 1-Mth Sector Funds 1-Mth ELSS 1-Mth
Escorts Growth (G) 12.61% Escorts Infrastructure (G) 16.15% Escorts Tax (G) 11.87%
Escorts High Yield Eq (G) 12.39% UTI Banking Sector (G) 15.83% Reliance Tax Saver (G) 10.28%
Reliance Reg Savings-Equity (G) 12.32% Reliance Banking (G) 15.53% JM Tax Gain (G) 9.47%
(1-Mth returns as on September 30, 2012)
(Source: ACE MF, Personal FN Research)

Monthly top gainers: Open-ended Fund of Funds
Fund of Funds 1-Mth
Quantum Equity FoF (G) 9.45%
ING 5 Star Multi-Mgr FoF (G) 9.06%
Kotak Equity FOF (G) 9.03%
(1-Mth returns as on September 30, 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 (G) 9.81% HDFC MIP-LTP (G) 3.75%
JM Balanced (G) 8.34% Sundaram MIP-Aggr (G) 3.69%
Baroda Pioneer Balance (G) 8.33% Birla SL MIP II-Wealth 25 (G) 3.61%
(1-Mth returns as on September 30, 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  
DSPBR Income Opportunities-Reg (G) 0.88% Axis Income Saver (G) 3.71% HSBC Gilt-ST-Reg (G) 1.24%
Reliance FRF ST (G) 0.76% SBI SHD-ST-Ret (G) 1.27% ICICI Pru Gilt-Treasury (G) 0.83%
Kotak Floater-ST (G) 0.73% Birla SL ST (G) 1.11% Templeton India G-Sec-Treas (G) 0.83%
Long Term   Long Term   Long Term  
Sundaram Flexible-FIP (G) 1.02% ICICI Pru Income Oppor-Reg (G) 2.04% L&T Gilt - Investment (G) 2.01%
HDFC FRIF-LT (G) 0.80% SBI Magnum Income (G) 1.71% SBI Magnum Gilt-LTP (G) 1.90%
Kotak Floater-LT (G) 0.73% Peerless Income Plus Fund-Reg (G) 1.71% IDFC G Sec-Invest-A (G) 1.58%

Liquid Funds 1-Mth Liquid Plus funds 1-Mth
Tata Liquidity Mgmt (G) 0.91% DWS Money Plus-Reg (G) 0.83%
Principal Retail Money Mgr (G) 0.76% Principal Bank CD (G) 0.80%
Escorts Liquid Plan (G) 0.75% Indiabulls Ultra Short Term Fund (G) 0.75%
(1-Mth returns as on September 30, 2012)
(Source: ACE MF, Personal FN Research)

The debt mutual funds, across categories and tenure also showed a decent performance in the month gone by, as yields across maturities of mellowed down due to sufficient liquidity in the system and measures taken by the Government on the path of fiscal consolidation. But income funds and gilt funds did well in the debt mutual fund category, as signs of policy rates mellowing down gradually (from the near the peak levels) appeared.

It is noteworthy that both FIIs and domestic mutual funds continued to be net buyers in the Indian debt market, as they both net bought to the tune of Rs 623 crore and Rs 48,693 crore respectively (as against Rs 265 crore and Rs 27,004 crore in the month of August 2012).

Thus in the last quarter (i.e. July 2012 to September 2012) the Indian mutual fund industry also registered a growth of 7.9% in the Average Assets Under Management (AAUM); with the value of AAUM standing at Rs 7.47 lakh crore (as against Rs 6.93 lakh crore in quarter from April 2012 to June 2012).

(1-Mth average returns of funds in various categories as on September 30, 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, banking and infrastructure funds took the lead, while defensive ones such as pharma and FMCG took a backseat and delivered petite returns due to the period of "risk-on" being reinstated. Tech funds too lost the steam due to gains in the Indian rupee; which led to their underlying stocks grieve - especially those companies having an export oriented nature of business. Among the diversified equity funds, gains were seen across market capitalisation, but the funds following a value style of investing performed a tad better.

Tracing with upward movement of prices of precious yellow metal - gold, Gold ETFs too exhibited positive returns for investors (gaining by an average of +1.6%). Likewise debt mutual funds across categories too gained with softening in yields of across maturities of debt papers.

Other News

  • Taking concrete steps towards regulating mutual fund distributors and reduce complaints regarding mis-selling of mutual funds, the Securities and Exchange Board of India (SEBI) has proposed to set up a Self-Regulatory Organisation (SRO), to regulate their mutual fund distributors. The capital market regulator, has also put forth its view that the Asset Management Companies (AMCs) could bear the recurring costs for Operating the SRO by charging 2 to 3 basis points (i.e. 0.02% - 0.03%) of their Assets Under Management (AUM); while the seed capital for setting up of the proposed SRO would be provided by SEBI and the mutual fund industry body - AMFI (Association of Mutual Funds in India). At present, some entities have also shown interest in sponsoring such an SRO, and as far as the process to select them is concerned, SEBI has assured that it will be entirely transparent. To know how this move would benefit you as an investor, please click here.

  • According to the guidelines put forth by the SEBI, the mutual fund houses will have to provide direct plans in their existing and new schemes with a separate Net Asset Value (NAV) from January 01, 2013. Until now, when an investor dealt directly with a fund company without going through a distributor, the money that didn't have to be paid to the distributor went to the fund house, adding to its margin of doing business. There was no particular advantage that the investor derived by doing things directly. But now that the guidelines direct the fund houses to come with direct plans with a separate NAV, such investors who walk the extra mile are sure to be benefited.

  • Under the direct plan the Total Expense Ratio (TER) could differ from one fund house to another depending on the corpus of the scheme. On the contrary, there could be a possibility that Association of Mutual Funds in India (AMFI) could formulate the TER on different asset classes which would then be followed by all Asset Management Companies. A direct TER (TER for direct plans in mutual funds) will be arrived at by deducting the distribution and commission expenses in a scheme. Apart from an upfront to the distributors, fund houses tend to pay 50 basis to 70 basis points trail commission in equity schemes. The commissions are lower on debt schemes. Thus, an investor may assume to benefit from a difference of at least 100 basis points in a direct plan.

  • The capital market regulator - Securities and Exchange Board of India (SEBI) has put in place strict norms for investment advisors. Post implementation of these stricter norms, all investment advisers would need to register with SEBI (Securities and Exchange Board of India) after payment of required application and registration fees. Going forward, SEBI eventually wants them (investment advisors) to be regulated through a SRO (Self-Regulatory Organisation) model.

  • Under the proposed norms the investment advisers would be under strict vigil for any front-running activity and in order to address any conflict of interest, investment advisers would be required to segregate other businesses from their activity as an investment adviser and disclose all commission and rewards that they receive from their clients. To read some few other guidelines which the investment advisors need to follow and our view on this initiative by SEBI, please click here.

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


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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