Funds with debt exposure beat pure equity schemes last year.
Mutual funds, as the name indicates, offer investors a mutuality with the underlying market. Therefore, when the broader equity market has fallen over the past one year, most equity funds have fallen too.
While the Sensex fell 13 per cent, the category of equity diversified funds fell 13.83 per cent on an average. This means investors paid fees to fund managers and saw their hundred rupees shrink to Rs 86 after 12 months.
Only two out of 207 equity diversified equity schemes delivered a return to investors for the year ending August 30, according to data provided by ICRA online. Even these two funds – UTI Wealth Builder Series II and Edelweiss Absolute Return Fund – barely justified their fee for the year delivering 2.5 per cent and 1.9 per cent, respectively.
| DEBT IS PRECIOUS | |
| Equity Diversified | Absolute 1-Yr Chg % |
| Average | -13.8 |
| BSE Sensex | -13.0 |
| Top Performers | |
| UTI Wealth Builder Fund - Series II | 2.5 |
| Edelweiss Absolute Return Fund | 1.9 |
| SBI Magnum Sector Funds Umbrella * | -0.5 |
| BALANCED | |
| Average | -8.2 |
| Crisil Balanced Fund Index | -5.5 |
| Top Performers | |
| ICICI Prudential Balanced | 1.5 |
| HDFC Balanced Fund | 0.9 |
| Escorts Opportunities Fund | -3.1 |
| MONTHLY INCOME PLAN | |
| Average | 3.2 |
| Crisil Composite Bond Fund Index | 5.8 |
| Top Performers | |
| HDFC Multiple Yield Fund - Plan 2005 | 7.2 |
| Religare MIP Plus | 6.6 |
| Birla Sun Life MIP - Savings 5 | 6.6 |
| * Emerg Buss Fund , As on 30 Aug 2011 Source :- www.mutualfundsindia.com | |
Among the other top outperformers was SBI Magnum – Emerging Business Fund, which delivered negative 0.5 per cent over the past one year. UTI India Lifestyle Fund and HDFC Midcap Opportunities followed with their NAV down 1.65 per cent and 2.3 per cent, respectively.
Navneet Munot, chief investment officer, SBI Mutual Fund said bottom-up stock picking, especially in the mid cap space, helped the Emerging Business fund to do well in the past one year. Munot feels the next year would be better for the mutual fund investor. “Valuations have turned attractive, while the global concerns remain. We are buying at lower levels,” he said. For most of the bruised investors, optimism is the last resort. Of the 105 funds, which lost more than the Bombay Stock Exchange’s Sensex, many are large funds with huge investor base. At least twelve funds with a corpus of Rs 1,000 crore or more have underperformed the Sensex. HDFC Equity Fund, with a corpus of over Rs 9,738 crore, also underperformed the benchmark index losing 13.36 per cent, but was better than most other large funds. Reliance Growth, with a corpus of around Rs 7,000 crore, lost a fifth of its value. Reliance Mutual Fund’s flag ship schemes Reliance Vision, Reliance Long Term Equity and Reliance Equity, which manage over Rs 7,500 crore between them, lost over 15 per cent each since last August. Even SBI Contra with over Rs 3,100 crore in assets saw its NAV fall by almost 19 per cent. And, so has Morgan Stanley Growth Fund, which had a corpus of Rs 1,465 crore – its NAV is down 18.3 per cent.
Sundeep Sikka, CEO of Reliance Mutual Fund, said “Broadly, last two years, we have seen a different kind of market, where large caps have done relatively better than the mid caps. Therefore, funds which have a mandate to pick midcaps have underperformed. It is not correct to compare them with Sensex returns.”
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The first half of Sikka’s argument is supported by a recent report by S&P Crisil. “Asset-weighted returns were higher than equal-weighted returns across categories in longer time frames of 3 and 5 years, indicating funds with larger assets under management performed better than smaller funds,” said the report.
However, the larger picture is not as rosy as most of the schemes, even those focusing on large caps, underperformed the indices even during longer time frames. In fact, many of the funds with over Rs 1,000 crore corpus have also underperformed their benchmarks.
According to the Crisil report, for the half year ended June 2011, majority of large cap and diversified equity funds underperformed their benchmark indices viz, the S&P CNX Nifty and the S&P CNX 500, respectively, across the 1, 3 and 5 year time periods. Within these two categories, a higher proportion of large cap equity funds underperformed their benchmark vis-à-visthe diversified equity funds category. The level of outperformance is highest for the 5-year time frame.
Typically, large cap equity funds are restricted to stocks that have a higher market capitalisation. Diversified funds, in contrast, have a wider choice than large cap funds as they can take exposure across market capitalisation. Therefore, diversified equity funds offer a greater probability of generating excess returns. According to the report, 60 per cent of the large cap schemes and 55 per cent of the diversified schemes underperformed their benchmarks.
In the ELSS (Equity linked savings schemes) category, investments which are intended for tax saving and typically have a 3-year lock-in period, 57 per cent and 65 per cent of the funds underperformed the benchmark S&P CNX 500 over the 3 and 5 year time frames, respectively. However, around 62 per cent of the funds outperformed the benchmark over a 1 year period.
Sikka of Reliance MF says looking at the number of schemes may be misleading. “About 60 per cent of the industry’s assets will be in top 100 schemes. Therefore, number of schemes is not the right criteria.”
Beyond the equity diversified funds category, if you had invested in a sector fund, the result could have been much different. For instance, Sikka says, “Our pharma fund has performed better than the equity diversified universe. So, if we go to town with it, it doesn’t make sense. Similarly, the infrastructure stocks have not done well leading to poor performance of infra funds. Things need to be seen in the context”.
Infrastructure and commodities oriented funds are among the worst performers. JM Basic, which predominantly invests in infrastructure stocks, has lost 40 per cent of its NAV, which is hovering around its NFO price of Rs 10.
One way of limiting such huge losses is to invest in hybrid funds. These schemes provide investors a blend of stocks and bonds. Based on their risk appetite, investors can decide their allocation to stocks and bonds and accordingly choose between balanced funds and MIPs.
Balanced Funds
The balanced funds category did not do much better than the equity funds during the year. However, because of their hybrid nature, the pain was relatively lesser. These invest in both stocks and bonds, with the exposure to the latter limiting the overall portfolio damage caused by the potential losses in the former during market downturns.
Data from ICRA Online showed that the category lost an average of 8 per cent in the past year, lesser than the equity diversified category which lost over 13 per cent, but much higher than the benchmark CRISL Balanced Fund Index, which showed a negative return of 5.5 per cent. Even in this category, just two funds – ICICI Prudential Balanced (1.46 per cent) and HDFC Balanced (0.93 per cent) – managed to post positive returns for the year ending August 30, 2011. These two were among the seven, which managed to outperform the benchmark index, out of the total 21 balanced funds.
MIP
Monthly Income Plans or MIPs were the best performing category among the funds that have equity exposure because of its least exposure to stocks, over the last year. Balanced funds have a relatively higher exposure of 65 per cent or more, while MIPs typically invest between 10 and 20 per cent into equities.
The category, only one to add value to investors’ money among the three categories, on an average gave a return of 3.2 per cent.
Most of the 51 schemes delivered positive returns in the MIP category with HDFC Multiple Yield topping the table with 7.19 per cent. Religare MIP and Birla Sun Life MIP also delivered returns in excess of 6 per cent for the year ended August 31, 2011.
According to the Crisil report, in the hybrid category, majority of the equity-oriented balanced funds underperformed their benchmark (CRISIL BalanCEX), while majority of the debt-oriented MIPs outperformed their benchmark (CRISIL MIPEX) across all time frames. “This proves that majority of funds with a higher equity component (balanced funds) underperformed their benchmark, while most funds with a lower equity component (MIPs) outperformed theirs. While both these categories vary their equity component within a specified range, the higher volatility (risk) in the equity component of balanced funds has not generated commensurate returns for majority of these funds,” the report added.
Asset-weighted returns continued to be higher than equal-weighted returns across the 1, 3 and 5 year time frames for balanced funds. A similar trend existed for MIPs across the 3 and 5 year time periods, indicating that funds with higher assets under management (AUMs) performed better than smaller peers, Crisil said. In fact, some experts say its a good time to consider debt schemes.
“(Prevailing high) interest rate is a gift of RBI. So, people should pick up fixed income instruments with a two year horizon. Though it is difficult to predict with certainty, equity markets appear badly slotted with the global concerns and industrial production being a victim of RBI’s policies,” Krishnamurthy Vijayan, Honorary Chairman, My India Capital Consultancy, a social investment firm.