Equity funds with focus on mid-cap stocks lead the pack

MUTUAL FUNDS/Icra online rankings 2004

Calendar 2003 has been a year of exceptional gains for most Indian investors. With robust inflows from foreign institutional investors (FIIs), the equity markets witnessed a major rally during the last calendar year""the Bombay Stock Exchange Sensitive Index was up by 2,462 points in 2003, the highest gain in any calendar year since its inception in 1979.

More remarkable perhaps was the depth and breadth of the 2003 rally, encompassing both large and mid-cap stocks across sectors. The most significant appreciation was witnessed, among others, by stocks from sectors like public sector undertakings , banking, technology, automotives, pharmaceuticals, fast moving consumer goods and the old economy.

Both the major equity market indices, the BSE Sensex and the National Stock Exchange (NSE) Nifty, saw appreciation in excess of 70% during 2003.

Among the major sectoral indices, the BSE PSU gained 144% while others like BSE Bankex, BSE Healthcare, BSE FMCG and BSE IT indices appreciated by 108%, 96%, 35% and 23%, respectively. The index for mid-cap companies""the CNX Mid-cap 200""gained 136%.

Arguably, one of the most effective strategies for the retail investor to cope with the ups and downs of the stock market is to follow the basics of investment: (a) invest for the long term""do not press the sell button during bearish phases; (b) invest through mutual funds; and (c) invest through Systematic Investment Plans (SIPs).

By following an SIP, the need to time the market is precluded; it is just that one buys more when the markets are ruling low and vice versa. Perhaps it is pertinent to note that anyone who stayed invested through the bearish market that followed the end of the 2000 boom would now be a happy investor.

As for the debt markets, they also delivered reasonable returns during the year, despite the high volatility. Thus, the gilt market benchmark I-Bex gained over 12% in 2003 over the previous year.

However, debt fund investors, who have had a good going during the last three years, would now have to realign their expectations with the prevailing low interest rates.

Further, given the confluence of positive factors""like increased liquidity, and expectation of a 4-4.5% annual inflation rate""and negative ones""like firming up of global interest rates""the ride ahead through the debt markets is likely to be a bumpy one.

Equity Funds

Equity funds once again brought gains to investors in calendar 2003. The average returns from diversified equity schemes for the one-year and three-year periods ended December 31, 2003 were around 110% and 23%, respectively.

Diversified equity funds with focus on mid-cap stocks were in the forefront, leading the pack of diversified equity schemes; banking and technology were clearly the most popular sectors among fund managers.

As for Sectoral Equity funds, technology funds were back in focus reporting an average one-year return of 51% as against a negative 0.06% for the three-year period ended December 31, 2003.

Balanced Schemes

Balanced funds, on an average, posted over 60% absolute returns during calendar 2003. Most fund managers booked profits and reduced the exposure to equities, as the stock prices soared in the latter part of the year.

While at the beginning of the year, the average allocation to equity was around 66%, by the year-end, the average allocation dropped to 59%. The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 62% and 21%, respectively.

Marginal Equity Schemes

Marginal equity schemes, which are debt schemes with a marginal equity exposure, came into focus once again. With returns from debt funds declining and the equity markets showing improved performance, marginal equity schemes accounted for the bulk of the new launches in the mutual funds industry in 2003, attracting investors looking for better returns without taking too much risk. The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 15% and 13%, respectively.

Debt Funds

Although overshadowed by the performance of Equity Funds, Debt Funds also reported satisfactory performance, with most long-term debt funds delivering returns in the range of 8 to 10%. During the last one year, most fund houses maintained an average portfolio maturity of five to seven years for their debt schemes.

Dynamic Bond funds were also launched to give more flexibility to fund managers in terms of portfolio restructuring. The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 7.75% and 13.7%, respectively.

Short-term debt funds , which are becoming increasingly popular among corporates and other investors with short investment horizons, also gained significance over the last one year because of the increased volatility in the debt markets. The average return in this category for the one-year period ended December 31, 2003 was 6.25%.

Gilt Schemes

Within the fixed income category, long-term gilt funds have been reporting the highest returns for the last three years. The one-year and three-year returns posted by long-term gilt funds for the period ended December 31, 2003 averaged very high figures of 10.7% and 18.9%, respectively, on the back of a soft interest rate regime.

However, going forward, investors would perhaps have to reconcile themselves to very conservative returns from Gilt funds and also factor in the higher volatility associated with them vis-à-vis their debt counterparts.

Liquid Schemes

The returns from liquid funds moved within the narrow range of 5 to 5.5% during calendar 2003. Over the same period, the call rates were around 4.25 to 4.5% while the repo rate moved down from 5.50 to 4.50%. The average return in this category for the one-year ended December 31, 2003 was 5.36%.