| TOP 10 EQUITY DIVERSIFIED SCHEMES IN 2005 | |||
| Scheme | 1-year | 2-years | 3-years |
| SBI Magnum Sector Umbrella - Emerging Businesses | 78.26 | - | - |
| SBI Magnum Global Fund 94 | 77.34 | 73.61 | 80.40 |
| Prudential ICICI Emerging STAR Fund | 71.24 | - | - |
| SBI Magnum Sector Umbrella - Contra | 70.35 | 68.34 | 80.62 |
| SBI Magnum Multiplier Plus 93 | 67.03 | 48.77 | 68.38 |
| Reliance Growth | 66.08 | 54.07 | 82.43 |
| HDFC Equity Fund | 62.49 | 43.50 | 66.52 |
| Prudential ICICI Discovery Fund | 62.01 | - | - |
| Taurus Starshare | 61.31 | 44.83 | 65.36 |
| Source: www.mutualfundsindia.com | |||
What is in store for 2006?
Fund managers note that things are unlikely to be as good as in the past two years. Still the good news is that equities should continue to give returns which are better than any other asset class, stray cases apart.
There is a cause for such optimism. One obvious reason is that fund managers continue to bet on the India growth story. Despite worries on several quarters about India's high valuation vis-à-vis other emerging markets as well as the fact that corporate earnings growth has been slowing down in the past few quarters, fund managers remain bullish.
According to Nilesh Shah, chief investment officer of Prudential ICICI Mutual Fund, the fundamentals of Indian equity markets are still attractive.
"The economy is on a good wicket. Indian economy managed a growth of 8.5 per cent in the first half of current fiscal and considering the fact that second half is usually better than the first, even on a conservative estimate, we can hope to achieve a 7.5-8 per cent growth for the full year," he says.
Shah also feels that worries about FII inflows - which crossed the $10 billion mark recently - slowing down are out of place. "Several new investors, especially from regions like Japan, Middle East, Australia and Germany are entering the Indian markets for the first time, which should ensure that inflows continue in 2006 too."
Indian equity valuations, even at the current levels (Sensex is currently ruling at a trailing P/E of 18.5x) are also reasonable, feel fund managers. Anup Maheshwari, chief investment office of HSBC Mutual Fund notes that current valuations are close to historic average valuations.
"So as long as there is good earnings growth stocks should take care of themselves," he says. According to Shah, Indian markets deserve to be valued at current levels, considering the fact that country's growth rates are expected to be higher than other emerging markets. "Indian markets are ruling at fair value, though there is a premium attached to the growth potential."
Expect 15-20 per cent returns from equities
Despite the optimistic mood, fund managers seem convinced about one thing; that is equity returns are unlikely to be as high as they have been in the past couple of years.
Says Shah, "Investors should pare down their return expectations. Given the larger base and a stable interest rate scenario, corporate earnings growth may be steady rather than spectacular. This is bound to get reflected in equity returns too."
His namesake and president of Kotak Mahindra Mutual Fund, Nilesh Shah concurs with that view. According to him, 2005 was a very good year for mutual funds.
However, 2006 is unlikely to be as good. "Clearly investor expectations are high. They should lower their return expectations from equity funds. In the next 3-4 years, we can expect an earnings growth (CAGR) of 15-20 per cent. Equity returns should be more or less in line with that."
Says Shah of Prudential ICICI MF, "Indian markets are fully discovered, fully priced and at current levels fully discounted. From hereon returns will be in proportion to what corporates can deliver."
Fund managers note that only a bottom up approach is likely to work in today's scenario. "India is a stock picker's market," notes Shah of Kotak.
"The biggest challenge is for fund managers to reduce the gap between value and price. Time to market is shrinking rapidly these days. Whoever is able to get into the right stock at the right time stands a better chance of succeeding," says he.
Investment strategies
That brings us to a touchy subject with active fund managers. Given the fact that stocks are ruling at an all-time high, would it be wiser to invest in index funds? "Not yet," says Shah of Kotak.
"Going by the experience in developed markets, it is true that index funds tend to better than actively managed funds over a period of time. However, one has to keep in mind that India is still a growing market and actively managed funds have done better than index funds in the past. Given the fact that in a market like this only a keen eye for stock picking will deliver superior returns, active fund managers stand a better chance of giving superior returns," he adds.
Investment analysts note that how investors approach their equity investments will depend on their risk appetite. "If one is looking for safety, then it is better to go for large-caps. However, even at the current market levels, growth is likely to come from the mid-cap segment, though the risk is definitely higher there," says Shah of Prudential ICICI MF.
His advice is to keep a diversified portfolio so as to mitigate undue risk. Shah also advised investors to take to the systematic investment plans (SIPs) of mutual funds which will minimise risk.
Finally it is all about asset allocation and one's risk appetite. "If an investor is overweight on equities, may be he needs to cut down. However, if an investor has only about 20-30 per cent allocation to equities, he can consider a higher exposure. The point is one should keep a reasonable weightage in equities and don't worry about market levels," Shah adds.
Despite the breadth of the market rally, interestingly it was a sectoral fund category which did better than diversified funds during 2005. FMCG funds have been ruling the roost for quite some time now with technology and auto funds not too far behind. In such a market does it make sense to invest in sectoral funds?
Shah of Prudential ICICI MF feels that a sector fund exposure should be considered only as an add-on to one's portfolio. He is bullish on the non-ferrous metals, technology and select pharma counters. One sector which is not on the fund managers' radar right now is the oil and gas segment.
To sum it up, what fund managers are saying is this; equity fund returns are unlikely to be as high in 2006 as it was in 2005. Given an expected corporate earnings growth rate of 15-20 per cent, fund returns are likely to be more or less in line with that.
Secondly, in this market one needs to be careful about where to invest. If safety is the main concern, go for large-cap oriented funds. On the contrary, if growth is what one is looking for mid-cap oriented funds are likely to be better off, though risk will be higher. And importantly, take an exposure to sectoral funds only after making a diversified portfolio, thus mitigating the risk.