Liquid funds favoured in volatile times

The quarterly Crisil Composite Performance Rankings carried out by Crisil FundServices for the quarter ended June indicate that liquid funds emerged as the best performing category in a volatile debt market.

During the quarter, the debt market witnessed hardening of yields on concerns over inflation and interest rate hikes.

The liquid fund category registered best performance among all mutual fund categories for the quarter in a choppy debt market, delivering positive returns.

During the quarter, domestic markets had to deal with a change in the political dispensation after the elections, and there was also a phase of equity market turbulence on concerns over the continuation of economic reforms.

This led to a sharp correction in May, as a result of which the equity market ended the quarter in negative territory.

The debt market also witnessed volatility during the quarter because of the rising inflation rate and hardening of global interest rates.

However, the hardening of interest rates was largely restricted to debt instruments of a longer tenure, with the short-tenure ones not being materially impacted. This led to steepness of the yield curve.

Liquid funds, which invest largely in money market instruments and very short-term debt instruments, were thus able to outperform other debt categories, Crisil FundServices said.

Despite the recent lull, the fundamentals of the Indian market remain sound, both on the economic and corporate fronts. This was reflected in the performance of the country's economy, which registered an 8.2 per cent growth in gross domestic product for the year ended March, and the projection of a 6-6.5 per cent growth in 2004-05.

In the recently announced Union Budget, the proposed enhancement in foreign direct investment limits in telecommunication, insurance, and civil aviation sectors could raise the prospects of these sectors. The increased thrust on the agriculture sector is also expected to increase credit flow to this sector, said Crisil FundServices.

On the capital market front, while the abolition of long-term capital gains tax is a positive prescription, the higher dividend distribution tax on debt mutual funds is expected to result in shift of investor interest to equity funds.

Crisil FundServices ranked 142 schemes across seven categories on various Crisil-CPR (Composite Performance Ranking) parameters in the quarter ended June. These schemes accounted for 68 per cent of mutual funds' assets under management.

The ranking, Crisil-CPR 1 indicates a very good performance, followed by Crisil-CPR 2, which indicates good performance. Crisil-CPR 3 stands for average performance. Crisil-CPR 4 and Crisil-CPR 5 denote below average performance and poor performance, respectively.

Crisil Fund Services ranked the performance of equity, income, balanced, gilt-long funds, and monthly income plans schemes over two years, and ranked the liquid and income-short-term funds over a year.

Equity diversified schemes: Out of the 36 schemes that were ranked in this quarter, Alliance Basic Industries Fund, DSP Merrill Lynch Opportunities Fund, HDFC Top 200 Fund, and UTI Growth Value Fund topped the charts on Crisil-CPR 1 rank, which indicates very good performance.

The Crisil Fund-ex, the benchmark for equity diversified funds, generated an annualised point-to-point negative return of 36.54 per cent for the quarter ended June.