Mutual Fund Roundup: August 2010
Market Overview
In the month of August 2010, the Indian equity markets (BSE Sensex) continued to show its indecisive movement depicting a consolidation, but nonetheless ended the month in green by mere 270.2 points or 1.50%. However, the Indian equity markets remained nervous on account of the global economic worries and southward movement in the IIP number to 7.3% in June 2010 (data released in August 2010), from 11.5% reported in May 2010. Gold too once again started becoming bold, as the global economic turmoil continued and inched-up by 0.6%.
Crude oil prices on the other hand rose marginally on supply concerns. The 10-Yr G-Sec yield also inched-up on the possibility that the Reserve Bank of India (RBI) may increase policy rates by another 25 basis points (in its mid-quarter review of monetary policy scheduled for September 16, 2010), to make policy rates more relevant to current economic growth rate and curbing inflationary situation.
Monthly Market Roundup
|
Close |
Change |
% Change |
| BSE Sensex |
17,971.1 |
270.2 |
1.5%![]() |
| CNX Midcap |
8,679.9 |
549.0 |
6.8%![]() |
| Re/US $ |
47.1 |
0.6 |
1.3%![]() |
| 10-Yr G-Sec (%) |
7.95 |
0.40 |
40 bps<img alt="" width="11" height="10" https:="" data.personalfn.com="" images="" up.gif"=""> |
| 1-Yr FDs |
6.00% - 7.10% |
(Monthly change as on August 31, 2010)
The graph hereunder clearly depicts that being concerned about the domestic factors such as southward movement in IIP number and inflation, the Foreign Institutional Investors (FIIs) turned cautious and bought lesser amount i.e. net Rs11,688 crore in the Indian equity markets; as compared Rs 16,617 crore (net buying) in July 2010.
BSE Sensex vs FII inflows
(Source: ACE MF)
The IIP (Index of Industrial Production) number for June 2010 (data released in August 2010) got into the slowest pace in the last 13 months, and slipped to 7.1%, after showing it previous signs of a downward trend in May 2010 (11.5%).
According to the quick estimates released by the Central Statistical Organisation (CSO), the main reason for the southward movement in the IIP growth was on account of:
- Decelerating manufacturing growth - The manufacturing index, which is the principal component of the IIP, decelerated to 7.3% in June, when compared to 12.3% in the previous month (May 2010).
- Loss of growth in sectoral output - The growth in the output of capital goods mellowed to 9.7% in June 2010 (from 34.3% in the previous month) along with the output of consumer non-durables mellowing to 1.3% (2.4% in the previous month). However, the output of consumer durables grew to 27.4% (23.7% in the previous month), with the overall growth in consumer goods being at 8.3% (8.2% in the previous month).
Finance Minister - Mr. Pranab Mukherjee also expressed disappointment on the IIP number by saying, "I expected it to be a little better". Meanwhile Mr. Montek Singh Ahluwalia - Deputy Chairman of the Planning Commission said, "For a year as a whole it (IIP) does not necessarily have to be in double digit... to achieve 8.5% GDP growth. But we do want double digit industrial growth".
Mutual Fund Overview
The mutual fund industry's Average Asset Under Management (AAUM) grew by Rs 21,992 crore or 3.3% during August 2010, and the combined average AAUM of the 41 fund houses stood at Rs 6,87,560 crore. The country's largest fund house, Reliance Mutual Fund’s AAUM stood at Rs 1,04,511 crore rising marginally by 2.3% or Rs 2,332 crore as per the data available with the Association of Mutual Funds in India (AMFI). While most of the equity oriented fund houses witnessed rise in their AAUM, the growth in their asset base can also be attributed to the valuation of their equity assets held over the last month.
Despite SEBI ruling of new valuation norms of mark to market for securities of over 91 days coming into play, rise was also witnessed in the AAUM of debt dominated fund houses. Most fund managers realigned the portfolio of their ultra short term plans by incorporating debt holdings of less than 91 days in order to bring down the volatility, which remained a prime concern for most corporate investors.
Contrary to FII cautious buying activity, domestic equity mutual funds in August 2010 went on a selling spree, as they too were concerned about domestic factors such as southward movement in IIP number and inflation. Mutual funds sold to the tune of Rs 2,997 (net) in the Indian equity markets, thereby following a similar pattern of July 2010; where they were net sellers in Indian equities to the tune of Rs 4,182 crore.
BSE Sensex vs MF inflows
(Source: ACE MF)
Even though the BSE Sensex showed signs of consolidation, the mid cap segment saw some upward movement, which thus led to diversified mid cap oriented funds, along with the multi-cap ones generating appealing returns. Similarly, an upside movement was also seen in the funds focusing on Media & Entertainment theme and Banking & Financial Services theme. Balanced funds too, having mid cap exposure in its equity component, ended the month on a winning streak.
Monthly top gainers: Open-ended equity funds
| Diversified Equity Funds |
1-Mth |
Balanced Funds |
1-Mth |
Sector Funds |
1-Mth |
| Sundaram BNPP PSU Oppor (G) |
6.0% |
Reliance Reg Savings-Bal. (G) |
3.7% |
Sundaram BNPP Enter Oppor (G) |
7.6% |
| Birla SL India GenNext (G) |
6.0% |
DSPBR Balanced (G) |
3.6% |
Sundaram BNPP Fin Serv Oppor (G) |
6.1% |
| Religare Mid Cap (G) |
5.6% |
Canara Robeco Balance (G) |
2.8% |
Reliance Media & Entertainment (G) |
6.0% |
(1-Mth returns as on August 31, 2010)
(Source: ACE MF)
Monthly top gainers: Open-ended debt funds
| Monthly Income Plans |
1-Mth |
Long-Term Floating Rate Funds |
1-Mth |
Liquid Funds |
1-Mth |
| HDFC MIP-LTP (G) |
1.4% |
SBI Magnum InstaCash-Liquid Floater (G) |
0.5% |
Escorts Liquid Plan (G) |
0.6% |
| SBI Magnum MIP (G) |
1.1% |
Reliance FRF ST (G) |
0.5% |
Quantum Liquid (G) |
0.5% |
| Reliance MIP (G) |
1.1% |
Canara Robeco FRF-STP (G) |
0.5% |
Shinsei Liquid-Reg (G) |
0.5% |
(1-Mth returns as on August 31, 2010)
(Source: ACE MF)
Unlike equities, in debt instruments domestic mutual funds turned to be net buyers to the tune of Rs 22,243 crore in August 2010, after being net sellers in the last month (July 2010) to the tune of Rs 582 crore post SEBI diktat of new valuation norms for securities of over 91 days. This buying, in our opinion is on the expectation of domestic mutual funds that policy rates (especially repo rate) will now peak out from the mid-quarter review of monetary policy scheduled for September 16, 2010.
Performance across various categories of mutual funds
(Source: ACE MF)
(1-Mth average returns of funds in various categories as on August 31, 2010)
As per the above graph, all equity oriented funds ended in the positive terrain, despite the indecisive movement in the Indian equity markets. Particularly the banking and financial services sector funds generated impressive returns due to the rally seen in banking stocks, as the key policy rates were hiked by RBI in the last week of July 2010. Gold ETFs too ended the month of August in the positive terrain, with gold prices rallying across the globe on concern of a double-dip recession in the U.S. and continuation of global economic uncertainty. Similarly, debt mutual funds too ended the month in green, as WPI inflation for July 2010 (data released in August 2010) slipped in the single-digit territory at 9.97%.
Other News and New Fund Offers
- Liquid Plus category of mutual funds would face increased volatility in the near future due to the new valuation norms which require the fund houses to mark-to-market securities with maturity of over 91 days. AMCs are likely to incorporate a higher percentage of securities with less than 91-day maturity in Liquid Plus funds in order to tide over the volatility concerns. Investors would enjoy less volatility and tax arbitrage but this would affect the returns generated from such (Liquid Plus) funds.
- After showing an upward trend since September 2009 and also being in double-digits for the last five months, the Wholesale Price Inflation (WPI) for July2010 (data released in August 2010) slipped into single-digit territory at 9.97%. However, WPI inflation for May 2010 was revised upwards from 10.16% to 11.14%.
In our opinion, such a WPI inflation number would provide some relief to the government which has come under severe pressure of managing escalated prices, but we think that the drop in WPI inflation is due to the fading of base year effect, and hence we believe that RBI will continue to adopt its the calibrated exit path and thus it may raise policy rates by 25 basis points in its mid-policy review meeting (scheduled for September 16, 2010).
- In order to make the mutual fund industry more streamlined and disciplined, the Security and Exchange Board of India (SEBI) has barred mutual fund houses from selling options contract with effect from October 1, 2010 without specifying any reason.
In our opinion the directive issued by SEBI, is in the interest of investors’ as a wrong bet, taken by the fund manager will have an adverse impact on the investors’ wealth creation objective. Moreover such a move will affect the business of the stock brokers and also impact the volume in the options segment.
- In what could be a total revamp in transacting in the mutual funds, the capital market regulator - SEBI is planning to make listing of all schemes (debt and equity - both open-ended as well as close-ended) mandatory. The settlement will also be in line with those in stocks, and hence it would take place within two days of transaction (called T+2), instead of the existing three days (called T+3) of transaction for mutual funds.
In our opinion, SEBI’s plan to list all the mutual fund schemes is a step forward in developing the mutual fund market by enhancing its reach even to a small retail investor.
- SEBI Chairman - Mr. C. B. Bhave’s term ends on February 17, 2011, and he is unlikely to get a second term as a SEBI boss, as the Finance Minister, Mr. Pranab Mukherjee has approved of a search panel that will recommend a successor when his term ends. The finance ministry has recently rejected a proposal to extend the SEBI Chairman’s term by two years, from three to five years, which was in line with recommendations of the Sixth Pay Commission.
- In a strong response to the lackluster attitude of mutual fund houses towards updating investor-related documents, SEBI directed mutual fund houses to comply with the requirements by November 2010.
The documents to be maintained and made available include anti money laundering, combating financing of terrorism, Know-Your-Customer (KYC) documents and the Power of Attorney (PoA). These (documents) need to be updated by November 15, 2010 for existing MF folios.
- In a recent directive issued by SEBI to mutual funds (MFs), investors will now stand a chance to exit from a mutual fund scheme, if the methodology to compute the total expenses (charged from a investor) is changed.
At present, mutual fund houses broadly charge the investment management fee and the redemption expenses to a fund. They currently charge a flat fee of 2.25% on the average daily or weekly net assets of the fund.
- Pramerica Asset Managers Pvt. Ltd. (the Indian asset management venture of US-based Prudential Financial Inc. (PFI)) unveiled its first fund "Pramerica Liquid Fund" - an open ended liquid scheme.
- Reliance Mutual Fund launched an open ended diversified equity small cap fund named "Reliance Small Cap Fund".
As per the offer document, the investment objective of the scheme is "to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities". The fund will benchmark its performance against the BSE Small Cap Index.
The New Fund Offer (NFO) is open for subscription from August 26, 2010 to September 9, 2010.
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