Mutual Fund Roundup: December 2010
Jan 05, 2011

Author: PersonalFN Content & Research Team

Mutual Fund Roundup: December 2010

Market Overview

After being in the red for the last couple of months, the Indian equity markets (BSE Sensex) ended the last month of the calendar year in the green (by gaining 987.8 points or 5.1%), as the FIIs exuded confidence in the Indian economy by pumping in Rs 2,049.6 crore. Quietness on the scams stories also attributed to this up move, along with robust Q2 GDP growth rate of 8.9% (data released in December 2010), and up-roaring IIP (Index of Industrial Production) number of 10.8% registered in October 2010 (data released in December 2010). However, as typical signs of consolidation were shown by the Indian equity markets during the month, the mid cap space got nervous which led to the CNX Mid Cap Index correcting by -50.3 points or 0.6%.

Gold on the other hand maintained its northbound journey, not ruling out that political uncertainties prevailing in India due to the opposition yet demanding a JPC (Joint Parliamentary Committee) on the 2G spectrum scam. Also the economic shivers in the developed nations along with overall rally in commodity asset class attributed to the upward movement of this precious yellow metal. Also, with the month of December being scheduled with several weddings, stockist also bought heavily which led to gold becoming bold.

Like the last couple of months, crude oil prices too continued to maintain it sky rocketing journey as the prices climbed up by 7.4% as the commodity asset class looked to be the favourite investment destination for most foreigners. The continuous demand from most oil consuming nations too led to rise in oil prices as stimulus package continued in most such nations.

The 10-Yr G-Sec yield fell below the 8.0% mark softening by 15 basis points, as the Reserve Bank of India (RBI) decreased the Statutory Liquidity Ratio (SLR) by 1.0% (from 25.0% to 24.0%) (in third quarter mid review of monetary policy held on December 16, 2010) to correct the tight liquidity situation prevailing in the banking system.

Monthly Market Roundup

	As on Dec 31, 2010	As on Nov 30, 2010	Change	% Change
BSE Sensex	20,509.1	19,521.3	987.8	5.1%
CNX Midcap	8,857.2	8,907.5	(50.3)	-0.6%
Re/US $	44.7	45.9	1.2	2.6%
10-Yr G-Sec (%)	7.91	8.06	(0.15)	15 bps<img alt="" width="11" height="10" https:="" data.personalfn.com="" images="" down.gif"="">
1-Yr FDs	6.50% - 7.25%

(Monthly change as on December 31, 2010)
(Source: ACE MF, PersonalFN Research)

The graph hereunder clearly depicts that despite the political uncertainties prevailing in our economy; the FIIs continued to exude confidence in our equity markets. However this time (in the month of December 2010) their participation was far muted (i.e. Rs 2,049.6 crore, as compared to Rs 18,293.1 crore in the month of November 2010) as valuations of the Indian equity markets remained a concern for them and they preferred investing in the developed nations - especially the U.S. due to signs of recovery there (2.6% Q3 GDP growth rate, appealing consumer confidence index of 54.3 in November 2010). The lacklustre flow towards the Indian equity markets was also attributed to change in focus from equity to commodity as an asset class.

BSE Sensex vs FII inflows

(Source: ACE MF , PersonalFN Research)

But nonetheless they invested in the Indian equity markets taking cue from the uproar in the October 2010 IIP number (released in December 2010).

This smart up-swing in the October IIP number can be attributed to the following reasons:

Accelerating manufacturing growth : The manufacturing index, which is the principal component of the IIP (constitutes around 80% of the index), rose to 11.3% from 4.5% in September 2010.

Growth in sectoral performance: After taking a beating in the last couple of months, the capital goods index jumped to 22.0% from -4.2% registered in September 2010. Consumer durables too, registered a robust growth of 31.0% from 10.9% in September 2010. However, consumer non-durables took a beating by growing at meagre 0.1%, as against 2.5% in September 2010.

Reacting to the IIP numbers, the Finance Minister Mr. Pranab Mukherjee said, "This (industrial growth) is quite encouraging. I hope this trend will continue and double-digit growth in industry would be possible."

In our opinion the sharp up-swing in the IIP number was fuelled by increase in production to meet festive demand during the month of October and November 2010.

Mutual Fund Overview

Contrary to muted FII activity, the domestic equity mutual funds evinced interest in the Indian equity markets as the GDP growth rate data and the IIP number for October 2010 revealed a robust economic outlook. They sailed along with the direction of the Indian equity markets and bought aggressively to the tune of Rs 1,849.4 crore, which was unlike their muted net buying activity of Rs 251.1 crore in the month of November 2010. However, the Industry’s Average Assets Under Management (AAUM) shrunk by 5.3% to Rs 6,75,377 crore during the quarter October - December 2010 (as on September 2010 the AAUM was Rs 7,13,281). Country’s largest fund house - Reliance Mutual Fund’s assets too declined by 5.6% to Rs 1,02,066 during the quarter October - December 2010 (as on September 2010 the AAUM of Reliance Mutual Fund stood at Rs 1,07,749 crore).

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

With the Indian equity markets ending the month of December 2010 in the positive terrain, diversified equity funds along with balanced funds delivered appealing returns. Moreover, the recovery in the technology sector, along with the strengthening of dollar during the parts of the month also led to technology sector funds performing better.

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Balanced Funds	1-Mth	Sector Funds	1-Mth
Birla SL India Opportunities (G)	4.1%	Baroda Pioneer Balance (G)	2.0%	Franklin Infotech (G)	11.0%
SBI Magnum Emerging Businesses (G)	3.6%	LICMF Balanced (G)	1.7%	ICICI Pru Technology (G)	9.4%
L&T Global Advantage (G)	3.4%	JM Balanced (G)	1.4%	Birla SL New Millennium (G)	7.5%

(1-Mth returns as on December 31, 2010)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended debt funds

Monthly Income Plans	1-Mth	Long-Term Floating Rate Funds	1-Mth	Liquid Funds	1-Mth
SBI Magnum MIP-Floater (G)	1.0%	Sundaram Flexible-FIP (G)	0.8%	Escorts Liquid Plan (G)	0.7%
SBI Magnum MIP (G)	0.9%	ICICI Pru LT FRF-A (G)	0.6%	IDFC Ultra ST (G)	0.7%
Bharti AXA Reg Return-Eco (G)	0.8%	Birla SL FRF-LT (G)	0.6%	IDFC Savings Advt-A (G)	0.6%

(1-Mth returns as on December 31, 2010)
(Source: ACE MF, PersonalFN Research )

In debt instruments domestic mutual funds did some heavy buying to the tune of Rs 40,699.5, thus betting more aggressively as compared to last month (where they were net buyers to the tune of 15,261.6 crore). This buying was due the increased confidence in the bond markets as the RBI maintained key policy rates in order to correct the tight liquidity situation (which is prevailing since September 2010). In effect to the same debt mutual funds among the monthly income plans, floating rate plans and liquid plans too generated positive returns.

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on December 31, 2010)
(Source: ACE MF, PersonalFN Research)

As per the above graph, as the scam stories of the “Adarsh Housing Society”, along with the housing finance scam continued to haunt the infra funds and banking and financial services sector funds, as they caused erosion of wealth. Mid caps too felt the jitters of the scam and they too ended the month in the negative terrain. However, some well managed diversified equity funds, along with equity oriented balanced funds ended the month in the green. But Gold ETFs ended in the negative terrain for the month as profit booking took place at every high levels. Debt funds also didn’t shy away from giving positive returns as RBI took prudent stance on correcting the tight liquidity (which prevailed since September 2010) and combating inflation.

Other News and New Fund Offers

In their bid to beat competition from large mutual fund houses and carve out a niche for themselves, smaller mutual fund houses are focusing on a select group of products. This trend is also an outcome of increasing regulatory control over mutual funds. Mutual fund houses are now looking at differentiating their products and simplifying things for investors.

At present, a few mutual fund houses like Benchmark, Motilal Oswal, DSP BlackRock, JP Morgan and Quantum are carving out a niche position by differentiating their products. Benchmark has established itself in the ETF (exchange traded fund) category and Motilal Oswal is trying likewise.

JP Morgan and DSP Blackrock are bringing their international products to domestic investors. Quantum Mutual Fund follows a unique no-commission model, where the investors directly interact with the mutual fund house.

The BSE TASIS Shariah-50 Index - launched by Bombay Stock Exchange (BSE) a couple of days ago - has received good response. The index which is structured in partnership with Taqwaa Advisory Shariah Investment Solutions will have 50 stocks selected from the BSE-500 bracket.

Shariah, the religious law of the followers of Islam, has strictures regarding finance and commercial activities permitted for believers. Arab investors only invest in a portfolio of 'clean' stocks. They do not invest in stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons.

The Confederation of Indian Industry's (CII) report expects majority of manufacturing sectors to clock double digit growth in production during the period April 2010 - December 2010 as compared to a year ago.

According to the report, as many as 72 out of 127 manufacturing sectors are likely to close the nine months period ending December 31, 2010 with over 10% growth compared to just 56 such sectors in the corresponding period last year.

The Securities and Exchange Board of India (SEBI) warned mutual fund (MF) houses to stick to the new rules in liquid schemes in 'letter & spirit' after the Association of Mutual Funds of India (AMFI) wrongly interpreted the SEBI circular on liquid schemes.

"The said communication issued by AMFI is not in conformity with the SEBI circular, and therefore, you are advised to disregard the same and ensure compliance in letter and spirit with the SEBI circular dated November 26, 2010, which is self-explanatory", the regulator's letter to MF houses said.

Goldman Sachs, the world's most profitable investment bank, is set to launch its Indian mutual fund business in 2011, its second attempt to foray into the Indian market after 2009.

Goldman Sachs had received SEBI's approval to start MF business in India in September 2008. However, the U.S. firm had postponed its India's MF plan following the global financial crisis.

Global consultancy firm Fitch has revised upwards its growth forecast for India to 8.7% this fiscal, from its earlier estimate of 8.5%. However, for 2011-2012 and 2012-13, it (Fitch) expects the economic growth to fall further to 8.5% and 8% respectively.

The SEBI asked mutual fund houses to strengthen their know-your-customer (KYC) norms. The new disclosures will also apply to Members of Parliament, Legislative Assembles and Legislative Councils. The new guidelines will come into effect from January 1, 2011. The new norms will help prevent money laundering and help track investments by bureaucrats and politicians in both stock markets and mutual funds.

Nilesh Shah, the Deputy Managing Director at India's third-largest mutual fund -ICICI Prudential Asset Management will demit his office in February 2011 after serving for seven years. During his tenure the Assets Under Management (AUM) at ICICI Pru quadrupled to 70,000 crore from 15,000 crore.

UTI Mutual Fund Chairman and Managing Director (CMD), Mr. U. K. Sinha is set to become the next SEBI Chairman, since the search panel headed by Cabinet Secretary Mr. K M Chandrasekhar, has recommended Mr. Sinha's name.

Mr. C. B. Bhave, present Chairman of SEBI will demit his office on February 17, 2011.

The capital market regulator - SEBI is considering a proposal wherein the fund management fees charged by equity mutual funds, will be linked to the performance of the scheme.

An internal discussion paper on this also said, "For investors, to pay the maximum amount in a scheme, which is consistently underperforming in relation to its benchmark is unreasonable and part of the burden should be shared by the mutual fund." To read more Click here.

Bank's investments have been under the scanner of the Reserve Bank of India (RBI) as the analysis of the pattern of banks' investments in mutual funds (MF) shows that inflows tend to be volatile, typically during the beginning and end of a quarter and also during times of a sharp surge in loan demand.

Therefore in order to keep a check on banks' investments in MFs, the RBI in collaboration with SEBI (Securities and Exchange Board of India) will finalise the guidelines for banks' investments in mutual funds.

Lion Fund Management Co. Ltd. (a China based Asset Management Company) won approval from China Securities Regulatory Commission (CSRC) to launch a first of its kind Gold Fund in China. Lion Global Gold Fund will invest in gold-backed Exchange Traded Funds (ETFs) overseas.

Such a fund was approved citing, inflation fears might fuel demand for the yellow metal (Gold).