Market Overview

The ascending trend displayed by the Indian equity markets, in January 2012 continued in the month of February 2012 as well. But this time around, the impulse was much softer, as the BSE Sensex cautiously trended up gaining +3.3%. The dunk in the Index of Industrial Production (IIP) for the month of December 2011 (data released in February 2012) to 1.8% (after a sharp rise in the previous month) did not go too well with the Indian equity markets. In fact the see-saw movement in IIP (for the period October 2011 to December 2011), was detrimental for the Q3 FY12 GDP growth rate as it dwindled to 6.1%. But since the average economic growth rate (for the last three quarter of FY12) continued to be at 6.9%, it enthused the markets. Moreover, the cool-off in WPI inflation data for the month of January 2012 (data released in February 2012) to 6.55%, also provided a fillip to the Indian equity markets as the inflation bug finally came within the comfort range (of 6.00% to 7.00%) set by RBI, thus setting expectations that from the next fiscal year (i.e. 2012-13), the central bank may reduce policy rates (and if required also reduce Cash Reserve Ratio) and thereby give impetus to business activity, India's strong consumption story and be a positive for interest sensitive sectors (such as realty, banking and auto). The market also witnessed enthusiasm for the Initial Public Offerings (IPOs). For instance, the IPO from MCX Ltd. saw huge investor response as it got over-subscribed by more than 54 times attracting bids of about Rs 36,000 crore. The IPO garnered enough retail participation as well, as the shares reserved for the retail shareholders were over-subscribed by nearly 24 times.

The news disseminating from the developed economies also helped the markets to continue its ascending trend. Greece's Prime Minister – Mr. Lucas Papademos's success in convincing lenders and politicians to sign-off a € 130 billion (i.e. U.S. $173 billion) second bail-out and indeed receiving it, along with Germany's business confidence being at a seven-month high (which was more than the forecast of many economists) aided the upward movement of the Indian equity markets. Greece clinching a second bailout package and falling bond yields of the Government debt from Italy to Spain helped to infuse optimism in the market, and shackled the worries of a debt-overhang temporarily. Likewise with the U.S. economy displaying signs of recovery by posting an uptrend in GDP growth rate in last four quarters of 2011 (and last quarter GDP growth being revised to 3.0% from 2.80%) along with a fall in their unemployment rate to 8.3% in January 2012 (being the lowest since February 2009), also provided positive signals to the Indian equity market. Similarly, with the U.S. showing an improvement in its business confidence index (also known Purchasing Managers Index) to 54.1 in January of 2012 (from 53.1 in December of 2011), according to the Institute of Supply Management (ISM) along with the consumer confidence too increasing to 70.8 in February 2012 (from 61.1 in January 2012), set in optimistic mood for the global markets.

But despite upbeat sentiments in the global markets, the precious yellow metal – gold like the last month continued its northbound journey (by gaining +1.7%), thus not ruling out the fact that the burgeoning debt crisis in the Euro zone, may once again pull the Euro zone into a recession. It is noteworthy that after growing at a dismal rate of 0.2% in Q3 of 2011, in the last quarter the Euro zone's GDP contracted to -0.3%. The uptrend in gold was also well supported by buying from stockist as they heightened their inventory to meet demand from on-going marriage season.

Speaking about the Brent crude oil, prices surged (by +10.9%) due to worry of supply contraction occurring from Iran and North Sea (marginal sea of Atlantic Ocean). Iran's plan to cut supply of Iranian crude to Euro also spiked the movement of oil. Moreover, the likely fall in output of crude oil in March 2012 from the North Sea due to maintenance work and natural aging of oilfields there, also fuelled to uptrend for oil prices.

For the bonds markets, despite the reduction of 50 basis points (bps) in the Cash Reserve Ratio (CRR) (brought in by the Reserve Bank of India (RBI) in its 3rd quarter review of monetary policy 2011-12) liquidity remained tight for most part of February 2012, as indicated record high borrowing worth Rs around 1,80,000 crore by banks through the Liquidity Adjustment Facility (LAF). This thus resulted in the short-term CD yields – both 1-month and 3-month CDs inching up by 5 bps and 80 bps (taking them to 9.7% and 10.7% respectively). Going forward too, the implied effect of advance tax obligations which is due in mid- March 2012, may also tight liquidity situation further in March 2012. However, contrary to the movement of short-term yields, the 10-Yr G-Sec yield mellowed by 9 bps, getting relived by WPI inflation data falling within the comfort range of RBI and expecting that measures for fiscal consolidation may be addressed in Budget 2012.

 

Monthly Market Roundup

	As on Feb 29, 2012	As on Jan 31, 2012	Change	% Change
BSE Sensex	17,752.7	17,193.6	559.1	3.3%
S&P CNX Nifty	5,385.2	5,199.3	186.0	3.6%
CNX Midcap	7,705.6	7,100.6	605.1	8.5%
Gold (Rs/10 gram)	28,620.0	28,140.0	480.0	1.7%
Re/US $	49.0	49.5	0.4	0.9%
Crude Oil ($/BBL)	122.5	110.5	12.0	10.9%
10-Yr G-Sec (%)	8.19	8.28	(0.09)	9 bps
1-Yr FDs	7.25% - 9.40%

(Monthly change as on February 29, 2012)
(Source: ACE MF, PersonalFN Research)

 

Enthused by the fact that second bailout package has been doled out to Greece and immediate worries of "debt-overhang” have been put off for now, along with assessment of the fact that Emerging Market Economic (EME) such as India is still offering luring growth, as compared to the Developed economies, Foreign Institutional Investors (FIIs) exuded confidence in the Indian equity markets and bought aggressively net to the tune of Rs 25,212 crore, thereby accelerating from our last month's activity where they bought net only to the tune of 10,358 crore.

 

BSE Sensex vs FII inflows

 

(Source: ACE MF , PersonalFN Research)

Mutual Fund Overview

However, domestic mutual funds on the other hand turned net sellers in the Indian equity markets to the tune of Rs 2,171 crore, thereby following their last month's selling activity worth Rs 1,947 crore. It seems that fund managers preferred to book profits in this impulsive move, and investors' too favoured profit booking, as the markets delivered a return of nearly 15% in the last two months.
 

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

 

Tracing the upswing of the Indian equity markets, domestic equity mutual funds too performed well. Amongst the diversified equity mutual fund schemes, mid cap funds provided luring returns along with those following the opportunities and value style of investing.

Amongst the sector funds, schemes focusing on the progressive themes, IT banking & financial services and infrastructure space helped in creating wealth for investors. However, interest sensitive sectors performed in a very appealing way, as markets expected that from the next fiscal year (i.e. 2012-13), the central bank may reduce policy rates (and if required also reduce Cash Reserve Ratio) and thereby give impetus to business activity.

In the Fund of Fund (FoF) schemes, the equity oriented international feeder funds did well.

Speaking about the hybrid funds, balanced funds due to their dominant exposure towards equity, got a fillip on return, while Monthly Income Plans (MIPs) too benefited by a drop in yields of long-term papers.

Speaking about the hybrid funds, balanced funds due to their dominant exposure towards equity, got a fillip on return, while Monthly Income Plans (MIPs) too benefited by a drop in yields of long-term papers.

 

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
HSBC Midcap Equity (G)	11.31%	HSBC Progressive Themes (G)	11.85%	Reliance Tax Saver (ELSS) (G)	7.08%
Birla SL India Opportunities (G)	10.04%	ICICI Pru Technology (G)	9.08%	HDFC Long Term Adv (G)	6.86%
Canara Robeco Emerging Eq (G)	9.42%	Sahara R.E.A.L (G)	8.00%	Tata Infra Tax Saving (G)	6.71%

(1-Mth returns as on February 29, 2012)
(Source: ACE MF, PersonalFN Research)

 

 Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
JPMorgan JF Gr China Eq Off-Shore (G)	7.24%
JPMorgan Emerg Eur Mid East & Afr Eq Off-shr Fund (G)	7.00%
DWS Global Agribusiness Offshore (G)	6.47%

(1-Mth returns as on February 29, 2012)
(Source: ACE MF, PersonalFN Research)

 

 Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
HDFC Balanced (G)	5.78%	DWS Twin Advantage (G)	3.47%
ICICI Pru Balanced (G)	5.72%	DSPBR MIP (G)	3.06%
Reliance Reg Savings-Balanced (G)	5.39%	IDFC MIP (G)	2.61%

(1-Mth returns as on February 29, 2012)
(Source: ACE MF, PersonalFN Research )

 

 Monthly top gainers: Open-ended debt funds

Floating Rate Funds	1-Mth	Income Funds	1-Mth	Gilt funds	1-Mth
Short Term		Short Term		Short Term
Kotak Floater-ST (G)	0.77%	Axis Income Saver (G)	1.76%	Edelweiss Gilt (G)	0.95%
SBI Magnum InstaCash-Liquid Fltr (G)	0.75%	Escorts ST Debt (G)	0.82%	HSBC Gilt-ST-Reg (G)	0.94%
Birla SL FRF-ST (G)	0.74%	Peerless ST - Reg (G)	0.80%	Templeton India G-Sec-Treas (G)	0.69%
Long Term		Long Term		Long Term
HDFC FRIF-LT (G)	0.75%	Peerless Income Plus Fund (G)	1.41%	Tata Gilt Mid Term Fund (G)	1.27%
SBI Magnum Income FRP-LTP (G)	0.74%	Escorts Income Bond (G)	1.14%	L&T Gilt - Investment (G)	1.17%
Birla SL FRF-LT (G)	0.72%	Canara Robeco Yield Adv Fund (G)	1.12%	Canara Robeco Gilt PGS (G)	1.15%

 

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.84%	JM Money Mgr-Reg (G)	0.78%
Pramerica Liquid Fund (G)	0.76%	JM Money Mgr-Super Plus (G)	0.78%
Union KBC Liquid (G)	0.76%	Kotak Floater-ST (G)	0.77%

(1-Mth returns as on February 29, 2012)
(Source: ACE MF, PersonalFN Research )

 

Debt mutual funds too across categories and tenure performed well in the month gone by. But the impact of rising yields of short-term papers (due to tight liquidity situation in the system) had some negative impact on short-term debt funds (due inverse relationship between yields and bond prices). However, long-term gilt funds performed better aided by softening in yield of 10-Yr G-Sec yield.

But a noteworthy point is that domestic mutual funds net bought aggressively to the tune of Rs 20,575 crore in debt market, thus accelerating from their January 2011 net buying activity worth Rs 13,242 crore.

 

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on December 31, 2011)
(Source: ACE MF, PersonalFN Research)

 

The graph above depicts how various categories of mutual funds performed in the previous month. As revealed above, all equity funds across categories performed well, barring pharma funds despite their defensive trait. Amongst the diversified equity funds, mid cap funds delivered stellar returns (of average 6.4%) as the rally in the market was led by stocks in mid and small cap segment. Value style funds along with opportunities one, too created wealth for investors. Tax saving funds being diversified and multi-cap, also performed well in the month gone by.

Amongst the sector funds, schemes focusing on the progressive themes, IT, banking & financial services, FMCG and infrastructure space helped in creating wealth for investors. But, interest sensitive sectors performed in a very appealing way, as markets expected that from the next fiscal year (i.e. 2012-13), the central bank may reduce policy rates (and if required also reduce Cash Reserve Ratio) and thereby give impetus to business activity.

Tracing with the upward movement of the precious yellow metal, Gold ETFs too exhibited positive returns for investors (gaining by an average of 1.2%). Debt mutual funds schemes took cue from liquidity conditions and RBI's monetary policy action and delivered return across categories as cited above.

Other News and New Fund Offers

• In order to avoid conflict of interest that may arise on account of managing multiple schemes, the capital market regulator - Securities and Exchange Board of India (SEBI) mandated that the asset management companies (AMCs) vide a circular to appoint one fund manager per scheme.
  
  However, SEBI also made an exception vide its circular for mutual fund schemes managed by the fund manager having same investment objectives and asset allocations. Furthermore, the circular also enunciated that for mutual fund schemes having 70% of its portfolio being replicated across the schemes can be managed by the same fund manager. SEBI also directed AMCs to ensure that they have a written policy in place for trade allocation and that they comply at all points of time that the fund manager shall not take directionally opposite positions in the schemes managed. For instance, a fund manager managing two equity schemes, having 70% of the stocks in common, cannot buy a particular stock in one scheme, while simultaneously selling the same stock in another. Furthermore, in order to bring transparency while addressing the issue of conflict of interest (wherein a fund manager is common across mutual fund schemes), capital market regulator directed AMCs that they should disclose on a monthly basis the returns provided by the fund manager for all schemes managed by him/her. The same applies for any scheme-related advertisement issued by the AMC.
  
  We believe that the mandate of having one fund manager for one mutual fund scheme is a stiff directive issued by SEBI. At present, the mutual fund industry has 1,710 unique schemes and the total number of fund managers is 262. Considering the fact that at least one fourth of the schemes have unique portfolio (i.e., they don't meet the criteria of having 70% of the stocks in common) it would require 428 fund managers to manage the same.
  
  And if the mandate is followed in its entirety, the mutual fund houses coming up with NFOs would try and replicate 70% of the new fund's portfolio, with an existing mutual fund scheme (thereby taking cover under the exclusion provision of the circular) and thus attempt to save cost (by not hiring a new fund manager). Moreover, as result of this, unique schemes (in terms of the underlying portfolio) may not be found by investors even though transparency would be infused in the disclosure for the returns generated by the respective fund manager of a particular scheme on a monthly basis.
   
• Recently Fidelity Mutual Fund, a renowned named in the mutual fund industry (which set-up its business in India in 2004) decided to sell its stake India asset management company better known as FIL Fund Management Private Limited (FFMPL). In a sharp contrast to this move, now Chennai-based conglomerate – "Shriram Group” has decided to revive its defunct mutual fund business. It is noteworthy that way back in 90s Shriram Asset Management Company (Shriram AMC) had four mutual fund products, which the company decided eventually to wind up due to lack of interest. The decision of reviving the group's mutual fund business, now comes on the back of SEBI's directive to either surrender the license or restart operations. Therefore Shriram AMC (the only listed AMC in India), intends to launch new products – starting with gold and balanced funds in the next six months targeting the retail investor.
   
• In order to weed out duplication of records and ensure investors receive their Consolidated Account Statements (CAS), the Association of Mutual Funds in India (AMFI) has asked Registrar & Transfer (R&T) Agents and AMCs to consolidate folios based on matching PAN with investor names to smoothen consolidated account statement (CAS) issuance process by February 29, 2012. Earlier, in order to issue consolidated statements, R&Ts were identifying folios based on PAN and the exact match of investor names under various folios of that particular PAN. However AMFI has observed that many investors have provided different names, sometimes their full names and sometimes only initials or surname. Thus a large number of investors got excluded from getting CAS which resulted in duplication of costs. Thus, AMFI has now instructed R&Ts to drop the validating folios on the basis of exact name match for statements to be dispatched from March 2012. AMFI has also directed R&Ts to send CAS electronically to valid email ids from May 2012 onwards.
   
• The Securities and Exchange Board of India (SEBI) has asked fund houses coming up with new Fixed Maturity Plans (FMPs) to spell out the sectors they will refrain from investing in as the capital market regulator wants to make sure that the bets taken by the FMPs do not back fire and that the investors' money is relatively safe. The regulator's concern stems from its experience in 2008-09, where many investors lost out as mutual funds, having invested in thinly-traded securities of real estate companies, were stuck when FMPs came up for redemption.
  
  The regulator has also asked a few asset management companies to make changes in their draft prospectus filed recently. Fund houses may have to even share with investors an exclusion list for on-going FMPs, particularly those maturing in six months to a year.
  
  We believe that directives issued by SEBI, is right and will aid in bringing in some transparency, in the way FMPs are managed, as at present these products do not disclose their portfolio holdings as well as sectors which they are exposed to. Moreover along with the move intending to curb exposure in risk businesses, it may also help in proper asset-liability management, and thus would facilitate smooth handling of redemptions. Also, clarity about the investment pattern of the FMPs will help the investors in their decision making process.
   
• SEBI has expressed its discomfort over some investors getting the same day's net asset value (NAV) by splitting their purchases in income or debt schemes to ensure the Rs 1 crore limit is not crossed.
  
  As per the regulations on purchase of units in income or debt-oriented schemes, other than liquid schemes, with an amount equal to or more than Rs 1 crore, irrespective of the time of receipt of application, the closing NAV of the day on which the funds are received by the mutual fund house is applicable. However, if the investment is under Rs 1 crore, investors get the NAV of the day on which the application was made. SEBI found that certain entities were exploiting regulatory loopholes to get the same day's NAV by splitting their investments.
  
  The method of circumventing this regulation is simple. Say, an investor wants to put Rs 3 crore in a debt scheme. If he puts the entire sum through a single application, he will get the NAV of the day on which the fund house receives the money. It takes two-three days for a fund house to receive the money through cheques. Instead, if the investor splits his investments in four applications of, say, Rs 95 lakh, Rs 90 lakh, Rs 85 lakh and Rs 30 lakh on the same day, he will get the NAV of that day itself. Citing this, the regulator has asked fund houses to ensure proper controls are in place to prevent the practice and protect the interest of existing investors.
  
  We believe that the SEBI's initiative to curb this manipulation of splitting investments in order to bypass the regulation is justified as this practice of manipulation is not in the best of the interests' of HNI investors. Mutual fund houses should undertake proper checks and balances in order to avoid such wrong doings in order to safeguard the interests' of other investors.
   
• Birla Sun Life Mutual Fund introduced a gold savings fund - "Birla Sun Life Gold Fund” (BSLGF); a gold fund of fund scheme which is mandated to invest its corpus into the underlying fund - "BSL Gold ETF” (BSLGE). The Fund is launched especially considering the requirements of those who want to buy gold in a paper form but do not have a demat account and is available for subscription from March 1, 2012 until March 15, 2012.
  
  As per its offer document, the fund's investment objective is "to provide returns that tracks returns provided by Birla Sun Life Gold ETF (BSL Gold ETF)." As far as allocation of its assets is concerned, the scheme will invest 95% - 100% of its total assets in units of Birla Sun Life Gold ETF and the rest (i.e. upto 5%) in money market instruments.
   
• Motilal Oswal Mutual Fund added to its stable a gold ETF - "Motilal Oswal MOSt Shares Gold ETF" (MOSt Gold Shares) (which is available for subscription from March 2, 2012 until March 16, 2012). MOSt Gold Shares being an open-ended ETF has an investment objective (as per its offer document) "to provide return by investing in Gold Bullion. The performance of the fund will be benchmarked to the Spot Domestic Gold Price. However, the performance of the scheme may differ from that of the underlying index due to tracking error. There can be no assurance or guarantee that the investment objective of the Scheme would be achieved.” As far as allocation of its assets is concerned, the scheme will invest 95% - 100% of its total assets in Gold Bullion and the rest (i.e. upto 5%) in Government securities and money market instruments.



 

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paulabear525@aol.com Mar 24, 2012 Mutual funds are an affordable way for an foenunrmid investor to diversify their investments to minimize risk. They are good in the respect that it allows you to probably not lose all your money if one or two companies go bad.On the other hand, they often have many charges incurred along with them for upkeep or maintenance and things like that. And often, the funds that have the highest amount of charges because they have the most active management often don't show any better performance than a fund with little charges/activity.In the end though, mutual funds often don't even beat the market performance, and returns can be harder to figure out on a daily basis. If you want to be able to see how you're doing easily and up to the minute, consider an index fund which contains weighted pieces of a number of large stocks (like a NASDAQ or DOW index fund).On the plus side though, you can get money mutual funds from which you can write checks or even make interact payments, so basically operate like a bank account with higher interest.

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