Mutual Fund Roundup: July 2011
Market Overview
The Indian equity markets (BSE Sensex) continued to display a downward bias (with seesaw movements) as the marginal gains (of 1.9%) registered in June 2011, were completely washed in July 2011 as the BSE Sensex corrected by good -3.4%. The Indian equity markets seemed to be under a blanket of nervous sentiments led by the under-mentioned downbeat economic factors:
- WPI inflation remaining sticky (9.44% in June 2011 - data released in July 2011)
- Industrial growth slowing down (from 5.8% April 2011 to 5.6% in May 2011- data released in July 2011)
- Debt-overhang situation in the Euro zone (recently in last week of July 2011, Standard & Poor downgraded Greece ratings by two notches to CC, with a negative outlook)
In order to manage inflationary pressures in India while the street expected that the Reserve Bank of India (RBI) would manage inflation through its calibrated exit path, the RBI proved them wrong as they increased the policy rates rather in a hawkish way - by 50 basis points (bps) (in its 1st quarter review of monetary policy held on July 26, 2011), thereby even hinting that the central bank was even ready to compromise on country’s economic growth. In fact in a speech in Visakhapatnam, RBI Governor - Dr. D.Subbarao said, "Growth last year was 8.5%. This year it may be slightly lower. We need to raise rates in order to restrain inflation that hurts growth."
Speaking about the economic headwinds in the international markets, in the U.S. President’s Obama’s persistent letdown from the Republicans for increase in debt ceiling limit (from the present U.S. $14.3 trillion) also infused in nervous sentiments in the markets across the globe. This is because a failure on increasing the U.S. debt ceiling limit elevates the chances of a global economic slowdown (led by rating being downgraded by leading rating agencies) in a scenario where the U.S. is grappling with lagging economic growth rate and high unemployment rate. Also, the debt-overhang situation in the Euro zone (led by failure of Greece to put its public finances in place) was also another reason for the bear cartel to tighten their grip on the equity markets.
But assessing all these domestic as well global economic factors, investors preferred to take refuge under the precious yellow metal - gold, and thus it looked bold (by gaining 6.1%). Stockist too piled up their inventories ahead of festive season, and ascertaining the fact the investors are opting for gold due to its trait of being a safe haven during uncertain times and for hedging against further chances of it being bold during festive times.
As far as Brent crude oil prices is concerned, after displaying a corrective phase in June 2011, oil prices once again surged by 4.2% in July 2011. This up-move occurred due to optimistic feeling that the U.S. may achieve success in increasing their debt ceiling limit. Also the pipeline and platform maintenance work in the North Sea (which has an effect of impeding supply) also attributed to the up-move in Brent crude oil prices.
For the bonds markets, RBI’s hawkish measure of taming inflation at the cost of sacrificing economic growth didn’t do to well as the yields inched up for both the short-term as well as the long-term debt papers. 1 month and 3 month CDs have amplified by 30 bps and 65 bps respectively since there last month’s (i.e. June 2011) closing. Moreover, the increase in Brent crude oil prices also attributed to the upswing in yields as it implied that import bill (for crude oil) as well as current account deficit would bloat.
Monthly Market Roundup
|
As on July 31, 2011 |
As on June 30, 2011 |
Change |
% Change |
| BSE Sensex |
18,197.2 |
18,845.9 |
(648.7) |
-3.4%  |
| S&P CNX Nifty |
5,482.0 |
5,647.4 |
(165.4) |
-2.9% |
| CNX Midcap |
8,017.4 |
7,971.5 |
45.9 |
0.6%  |
Gold ( /10 gram) |
23,300.0 |
21,965.0 |
1,335.0 |
6.1% |
| Re/US $ |
44.2 |
44.7 |
0.5 |
1.1% |
| Crude Oil ($/BBL) |
117.1 |
112.4 |
4.7 |
4.2% |
| 10-Yr G-Sec (%) |
8.46 |
8.34 |
0.12 |
12 bps |
| 1-Yr FDs |
7.25% - 9.25% |
(Monthly change as on July 31, 2011)
(Source: ACE MF, PersonalFN Research)
However despite all the domestic and global economic uncertainties, the graph hereunder clearly reveals that Foreign Institutional Investors (FIIs) continued to exude confidence towards Indian equity markets. In July 2011 they net bought to the tune of 
8,030 crore thus maintaining their buying streak as seen in June 2011 where they were net buyers to the tune of 4,572 crore.
BSE Sensex vs FII inflows
(Source: ACE MF , PersonalFN Research)
Mutual Fund Overview
The domestic mutual funds too assessing the fact that India appears to be a promising investment destination for long-term wealth creation, were net buyer in July 2011 to the tune of 652 crore. But the aggression in buying had substantially reduced as compared to the one witnessed in June 2011 where they were net buyers to the tune of 1,198 crore. Mutual funds continued to be buyers in light of the following economic factors:
- Attractive valuations (markets have already corrected 13.4% from their last peak of 21,004.96 made on November 5, 2010)
- Gradual expansion of the Indian economy on a year on year basis (8.5% in FY11, while 8.0% in FY10)
- Robust gross capital formation (at 32.1% in Q4FY11)
- Achievable fiscal deficit target (FY12 target of 4.6%)
- Normal monsoon leading to better harvest (thus cooling food inflation)
- Expectation of WPI inflation to cool down gradually due to RBI’s persistent anti-inflationary stance
BSE Sensex vs MF inflows
(Source: ACE MF, PersonalFN Research)
As far as the performances of the funds are concerned, most diversified equity funds in the mid and small cap domain provided luring returns as the CNX Mid Cap index revealed marginal gains of +0.6%. For sector funds the performance was rather mixed where FMCG delivered stunning returns (in the midst of all domestic and global economic uncertainties due to its defensive nature), but ones in the media and entertainment, technology and infrastructure space faltered.
Amongst the Fund of Funds (FoFs) those focusing on precious commodities - especially gold, provided luring returns to investors as the precious yellow continued its northward journey. Hybrid fund also created wealth for investors as yields had mellowed for most part of July 2011, until the RBI took a hawkish stance of increasing policy rates by 50 bps in 1st quarter review of monetary policy 2011-12 (held on July 26, 2011).
Monthly top gainers: Open-ended equity funds
(1-Mth returns as on July 31, 2011)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Fund of Funds
(1-Mth returns as on July 31, 2011)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Hybrid Funds
(1-Mth returns as on July 31, 2011)
(Source: ACE MF, PersonalFN Research )
Monthly top gainers: Open-ended debt funds
| Liquid Funds |
1-Mth |
Liquid Plus funds |
1-Mth |
| Escorts Liquid Plan (G) |
0.79% |
JM Money Mgr-Super (G) |
0.74% |
| Sahara Liquid-Fixed Pricing (G) |
0.76% |
Pramerica Ultra ST Bond-Reg (G) |
0.73% |
| Baroda Pioneer Liquid-Reg (G) |
0.75% |
JPMorgan India Treasury (G) |
0.72% |
(1-Mth returns as on July 31, 2011)
(Source: ACE MF, PersonalFN Research )
Debt mutual funds across all categories too performed well as yields of both short-term as well as long-term debt papers dropped until RBI’s hawkish rate hike stance (on July 26, 2011) to tame inflation. An aggressive policy rate hike stance led to yield tightening in last week of July 2011, where upward pressure was felt across the yield curve, and short-term rates appeared more attractive as compared to the ones offered by long-term debt papers.
In the Indian debt markets domestic mutual funds maintained their buying aggression (net bought to the tune of 15,215 crore in July 2011) as seen in the month of June 2011 (where net buyers to the tune of 34,991crore). Attractive coupons offered by most debt papers led by the short-term ones were encouraging point for fund managers to go aggressive with debt instruments.
Performance across various categories of mutual funds
(1-Mth average returns of funds in various categories as on July 31, 2011)
(Source: ACE MF, PersonalFN Research)
The graph above displays how various categories also mutual funds performed in the previous month. As revealed above, amongst the thematic funds FMCG funds delivered luring returns in the midst of downbeat domestic as well as global economic sentiments (due to FMCG funds being defensive in nature), while in the diversified equity funds category only those in the mid and small cap domain managed to create wealth for investors in the last month. As gold became bold due to downbeat economic sentiments, Gold ETFs too delivered stellar returns for investors thus proving to be a true safe haven. Debt funds mutual funds too across categories performed well as yields dropped for most part of the month until RBI took hawkish measures to increase policy rates in its 1st quarter review of monetary policy 2011-12 (held on July 26, 2011).
Other News and New Fund Offers
- In order to make mutual fund investments more attractive for investor community, the Securities and Exchange Board of India (SEBI) is mulling ways to lower the cap on the expense ratio on mutual funds to 1.50% - 1.75% from the current level of 2.50% of their Assets Under Management (AUMs).
Moreover, the SEBI is also likely to direct mutual fund houses to pay for the brokerage from their own pocket instead of charging to investors. At a recent meeting, SEBI's mutual fund (MF) advisory committee had proposed that brokerage charges incurred while acquiring shares for an equity scheme be accounted for in the expense ratio. Thus, if this proposal gets through investors will now be able to get more units to their credit as against earlier when the expense ratio was capped at 2.50%.
We believe that the proposal of imbibing brokerage into expense ratio may display a detrimental impact on the profitability of the mutual fund houses. But, going forward we may see mutual funds churning their portfolio less in an attempt to manage this (thereby reducing their brokerage costs), which in turn would be in the benefit of the investors as risk reduction may occur.
However, while investing you should keep in mind that lower expense ratio may not be the only criteria in selecting the right mutual funds for their portfolio. Remember always select mutual fund schemes from well established fund houses with good track record of the scheme and with a horizon of 3 to 5 years.
- In order to revive the mutual fund (MF) industry which is reeling under redemption pressures along with slowdown in sales ever since the ban on entry loads (initiated in August 2009), the Association of Mutual Funds in India (AMFI) from August this year will embark on an advertisement blitz in an attempt to induce the TV audience to invest in mutual funds. This the first time an industry body such as AMFI will advertise.
Moreover, unlike usual MF advertisements that are shown on business channels, AMFI aims to showcase such ads on general entertainment channels, thus attempting to reach out to those individuals who are yet to invest. Further to ensure that these ads reach out to a large number of audiences, the ads will also be featured in Hindi along with seven other regional languages including Marathi, Tamil and Bengali.
In our opinion while this initiative is intended to revive the fortune of the mutual fund industry (by creating awareness amongst people about the benefit of investing in mutual fund), care should be taken to ensure that the ads are simple to understand, informative / educative, and should also aim at protecting investors against the atrocities of mis-selling. Because unless, the ads do not depict the benefits of investing in mutual funds along with safeguarding investors', steam may not be garnered for the Indian mutual fund industry.
- The Association of Mutual Funds in India (AMFI), - the industry lobby, has been pushing the capital market regulator SEBI (Securities and Exchange Board of India) to allow mutual fund houses an entry into pension product market, in a bid to garner long-term funds. Interestingly, last month SEBI Chairman Mr. U.K. Sinha had also mentioned that AMCs should look into penetration into the pension fund market and start selling such plans.
At present the mutual fund industry is busy working out the modalities of the right product mix along with right balance between equity and debt. Moreover, the regulatory aspects are also being looked into since at pension products are offered only by insurance firms and Pension Fund Regulatory and Development Authority (PFRDA).
We believe that mutual fund industry's attempt of entering the pension fund market, is intended to provide a fillip to the industry, which is riddled with sagging inflow after the entry load ban in August 2009. Moreover, pension product market is strategically chosen assessing the fact that pension products would help in garnering long-term money.
We recognise that while pension funds are critical to one's portfolio, we believe that mutual fund houses should not enter into the market to garner more AUMs. Instead (if SEBI gives a nod) they should be managed prudently thereby safeguarding from the vagaries of the volatile equity markets. Also, fund managers must show prudence while managing a pension fund portfolio and keep churning at minimum so as to ensure stable returns over a long-term.
- Tata Mutual Fund has severed its ties with the Credit Suisse as its offshore fund management partner in May 2011. Credit Suisse was managing Tata MF's Growing Economies Infrastructure Fund and Indo Global Infrastructure Fund. The absence of an offshore fund manager has forced Tata MF to liquidate its foreign assets and hold large piles of cash in the two international funds.
- The UTI Asset Management Company is planning to seek approval from the Securities and Exchange Board of India (SEBI) to launch a global emerging markets fund aimed at high net worth individuals (HNIs). The fund would operate in a feeder fund structure, wherein the scheme would invest in T Rowe Price Emerging Market fund.
The company will launch the fund in collaboration with the T Rowe Price (TRP) Group, which acquired a 26% stake in UTI AMC and UTI Trustee Company in 2010.
- Individual foreign investors who wish to invest in India (either in stock markets or mutual funds) will now have to acquire Permanent Account Number (PAN) in India. However, the Know-Your-Customer (KYC) conditions prescribed to acquire PAN are quite stringent which might become a hurdle for the prospective foreign investors.
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Add Comments
| Comments |
musayildiz@cilginbiyologlar.com
Aug 19, 2011
I was so confused about what to buy, but this makes it understandable. |
jrome2323@yahoo.com
Aug 19, 2011
I'm not worthy to be in the same forum. ROTFL |
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