Mutual Fund Roundup: June 2011
Market Overview
The Indian equity markets (BSE Sensex) continued to be on a seesaw ride as after correcting by good 3.3% in May 2011, they once again gained by 1.9% in June 2011. However, the earlier part of the month (till June 22, 2011) witnessed the bears tightening their grips due to the following factors:
- Inflation remaining sticky (9.06% in May 2011 – data released in June 2011)
- Industrial growth slowing down (from 8.8% in March 2011 to 6.3% April 2011- data released in June 2011)
- Debt-overhang situation in the Euro zone (due to failure of Greece to put its public finances in place)
- Expectations of QEII withdrawal in the U.S.
But later as the news of austerity measures adopted by the Greece Government (to secure international funding and avert imminent bankruptcy) was disseminated, the global markets got a boost as the immediate worries were dispelled. Moreover, the unexpected jump displayed by the business activity in the U.S. (The Institute for Supply Management-Chicago Inc.’s business barometer climbed to 61.1) and 10-week high of consumer confidence receded the fears of a economic slowdown in the U.S., and poised an upward move for the global equity markets. The Indian equity markets in the last six trading session moved northwards (by gaining 5.9%) despite the hike in prices of diesel, LPG brought in by the Government in power on June 24, 2011. It in a way revealed that realisation dawned upon investors that equity as an asset class would be the best to hedge against continuing inflationary pressures (brought in by rise in prices of fuels), and the reasonable valuations of the Indian equity markets too encouraged them to participate.
Speaking about the precious yellow metal – gold, it displayed a downward movement (losing 2.6%) in the month of June 2011 as immediate fears of Euro zone debt crisis were dispelled. Moreover, the unexpected jump in the business activity and the 10-week high of consumer confidence in the U.S. receded the fears of an economic slowdown, and thus did not enthuse investors to look at gold. Stockist too didn’t pile their inventory which kept the demand for the precious yellow metal low.
Brent crude oil prices also after displaying a northward journey (since the release of the QEII money), displayed a corrective phase where in the last month (June 2011) they mellowed by 2.1%. This correction occurred due to slowdown in consumption from the U.S (world’s largest consumer of oil) and China. Moreover, the surprise release of 60 million barrels of oil from member countries announced by International Energy Agency (IEA) also put downward pressure on Brent crude oil prices.
Bonds markets saw the yields softening (for both the short-term as well as the long-term debt papers) as RBI continued to maintain its anti-inflationary stance. In the mid-quarter review of Monetary Policy 2011-12, the RBI hiked policy rates (by 25 basis points – both on the repo rate and the reverse repo rate) 10th successive time in order to tame inflation. The correction in Brent crude oil prices also signalled decrease in the import bill, thereby reducing current account deficit and thus being a positive for the bond markets. 1month and 3 month CD ended the month at 8.35% and 8.50% respectively, while the 10- Yr G-Sec 7.80% 2021 yield stood at 8.34%.
Monthly Market Roundup
|
As on June 30, 2011 |
As on May 31, 2011 |
Change |
% Change |
| BSE Sensex |
18,845.9 |
18,503.3 |
342.6 |
1.9%  |
| S&P CNX Nifty |
5,647.4 |
5,560.2 |
87.3 |
1.6% |
| CNX Midcap |
7,971.5 |
8,064.8 |
(93.3) |
-1.2%  |
Gold ( /10 gram) |
21,965.0 |
22,555.0 |
(590.0) |
-2.6% |
| Re/US $ |
44.7 |
45.1 |
0.4 |
0.8% |
| Crude Oil ($/BBL) |
112.4 |
114.8 |
(2.4) |
-2.1% |
| 10-Yr G-Sec (%) |
8.34 |
8.40 |
(0.06) |
6 bps |
| 1-Yr FDs |
7.25% - 9.25% |
(Monthly change as on June 30, 2011)
(Source: ACE MF, PersonalFN Research)
The graph hereunder clearly depicts that Foreign Institutional Investors (FIIs) also exuded overwhelming participation in the Indian equity markets due to the aforementioned positive factors and reasonable valuation of the Indian equity markets. They bought net tune of Rs 4,572 crore, thereby contravening their last month’s trait where they were net seller to the tune of Rs 6,614 crore.
BSE Sensex vs FII inflows
(Source: ACE MF , PersonalFN Research)
Mutual Fund Overview
The domestic mutual funds too assessing the fact that the following factors favour long-term investments bought aggressively to the tune of Rs 1,198 crore, thereby accelerating further from their last month’s (May 2011) net buying activity of Rs 353 crore.
- Attractive valuations (markets have already corrected 11.5% 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%)
- Expectation of favourable monsoon leading to better harvest (thus cooling food inflation)
- Expectation of WPI inflation to cool down due to RBI’s persistent inflationary stance
- Immediate fears of Euro zone debt crisis dispelling
- Fear of an economic slowdown in the U.S. receding due to jump in business activity in the U.S and high consumer confidence
BSE Sensex vs MF inflows
(Source: ACE MF, PersonalFN Research)
As far as the performance of the funds are concerned, most diversified equity funds along with FMCG ones did manage create wealth for investors, as the Indian equity market surged upwards due to the aforementioned factors. Fund of Funds (FOFs) and hybrid funds also delivered positive returns to their investors as positive news for both equity as well as debt market was disseminated in the last month.
Monthly top gainers: Open-ended equity funds
(1-Mth returns as on June 30, 2011)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Fund of Funds
| Fund of Funds |
1-Mth |
| Birla SL Asset Alloc-Aggr (G) |
1.48% |
| FT India Dynamic PE Ratio FOFs (G) |
1.01% |
| Birla SL Asset Alloc-Mod (G) |
1.01% |
(1-Mth returns as on June 30, 2011)
(Source: ACE MF, PersonalFN Research)
Monthly top gainers: Open-ended Hybrid Funds
(1-Mth returns as on June 30, 2011)
(Source: ACE MF, PersonalFN Research )
Monthly top gainers: Open-ended debt funds
(1-Mth returns as on June 30, 2011)
(Source: ACE MF, PersonalFN Research )
Debt mutual funds across all categories too performed well as RBI continued to be vigilant about taming the inflation bug. The softening of both short-term as well as long-term bonds yields pushed bond prices upwards thus benefiting debt mutual funds.
In the Indian debt markets domestic mutual funds bought aggressively to the tune of Rs 34,991crore (as against the net selling witnessed in May 2011 to the tune of Rs 1,189 crore). The anti-inflationary stance maintained by the RBI to tame inflation along with the mellowed Brent crude oil prices reducing the import bill as well as the current account deficit, construed to be a positive for the Indian debt markets. Moreover, attractive coupons offered by most debt papers also encouraged 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 June 30, 2011)
(Source: ACE MF, PersonalFN Research)
The graph above also displays how various categories also mutual funds performed in the previous month. As displayed above equity funds headed by FMCG, banking and pharma funds (under the thematic funds) delivered appealing returns. Amongst the diversified equity funds, those following a flexi style of investing (i.e. investing in large caps, mid caps and small caps) delivered pleasing returns along with those in the ELSS category. Debt funds mutual funds too across categories performed well due to favourable factors (as mentioned above) for the debt markets.
Other News and New Fund Offers
- In order to tide over the downturn of the Indian equity markets; caused due to various domestic as well as global factors, domestic mutual funds are looking at international opportunities in order to help the investors to diversify their investment portfolios across nations.
Leading fund houses, including DSP Blackrock, JP Morgan Mutual Fund, Deutsche Mutual Fund, and Franklin Templeton, have sought approval from the capital market regulator SEBI to launch international feeder funds.
- Investors would soon be able to invest in Exchange Traded Funds (ETFs) on fixed income if the capital market regulator SEBI has its say. SEBI wants fund houses to attract the untapped mass of risk-averse small investors through these low-risk and low-cost products.
At a conference on ETFs last week, Mr. K. N. Vaidyanathan, Executive Director, SEBI, said, "We need to think about how to bring this vast majority of savers to get a little more productive in their investments. Initially, may be through the debt route or the liquid investment route. Why does the realm of ETFs stick to equities or gold? Why haven't we thought of ETFs, say, around a liquid fund, which will make the concept very easy for anybody to relate to as a sweet product?"
- In a bid to revive the fortunes of the mutual fund industry, a committee headed by Mr. Prashant Saran has proposed a fixed ‘transaction fee’ on fresh mutual fund investments, which has the potential to be dubbed as revival of ‘entry load’ with a different name.
According to the committee a transaction fee of 100 could be imposed on investors for every new investment made, to help distributors cover costs. In the initial phase, the transaction fee would be only for agents catering to middle and lower-income investors. In order to preclude distributor-induced portfolio churning, the committee has also recommended limited the number of transactions in a SIP folio to six per year. Moreover, the committee has also proposed a ‘tied agent’ concept, which would exclusively market products of one mutual fund.
We believe that the proposal of introducing transaction fee may not be accepted by the present SEBI, Chairman - Mr. U.K. Sinha, as he had earlier ruled out rolling back the entry load ban imposed by his predecessor Mr. C.B. Bhave. And if even if they do that, it would be a distinct case of SEBI turning pro-distributors in order to revive the fortune of the mutual fund industry, but again that may not lure mutual fund distributors as it did back when entry loads were in force. However, having said that it would hurt investor sentiments as they credit the good doings of SEBI’s predecessor Mr. C.B. Bhave.
Moreover, investors enrolling for a Systematic Investment Plan (SIP) would face the brunt of a 100 transaction fee. This is because say for example an investor starts a 1,000 SIP in a mutual fund scheme, he would be charged 100 which accounts to 10% of the initial investment; which is much more than what was charged when the entry loads were in force. This thus reveals that retail investors contributing a lower amount for a SIP would feel the pinch the most.
In our opinion, SEBI should act in a pro-investor manner and should not resort to the imposition of a transaction fee to revive the fortunes of mutual fund industry. Instead they should encourage fee-based advisory model which will help both the investor as well as distributors. Bringing awareness amongst the investors is very important for the mutual fund industry to flourish.
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| Comments |
xinlu@pharme.cn
Sep 29, 2011
Good point. I hadn't thoghut about it quite that way. :) |
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