Market Overview

After exhaustion in the Indian equity markets in October 2012 (where the BSE Sensex descended by -1.4%), a recovery was witnessed in November 2012 led by strong impulse towards the tail of the month which made the markets registered a gain of +4.5% (or 834.52 points) in the month gone by, and revived memory of the exuberant impulse seen in September 2012.

The liquidity easing measure taken by the Reserve Bank of India (RBI) by effecting a CRR (Cash Reserve Ratio) cut of 25 bps helped in uplifting the sentiments of the market. Likewise the focus on fiscal consolidation from the Government (to restrict the fiscal deficit target to 5.3%) also aided to infuse confidence in market. It is noteworthy that Mr P. Chidambaram in the month gone by, asked his ministerial colleagues to take belt tightening measures to stave off a fiscal crisis and preclude the country being conferred junk grade on creditworthiness. He emphasised on controlling expenditures (especially subsidies) and raising more resources through disinvestment in the remaining five months of the financial year. But the markets seemed incredulous over the fiscal deficit target (of 5.3% for fiscal year 2012-13) - whether it could be achieved when uncertainty is looming around and political consensus is deficient; and that's the reason why in initial part of the month the markets did consolidate. The Index of Industrial Production data for September 2012 (announced in November 2012) slumped to -0.4% and overall the movement was "see-saw" thereby making the trend look volatile due to crippling effect of the downbeat sentiments prevailing in the global economy and a high interest rate scenario in India. The WPI inflation for October 2012 (data released in November 2012) dropped to 7.45% (from 7.81% in September 2012), but such a reduction was not enough encouragement for the Reserve Bank of India (RBI) to reduce policy rates as the inflation bug remained over the comfort zone (of 6.0% to 7.0%) of RBI. Thus the markets on the date of announcement of WPI inflation data and in the immediate ensuing two trading session descended. The winter session of the Parliament began on November 22, 2012 and the markets kept a watch on the proceeding, as many important bills (such as the Pension Bill, Insurance Bill, Real Estate (regulation & development) Bill) - which can put India on the growth path, awaited parliamentary approvals. Likewise the Government's decision to increase FDI in multi-brand retail in mid-September 2012, was watched carefully by the markets since the parliament remained in deadlock, with no decisions reached since the start of the winter session on Nov. 22.

But the global cues this time helped to uplift the sentiments of the market. Primarily, the victory of Mr Barack Obama in the U.S Presidential election too was supportive for the Indian equities, although worry of fiscal situation in the U.S does remain. During the tail of the month, the U.S. registered an increase in its third quarter GDP to 2.7% due to positive contribution from personal consumption expenditures (PCE), private inventory investment, federal government spending, residential fixed investment, and exports that were partly offset by negative contributions from non-residential fixed investment and state and local government spending. Optimism also elevated amongst the U.S. consumer as they felt that the overall state of the economy and their personal financial situation was better, and thus the Consumer Confidence Index in the U.S. increased to 73.7 in November of 2012 from 73.1 in October of 2012. In the Euro zone, during the month while Moody's stripped France's credit rating to "AA1" from "AAA" and declared that the outlook remains negative, it did not have much of the detrimental impact on the Indian equity market. It was when European Union (EU) and the International Monetary Fund (IMF) agreed to unblock Greek bailout with a package of measures worth €40 billion, aimed at bringing an immediate 20% reduction to the country's debt; the markets gave exuberant impulses. Thus as a result the business confidence in Greece also increased to 79.00 in November of 2012 from 75.80 in October of 2012. Likewise with the European Commission (EC) also approving restructuring of Spanish bank loans (which would inject around €37 billion into the Euro zone) also helped to revive sentiments in the markets. India’s Q3FY13 GDP data was announced on the last day of November 2012, but that did not excite the market as the data revealed a slump in Q3 GDP growth rate to 5.3%.

As far as the precious yellow metal - gold is concerned; it too once gain continued its up-move (gaining +1.7%) after a corrective seen in October 2012; prior to which it continued with an emboldened move in the last few months. So, it can be said that a slight reduction in prices attracted investors to flock towards the precious yellow metal during festive times of Diwali and buy ahead of wedding season. Stockist too piled up their inventory to meet the demand during this time. It is noteworthy that traditionally, the demand for gold in India (world's top consumer of gold) rises in the last quarter of the calendar year. The uncertainty looming around in the global economy also led to smart investors to take refuge under the precious yellow metal in the month gone by.

Speaking about Brent crude oil, after undergoing a corrective phase in the last couple of month's prices once again inched up marginally (by +0.7%) with fading downbeat economic sentiments towards end of November 2012. A strong U.S. dollar also aided oil prices to show an ascending move, and towards the tail of the month with Greece bailout package measure being taken and restructuring of Spanish bank loans allowed, a mood of optimism set into the Euro zone which helped oil prices to show an up-move.

For the bond markets, liquidity remained a major concern in the month of October 2012. Over the past one month, the banks have started facing liquidity pressure which can be seen in the average daily borrowing by banks under Liquidity Adjustment Facility (LAF) that has been near Rs 1 Lakh crore. Due to this reasons short-term yields CD have remained firm, with 1-month and 3-month at 8.25% and 8.45% respectively. The RBI to handle this liquidity situation has thus far resorted to Cash Reserve Ratio (CRR) cut (by reducing CRR by 175 basis points so far in 2012), while maintaining a status quo on policy rates. Going forward too liquidity is expected to remain tight due advance tax payment obligation in mid-December 2012, but now to handle this tight liquidity situation the RBI would buy Government bonds via Open Market Operations (OMOs). In the month gone by 8.15% 2022 (10-Yr) G-Sec yield too mellowed marginally (by 2 bps) to end the month at 8.19%.

Going forward, the bond markets are likely to take cue from how the proceeding in the winter session of the Parliament go through where important bills are going to be passed (which can put India on the growth path) and how the fiscal deficit target be indeed achieved amid political backlash and graft charges.

  Monthly Market Roundup

	As on Nov 30, 2012	As on Oct 31, 2012	Change	% Change
BSE Sensex	19,339.90	18,505.38	834.52	4.5%
S&P CNX Nifty	5,879.85	5,619.70	260.15	4.6%
CNX Midcap	8,139.80	7,763.05	376.75	4.9%
Gold (Rs/10 gram)	31,475.00	30,950.00	525.00	1.7%
Re/US $	54.27	53.82	(0.45)	-0.8%
Crude Oil ($/BBL)	111.12	110.34	0.78	0.7%
8.15% 2022 (10-Yr) G-Sec Yield (%)*	8.17	8.19	(0.02)	2bps
1-Yr FDs	7.50% - 9.00%

*The 8.15% 2022 is the new 10-Yr benchmark which was introduced on June 9, 2012
(Monthly change as on November 30, 2012)
(Source: ACE MF, PersonalFN Research)  

As far as Foreign Institutional Investors (FIIs) participation in the Indian equity market is concerned, it was quite heartening to see the ascending trend continuing. However there seemed to be cautiousness while exuding confidence as they net bought to the tune of Rs 9,577 crore, as compared to net buying to the tune of Rs 11,365 crore in the month of October 2012. While throughout the month FIIs were net buyers, they were watchful over how the reform measure would take course with approvals awaiting in the winter session of the Parliament. Persistent political uncertainty also made them cautious while buying into Indian equities.

  BSE Sensex vs FII inflows

(Source: ACE MF , PersonalFN Research)  

Having said the above, the easy money policy adopted by the central bankers in the developed economies aided money flows into attractive investment destinations in the Emerging Market Economies (EMEs), and India was one of them.

 

Mutual Fund Overview

However contrary to cautious buying from FIIs, domestic mutual funds continued to be net sellers in the Indian equity markets. They net sold to the tune of Rs 1,273 crore; but a noteworthy point is that their selling streak reduced as compared to October 2012 where they net sold to the tune of Rs 2,520 crore. Also for the mutual fund industry the impulse shown by the Indian equity markets, left request for redemptions in equity funds unabated, as investors preferred to book profits. Thus fund managers experienced redemption pressures, while they were watchful about how the reform measure would take course with approvals awaiting in the winter session of the Parliament. They were also concerned about the political scenario in India which appeared tainted with graft charges emerging against every political party.

  BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)  

As far as the performance of various categories of mutual funds is concerned, gains were seen across styles and market capitalisations. However mid and small cap funds, those betting on emerging businesses and the one's following a growth style of investing were front runners due to better momentum in the mid and small cap space and growth stocks.

Among the sector funds, media & entertainment funds and certain funds enabled by their investment mandate investing in strategic sectors, generated double-digit return in the month gone by. Funds following investment themes such as banking & financial services and consumption also did well, while infrastructure funds and technology funds which eroded investors' wealth in October 2012 merely gained aided by the ascending move of the Indian equity markets in November 2012. The slowdown in capex cycle due to a high interest rates regime showed its detrimental impact on certain funds trying to tap capex opportunities. As far as ELSS funds are concerned, they ended the month in green, with support of the up-move in the market.

In the Fund of Fund (FoF) category, all of them - those focusing domestic equity and global assets, delivered positive returns except a few world energy funds and mining funds, including the ones in gold mining.

Speaking about the hybrid funds; amongst the balanced funds all of them managed to deliver positive returns, treading with upward movement of the Indian equity markets. However the debt portion of their portfolio remained under pressure due to yields remaining stiff. Likewise for Monthly Income Plans (MIPs) the gains were accounted for with the ascending movement of the equity market, but stiff yields had a limited scope for debt portfolio of their portfolio to perform.

  Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
Taurus Discovery Fund (G)	8.42%	Sundaram-Select Enter Oppor (G)	14.14%	ICICI Pru R.I.G.H.T Fund (G)	7.47%
IDFC Premier Equity Fund-A (G)	8.32%	Reliance Media & Enter Fund (G)	10.23%	SBI Tax advantage Fund-II (G)	7.03%
IDFC Classic Equity Fund-A (G)	7.97%	IDFC Strategic Sector (50-50) Eq-B (G)	10.22%	SBI Tax Advantage Fund-I (G)	6.55%

(1-Mth returns as on November 30, 2012)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
ING 5 Star Multi-Mgr FoF (G)	5.58%
ICICI Pru Indo Asia Eq Fund (G)	5.37%
Kotak Equity FOF (G)	4.93%

(1-Mth returns as on November 30, 2012)
(Source: ACE MF, PersonalFN Research)    Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
Principal Balanced Fund (G)	5.29%	Birla SL MIP II-Wealth 25 (G)	2.93%
SBI Magnum Balanced Fund (G)	5.19%	IDFC MIP-A (G)	2.58%
Principal Retail Equity Savings Fund (G)	4.99%	ICICI Pru MIP 25 (G)	2.10%

(1-Mth returns as on November 30, 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
L&T FRF (G)	1.62%	Axis Income Saver Fund (G)	1.61%	IDFC G Sec-STP-A (G)	1.52%
Canara Robeco FRF (G)	0.70%	Escorts ST Debt (G)	1.04%	Tata Gilt SMF (G)	0.78%
Principal Debt Opp Fund-Cons. (G)	0.69%	Taurus ST Income (G)	0.80%	HSBC Gilt-ST-Reg (G)	0.78%
Long Term		Long Term		Long Term
Kotak Floater-LT (G)	0.70%	SBI EDGE Fund (G)	2.10%	Sundaram Gilt Fund (G)	1.18%
HDFC FRIF-LT (G)	0.68%	Escorts Income Plan (G)	1.29%	Taurus Gilt (G)	1.04%
SBI Magnum Income FR-LTP (G)	0.67%	Peerless Income Plus Fund-Reg (G)	1.29%	Religare Gilt Fund - Long Duration (G)	0.88%

 

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.78%	Mirae Asset Ultra ST Bond-Reg (G)	0.81%
IDFC Ultra Short Term Fund-A (G)	0.71%	JM Money Mgr-Reg (G)	0.74%
BOI AXA Liquid Fund (G)	0.70%	Indiabulls Ultra Short Term Fund (G)	0.71%

(1-Mth returns as on November 30, 2012)
(Source: ACE MF, PersonalFN Research )  

Stiffening in yields had a mix reaction on performance of debt funds. As depicted by the table above, a few short-term income funds did slightly better as compared to in the month of October 2012, while long-term income funds did well since interest rates have peaked-out and are now expected to ease from the new calendar year onwards. Gilt funds (both short-term and long-term) also did well due to this seeping expectation (that interest rates may gradually start moving downwards from January 2012 onwards), and now the focus of debt fund manager seem to be on durations.

It is noteworthy that both FIIs and domestic mutual funds continued to be net buyers in the Indian debt market; but this time the FIIs were not at all aggressive in participating in the Indian debt markets as they net bought to the tune of mere Rs 292 crore, as against Rs 7,852 crore net buying witnessed in October 2012. But contrary to the FII participation, domestic mutual funds net bought aggressively in the Indian debt market to the tune of Rs 26,014 crore, thereby accelerating from October 2012 net buying of Rs 16,998 crore.

  Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on October 31, 2012)
(Source: ACE MF, PersonalFN Research)  

The graph above depicts how various categories of mutual funds performed in the previous month. Amongst the sector and thematic funds, banking & financial services funds and FMCG funds delivered stellar returns, while infrastructure funds and tech funds revived after eroding wealth in the month of October 2012. In the diversified equity fund category, gains were seen across styles and market capitalisations. From fund management style perspective, growth styled funds did slightly better than value styled funds, well supported by momentum in growth stocks.

Tracing with the upward movement in the precious yellow metal - gold, Gold ETFs too exhibited positive returns for investors (on average +1.3%). In the debt mutual funds, long-term income funds and gilt funds did well taking a view on the interest rate scenario.

Other News:

• Many of you may be aware that with effect from January 1, 2013 mutual fund houses will have to will have to provide direct plans in their existing and new schemes with a separate Net Asset Value (NAV), for investors who do not want distributor support.
  
  But mutual fund distributors seem to unveiling some discomfort over this move and requesting mutual fund houses to go slow with the roll-out of this plan. In fact some of them are looking apprehensive and have also started contemplating to look at other alternative sources of business (viz. insurance and real estate) which earns better commissions for them.
  
  We are of the view that, the direct plan could go a long way in benefiting long term investors in mutual funds who are well-versed with how to select winning mutual fund schemes. The direct plan indeed saves onto cost for investors, and therefore could also aid them to obtain better returns. However, the investors should exercise such options only after they have thoroughly studied the different schemes in mutual funds. At present, there are more than 4,500 schemes to select from, and so an investor who has not done his or her home-work may not be able to invest in the right mutual fund scheme depending on the risk appetite. So remember, self-service may not be the best service if you do not have the wherewithal. If you are a new investor, it is recommended to take help of a mutual fund expert who considers your investment objective and risk appetite amongst host of other facets, and then provides you with an unbiased and independent advice.
   
• About a month-an-half back, the capital market regulator - the Securities and Exchange Board of India (SEBI) enunciated some reform measures to transform the mutual fund industry in the interest of investor. Some of the various reform measures included:
   
  • Exhaustive disclosures
  • Shift to the one plan per scheme model (in an aim to de-clutter mutual fund schemes with numerous plans)
  • Charge expense ratio based on the penetration to small cities
  • Set aside a portion of their assets (AUMs) for investor education and awareness
     
  In addition to the above, SEBI also allowed mutual fund houses to levy brokerage and transaction costs (which are incurred for the purpose of execution of trade) subject to a maximum ceiling of 0.12% (i.e. 12 basis points) for cash market transactions and 0.05% (i.e. 5 basis points) for derivatives dealings. And now recently vide a circular, issuing a clarification thereto, SEBI has said that "any payment towards brokerage and transaction cost, over and above the said 12 bps and 5bps for cash market transactions and derivatives transactions respectively may be charged to the scheme within the maximum limit of Total Expense Ratio (TER). Any expenditure in excess of the said prescribed limit (including brokerage and transaction cost, if any) shall be borne by the AMC or by the trustee or sponsors."
   
• While many perceive debt market investing to be a very safe avenue, the fact is, it is not so. Investing is debt markets also entails with it risk such as interest rate risk, default risk, inflation risk, liquidity risk and re-investment risk, amongst host of other economic risk as well. Recently the capital market regulator - the Securities and Exchange Board of India, facilitating mutual funds to hedge their risk, allowed mutual funds to participate in the Credit Default Swap (CDS) market (vide a circular). To know what this means and to read our view over it, please click here.
   
• Reliance Mutual Fund (RMF) launched a Portfolio Systematic Investment Plan (PSIP), which is an investment facility for retail investors, enabling them to invest in various investment schemes (i.e. equity, debt and gold) offered by the fund house.
  
  The minimum investment for one to start investing vide PSIP in multiple schemes is Rs 6,000 and the frequency for a SIP can be either monthly or quarterly, and as an investor you can define percentage allocation to each scheme selected for your portfolio. PSIP also offers investors to determine their risk profile using a risk profiling questionnaire, so depending on that customers can choose their allocation for aggressive, moderate or conservative investors. Besides these asset allocation based options, as an investor you have a choice to invest in maximum five schemes of RMF using PSIP facility.
  
  We are of the view that, PSIP is a good investment facility enabling investors to form a portfolio of mutual funds and invest in them through the SIP mode of investing, which offers the benefit of rupee-cost averaging and compounding. The risk profiling sheet at the time of availing this facility enables one to allocate funds as per ones appetite for risk, which is also a prudent. However, for you as investors while selecting mutual funds for their portfolio it is imperative to select only winning mutual funds in order to strengthen your portfolio and create wealth over the long-term.
   
• Recognising that mutual fund industry is struggling to get every penny from investors in a turbulent market scenario, the capital market regulator - the Securities and Exchange Board of India (SEBI) facilitated them to collect cash investment upto Rs 20,000 from small investors, who may not be tax payers or have PAN and bank accounts. The move was intended to widen the reach of mutual funds and revitalize the industry.
  
  But now this move seems to have gone awry with mutual fund houses refusing to launch cash investment route, as they do not see huge investment inflows through this route. Their contention is that, why would a person who does not have even a bank account invest in mutual funds. Also they believe that the cost involved in handling cash investments (by setting up cash management facility) and accounting complexities are deterrents. Also the following aspects associated with cash investments are holding them back, which are:
   
  • Fear of frauds;
  • Money laundering; and
  • Meddling by tax official and economic intelligence agencies
     
  We are of the view that, mutual fund houses have studied the option of providing the cash investment route, more from a feasibility perspective - which they are right in doing so, and are also wary about the risk associated with cash investment such as fear of fraud, money laundering and embezzlement. They have put forth genuine points, but we think that a step taken by SEBI to allow cash transaction in mutual funds upto Rs 20,000 could have helped to widen the reach of mutual funds. Thus now for small investors, investing in mutual funds could be a distant dream if mutual fund houses desist from launching the cash investment route.
   

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