Mutual Fund Roundup: September 2010
Market Overview
In the month of September 2010, the Indian equity markets (BSE Sensex) surged sharply by 2,098 points (11.7%), moving upwards from the consolidation zone shown in the earlier months. This sharp up-move came in as the Foreign Institutional Investors (FIIs) reallocated funds from the developed markets to the emerging markets, as the U.S. economy continued to grapple with the uninspiring data on consumer confidence index and employment. For the FIIs amongst the emerging markets, India looked the most promising investment destination, given the robust economic outlook (GDP growth rate at 8.8% for Q1 of fiscal year 2010-11 and Index of Industrial Production (IIP) for July 2010 at 13.8%).
Gold too, showed positive correlation with equity, and inched up by 1.1%, as the economic turmoil still persists in the developed economies.
As the stimulus package continued in the most oil consuming countries, the demand for oil rose and led to crude oil prices increasing by 6.0% in September 2010. The 10-Yr G-Sec yield softened, as the Reserve Bank of India’s (RBIs) stance of increasing the repo rate and reverse repo rate by another 25 basis points and 50 basis points respectively in its mid-quarter review of monetary policy was in line with the market expectation. (The repo and reverse repo rate now stands at 6.00% and 5.00% respectively). Also the increase in investment limit for FIIs (by $ 5 bn each in government and corporate bonds) helped boost confidence in the bond markets, as it will improve the liquidity conditions.
Monthly Market Roundup
|
Close |
Change |
% Change |
| BSE Sensex |
20,069.1 |
2,098.0 |
11.7%![]() |
| CNX Midcap |
9,164.3 |
484.4 |
5.6% |
| Re/US $ |
45.0 |
2.1 |
4.5%![]() |
| 10-Yr G-Sec (%) |
7.84 |
0.11 |
11 bps<img alt="" width="11" height="10" https:="" data.personalfn.com="" images="" down.gif"=""> |
| 1-Yr FDs |
6.00% - 7.10% |
(Monthly change as on August 31, 2010)
The graph hereunder clearly depicts the confidence exuded by the FIIs in the Indian equity markets, on account of robust IIP number released in September. The FIIs bought aggressively worth 24,979 crore as compared 11,688 crore (net buying) in August 2010.
BSE Sensex vs FII inflows
(Source: ACE MF)
The IIP (Index of Industrial Production) number for July 2010 (data released in September 2010) got into to the double-digit territory at 13.8%, after slipping to its 13 months low at 5.8% in the previous month.
According to the quick estimates released by the Central Statistical Organisation (CSO), the main reason for such a jump in the IIP growth was on account of:
- Accelerating manufacturing growth - The manufacturing index, which is the principal component of the IIP, accelerated to 15.0% in July, compared to 9.7% in the previous month (June 2010).
- Growth in sectoral output - The growth in the output of capital goods soared to 63.0% in July 2010 (from 9.7% in the previous month). However, the output of consumer durables mellowed to 22.1% (27.4% in the previous month). The downtrend was also seen in the growth of consumer non-durables as it mellowed to 0.5% (1.3% in the previous month). Overall growth in consumer goods also fell to 6.7%, from 8.3% in the previous month.
Reacting to such IIP numbers, Deputy Chairman of the Planning – Mr. Montek Singh Ahluwalia said, "The July figures are better than what I had expected. On the whole, taking together April-July, it suggests we are on track at least to achieve the growth rate target".
Mutual Fund Overview
The mutual fund industry's Average Asset Under Management (AAUM) grew by 25,721 crore or 3.7% during September 2010, and the combined average AAUM of the 41 fund houses stood at 7,13,281 crore. The country's largest fund house, Reliance Mutual Fund’s AAUM rose by 3.1% or 3,237 crore as per the data available with the Association of Mutual Funds in India (AMFI).
But contrary to FII aggressive buying activity, domestic equity mutual funds in September 2010 went on a selling spree, as fund managers were compelled to book profits at every higher levels of the Indian equity markets, as investors’ logged in redemption applications. They sold to the tune of 5,189 crore (net) in the Indian equity markets, thereby following a similar pattern of August 2010; where they were net sellers in Indian equities to the tune of 2,997 crore.
BSE Sensex vs MF inflows
(Source: ACE MF)
As the Indian equity markets, showed a significant up-move in September, the diversified equity funds following quant models for investing, delivered appealing returns. Also, as the banking and financial services stocks surged after mid-policy review announcement, the banking and financial services sector funds delivered handsome returns. Balanced funds too, gained from the up-move of the equity markets, and softening in 10-yr G-sec yield, after the central bank made its mid-policy review announcement and Government’s step of raising cap on FII investment in Indian debt markets.
Monthly top gainers: Open-ended equity funds
| Diversified Equity Funds |
1-Mth |
Balanced Funds |
1-Mth |
Sector Funds |
1-Mth |
| Reliance Quant Plus (G) |
11.6% |
Baroda Pioneer Balance (G) |
6.5% |
ICICI Pru Banking & Fin Serv (G) |
12.3% |
| Religare AGILE (G) |
10.3% |
UTI Balanced (G) |
6.1% |
UTI Banking Sector (G) |
11.9% |
| Fortis Equity (G) |
10.3% |
LICMF Balanced (G) |
5.9% |
Sundaram BNPP Fin Serv Oppor (G) |
11.7% |
(1-Mth returns as on September 30, 2010)
(Source: ACE MF)
Monthly top gainers: Open-ended debt funds
| Monthly Income Plans |
1-Mth |
Long-Term Floating Rate Funds |
1-Mth |
Liquid Funds |
1-Mth |
| ICICI Pru MIP 25 (G) |
2.1% |
Sundaram BNPP Flexible-FIP (G) |
0.7% |
Escorts Liquid Plan(G) |
0.6% |
| DSPBR Savings Mgr-Agg (G) |
2.1% |
HDFC FRF-LT (G) |
0.6% |
IDFC Ultra ST (G) |
0.5% |
| Reliance MIP (G) |
2.0% |
SBI Magnum FRF-LTP (G) |
0.5% |
Quantum Liquid (G) |
0.5% |
(1-Mth returns as on September 30, 2010)
(Source: ACE MF)
Unlike equities, in debt instruments domestic mutual funds turned net buyers to the tune of 18,060 crore in September 2010, following the similar pattern of last month (August 2010) where they were net buyers to the tune of 22,243 crore. This buying was on account of increased confidence in the bond markets after the policy rate hike (in-line with the market expectations) by the central bank in its mid-policy review meeting, to curb inflation in the country. Also expectation of improvement in liquidity conditions, too boosted confidence in the longer tenor bonds (as the Government increased the FII limit in the Indian debt markets).
Performance across various categories of mutual funds
(Source: ACE MF)
(1-Mth average returns of funds in various categories as on September 30, 2010)
As per the above graph, all equity oriented funds ended in the positive terrain, as the Indian equity markets showed a smart up-move in September. Particularly the banking and financial services sector funds generated impressive returns due to the rally seen in banking stocks, as the key policy rates were hiked by RBI in mid-policy review meeting. Gold ETFs too ended the month marginally in green as the economic turmoil continued in the developed markets. Similarly, debt mutual funds ended the month in green, as WPI inflation for August 2010 (data released in September 2010) mellowed down to 8.51% (as per new base year – 2004-05).
Other News and New Fund Offers
- UTI Mutual Fund's Chairman and MD, Mr. U. K. Sinha was appointed as the Chairman of Association of Mutual Funds in India (AMFI), while HDFC Mutual Fund's MD Milind Barve was appointed as the Vice-Chairman of AMFI. The duo will be holding office till the next Annual General Meeting (AGM).
- The core sector comprising of six key infrastructure industries - crude oil, petroleum refining, coal, electricity, cement and finished steel, grew at 3.7% in August 2010 (data released in September 2010) as compared with 6.4% last year. In July 2010, the growth was 4.0%.
The six key infrastructure industries have a combined weight of 27.6% in the Index of Industrial Production (IIP).
Hence now the slowdown in the core sector growth, may lead to dampening of September 2010 IIP data (expected on October 12, 2010) and also affect the overall economic growth (GDP growth) of the country.
- With the spectacular response from the auction of wireless spectrum (fetching around 1,06,000 crores) and higher revenue receipts from taxes, the Government decided to share the fruits by increasing Foreign Institutional Investors (FIIs) participation limit in debt instruments.
Now FIIs will be permitted to invest additional U.S. $10 billion in corporate and Government securities. They (FII) would be able to collectively buy Government bonds worth U.S. $10 billion and corporate bonds worth U.S. $20 billion (earlier it was U.S. $5 billion and U.S. $15 billion respectively).
However, the additional U.S. $5 billion limit in each category comes with a condition that, it can be invested only in papers (bond) with a residual (remaining) maturity of over 5 years. Moreover, the additional limit of U.S. $5 billion for the corporate bonds category has been reserved exclusively for the infrastructure companies.
To know the impact of increase in FII limits in debt instruments Click here.
- In order to be in compliance with Know-Your-Client (KYC) by November 15, 2010, the Association of Mutual Funds in India (AMFI) has asked the mutual fund houses to release commission to distributors on a case-by-case basis depending on whether the investor-related documents have been submitted by distributors.
AMFI will also undertake a one-time special audit through independent auditors at Registrars and Share Transfer Agents (RTAs) - CAMS and Karvy, in order to ascertain the status of receipt of investor documents and completion of work. The audit report thus produced will be shared among all the mutual fund houses in order to for them to release commissions to distributors.
- Domestic fund houses expressed discontent over Bharti Axa Mutual Fund's decision to reduce exit load on its equity schemes to zero. According to other fund houses, such a move would increase churning of portfolios and hurt existing investors.
"No exit load will lead to an increase in inflow-outflow of funds and benefit only unscrupulous investors. Mutual fund schemes will become a trading arena for them. This will affect other investors who will start taking short-term calls on their investments," said a Chief Executive Officer (CEO) of a mid-sized fund house.
In our opinion, having an exit load infuses long-term saving habits in investors. But if a fund house adopts to "zero exit load", it may not do harm to investors (as long as they follow discipline in their investments), as churning between funds is matter of discipline, and an investor would continue to hold his mutual funds, if they have a consistent performance track record.
- Ever since the ban of entry load on mutual funds, several mutual fund houses, adopted the practice of paying upfront commissions to distributors from their own pockets, as a marketing effort to grow Assets Under Management (AUM). But such a practice now seems to be pinching their pocket, as mutual fund houses are now planning to stop paying upfront commissions to distributors. According to a mutual fund industry official, beginning October 1, 2010 fund houses may pay only trail commission to their distributors.
We believe that the initiative of banning entry loads (on mutual funds) taken by the SEBI, a year ago has brought the Mutual Fund Industry in order, and in our opinion is truly commendable. We think that now, as upfront commissions would be stopped, you'll hear your distributor telling you stay invested in your existing schemes, rather than entering new ones; as this in turn will be in his interest, as he will earn through the trail commissions on the AUM sustained by him. We also think, this move may tempt some distributors to adopt the fee based advisory model, in order to survive in their business.
- SMC, a domestic broking firm, has got provisional approval from SEBI to enter the mutual fund business, said group Chairman and Managing Director, Mr. Subhash Chand Aggarwal.
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