Mutual Fund Roundup: September 2011
Oct 04, 2011

Author: PersonalFN Content & Research Team

Mutual Fund Roundup: September 2011

Market Overview

After showing a deep correction of a good -11.5% in August 2011, the Indian equity market displayed "see-saw" movements in the month of September, but finally ended the month in the red losing 1.3% (or 223 points). The Indian equity markets for the most part of the month seemed to be under a blanket of nervous sentiments as the following economic factors were considered downbeat:

WPI inflation in India remaining sticky (9.78% in August 2011 – data released in September 2011) and over the comfort zone of Reserve Bank of India (RBI)
Central banks in India as well as other EMEs (Emerging market economies) adopting anti-inflationary monetary policy stance to combat rising cost of living, thus demonstrating a dampening effect on the consumption theme and pushing borrowing cost upwards
Growth forecast for India being sliced to 8.2% by the Prime Minister's Economic Advisory Council (PMEAC) and 7.8% the International Monetary Fund (IMF)
Depreciation of the Indian Rupee (which indicated that the import bill would balloon and thus the fiscal deficit)
Debt-overhang situation in the Euro zone led by Greece's failure to put its public finances in place (in last week of July 2011, Standard & Poor downgraded Greece ratings by two notches to CC, with a negative outlook)
Fear of a recession gripping in the Euro zone area as economic growth rate is dwindling (0.20 % in the last quarter (April 2011 – June 2011) and unemployment rate accelerating to double-digit terrain (at 10% in July 2011)
The U.S. economy growing by mere 1.3% (in the second quarter of calendar year 2011) along with their sovereign credit rating being downgraded to ‘AA+' with a negative outlook (from the prime credit rating of ‘AAA' enjoyed earlier), thus reflecting edginess in the economic recovery.

Even though in the last couple of days of September 2011, while Germany and France did vote in favour of expanding Euro zone rescue fund and auditors were back in Greece to decide bailout loans to avoid defaults; the markets were nervous as they perceived it to be mere postponement of a default.

Free-fall of industrial growth

(Source: CSO, PersonalFN Research)

Moreover, in India the free-fall displayed by the Index of Industrial Production (IIP) from 8.8% in June 2011 to 3.3% to July 2011 (data released in September 2011), (due to meagre growth of 2.3% registered by the manufacturing sector), also did not go too well with the Indian equity markets. In fact, the markets were foreseeing that anti-inflationary stance maintained by the RBI would decelerate industrial growth as borrowing cost would go up. Also the political scene painted over the 2G spectrum allocation row (which got the present Finance Minister and the Home Minster into a combat mode over the 2G spectrum allocation), too made the markets uneasy as it revealed lack of cohesive governance while the Congress President was away on medical grounds. Meanwhile the opposition was busy using this critical issue to tarnish the image of the Government in power, and also exhibiting their next Prime Ministerial candidate.

Gold which is considered as safe haven during economic and political uncertainties also went under corrective phase (fell by 3.1% in September 2011) after gaining by good +22.1% in August 2011. The corrective phase in gold came in as investors preferred to book quick profits ahead of the festive season. Stockist too didn't pile up their inventories much due to the month of "Pitru Paksha", and as such they had escalated on their inventory levels in August 2011 to meet festive demand.

As far as Brent crude oil price is concerned, it too witnessed a correction (descended by 5.9%), as inventories piled by due to faltering demand from developed economies.

For the bonds markets, as inflation for August 2011 (data released in September 2011) ascended to 9.78% (from 9.22% in June 2011), and RBI adopted its anti-inflationary policy stance (despite gloomy global economic environment); yields for both the short-term as well as the long-term debt papers climbed up, but quite marginally. 1-month and 3-month CDs stood at 9.00% and 9.15% respectively, while 7.80% 10-year G-sec yield stood at 8.35%.

Monthly Market Roundup

	As on Sept 30, 2011	As on Aug 31, 2011	Change	% Change
BSE Sensex	16,453.8	16,676.8	(223.0)	-1.3%
S&P CNX Nifty	4,943.3	5,001.0	(57.8)	-1.2%
CNX Midcap	7,094.0	7,294.8	(200.8)	-2.8%
Gold (/10 gram)	25,995.0	26,815.0	(820.0)	-3.1%
Re/US $	49.0	46.1	2.9	6.2%
Crude Oil ($/BBL)	106.4	113.1	(6.6)	-5.9%
10-Yr G-Sec (%)	8.35	8.33	0.02	2 bps
1-Yr FDs	7.25% - 9.40%

(Monthly change as on September 30, 2011)
(Source: ACE MF, PersonalFN Research)

Ascertaining all the aforementioned domestic and global economic uncertainties along with the political scenario in India, Foreign Institutional Investors (FIIs) too were wary and thus turned net sellers in the Indian equity markets to the tune of 158 crore. But a noteworthy point is, this time their selling trait was far more restricted as compared to last month (i.e. August 2011) where they were net sellers to the tune of 10,834 crore.

BSE Sensex vs FII inflows

(Source: ACE MF , PersonalFN Research)

Mutual Fund Overview

The domestic mutual funds also didn't react any differently to the downbeat global economic sentiments. They too turned net sellers in the Indian equity market to the tune of 731 crore, as redemption pressures kept building in from investors since markets continued their corrective phase. Despite the following positive factors domestic mutual funds weren't enthused to budge and buy into the Indian equity markets.

Attractive valuations (markets have already corrected 27.7% from their last peak of 21,004.96 made on November 5, 2010)
Better growth prospects for India (GDP growth rate at 7.7% for Q1FY12) when compared to the other developed economies
Robust gross capital formation (at 31.2% in Q1FY12)
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

Hence, they contradicted to their last month's (i.e. August 2011) buying activity, where they were net buyers in the Indian equity markets to the tune of 2,182 crore.

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

As far as the performances of the funds are concerned, some diversified equity funds holding predominantly a large cap portfolio managed to deliver positive returns for their investors. Similarly amongst sector funds, the ones focusing on the Information Technology (IT) theme gained as the depreciation of the Indian Rupee enhanced the prospects of IT companies in their portfolio (especially those which are export oriented) to earn better foreign exchange earnings. FMCG and pharma funds on the other hand - which are generally construed as defensive, were negatively impacted as the consumption theme witnessed a dampening effect due to persistent rate hikes by the central bank to tame the inflation bug.

Amongst the Fund of Funds (FoFs) those focusing on equities – especially the ones following a dynamic PE model, and asset allocation model managed to occupy the top-3 position. In the Hybrid fund category, Monthly Income Plans (MIPs) managed to deliver positive returns, when compared to balanced funds as they felt the brunt of downward pressures of the India equity markets due to their dominant exposure (generally 65%) towards equity.

Monthly top gainers: Open-ended equity funds

Diversified Equity Funds	1-Mth	Sector Funds	1-Mth	ELSS	1-Mth
IDFC India GDP Growth (G)	2.69%	Franklin Infotech (G)	3.78%	IDFC Tax Advt (G)	1.56%
Reliance Growth (G)	1.35%	ICICI Pru Technology (G)	3.53%	Reliance Tax Saver (ELSS) (G)	0.61%
HDFC Growth (G)	0.60%	Birla SL New Millennium (G)	1.02%	Franklin India Taxshield (G)	0.27%

(1-Mth returns as on September 30, 2011)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Fund of Funds

Fund of Funds	1-Mth
ING OptiMix Financial Planning- Cautious Plan (G)	0.60%
FT India Dynamic PE Ratio FOFs (G)	0.57%
ING OptiMix Asset Allocator Multi FoF (G)	0.56%

(1-Mth returns as on September 30, 2011)
(Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Hybrid Funds

Balanced Funds	1-Mth	Monthly Income Plans	1-Mth
Sundaram Balanced Fund (G)	0.36%	DWS Twin Advantage (G)	1.01%
FT India Balanced (G)	0.36%	ICICI Pru Multiple Yield-B (G)	0.98%
SBI Magnum NRI Inv-FlexiAsset (G)	-0.42%	ICICI Pru Multiple Yield-A (G)	0.91%

(1-Mth returns as on September 30, 2011)
(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
Escorts ST Debt (G)	0.88%	Taurus Dynamic Income Fund (G)	1.05%	Canara Robeco Gilt Advantage Fund (G)	0.64%
Canara Robeco FRF (G)	0.78%	ICICI Pru Banking & PSU Debt Fund-Premium Plus (G)	0.80%	DSPBR Treasury Bill (G)	0.61%
SBI Magnum Income FRP-Saving Plus Bond (G)	0.75%	JPMorgan India ST Income (G)	0.79%	Daiwa Govt Sec-STP (G)	0.60%
Long Term		Long Term		Long Term
HDFC FRIF-LT (G)	0.79%	Escorts Income Plan (G)	3.38%	Taurus Gilt (G)	0.97%
Birla SL FRF-LT (G)	0.78%	Escorts Income Bond (G)	0.97%	Sahara Gilt (G)	0.62%
SBI Magnum Income FRP-LTP (G)	0.78%	BNP Paribas Bond Fund (G)	0.87%	Mirae Asset GILT-Inv (G)	0.56%

Liquid Funds	1-Mth	Liquid Plus funds	1-Mth
Escorts Liquid Plan (G)	0.83%	Pramerica Treasury Advantage (G)	0.80%
ICICI Pru Sweep-Cash (G)	0.75%	JM Money Mgr-Super (G)	0.77%
Birla SL Cash Mgr (G)	0.74%	JM Money Mgr-Reg (G)	0.77%

(1-Mth returns as on September 30, 2011)
(Source: ACE MF, PersonalFN Research )

Debt mutual funds across all categories performed well as yields of both short-term as well as long-term debt papers inched-up only marginally. Moreover with Brent crude oil prices correcting from their earlier levels (as witnessed in the last seven months), was a positive for the bond markets as it implied a reduction in import bill (for crude oil) as well as current account deficit.

In the month gone by domestic mutual funds exuded confidence in the Indian debt market, as they net bought aggressively to the tune of 22,955 crore, thereby deviating from their August 2011 activity where they were net sellers to the tune of 186 crore.

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 of mutual funds performed in the previous month. As revealed above, all equity funds – across categories (i.e. diversified equity funds and thematic funds) and styles faltered. Even the balanced funds felt the brunt of downward pressures of the India equity markets due to their dominant exposure (generally 65%) towards equity. Gold ETFs too eroded their investors' wealth as investors preferred to book profits in the precious yellow metal. However, as yields of both short-term and long-term debt papers rose only marginally after RBI's 2nd quarter mid review of monetary policy 2011-12 (held on September 16, 2011), debt funds - across categories didn't feel the brunt and thus delivered positive returns for their investors.

Other News and New Fund Offers

After proposing to set up a Self-Regulatory Organisation (SRO) to regulate the independent financial advisors, banks, distributors, fund managers among others, the Securities and Exchange Board of India (SEBI) has now penned down certain level of qualification to be eligible as an investment advisors. Individuals will now be required to have a professional qualification such as Chartered Accountancy (C.A.) or MBA in finance or at least 10 years of relevant experience to register themselves as investment advisors.

SEBI also proposed that investment advisors will have to do adequate risk profiling of the client before any investment service is provided to them. Besides, they will also have to maintain records of all forms of communication made with investors for at least five years.

In our opinion the demarcation between an agent / distributor and an advisor was very much required to prevent investors from falling prey to mis-selling. Also, financial products being intangible and conceptually difficult for a layman to understand, requires a qualified person to help you understand the nuances of the financial products.

Furthermore, a qualified individual or an investment advisor will help you understand what financial products will suit your risk profile thus helping you achieve your goals.
In order to keep check on the casual fund (mutual fund) launches by mutual fund houses, the Securities and Exchange Board of India (SEBI) has raised the Minimum Target Amount (MTA) to 10 crore in case of equity schemes and 20 crore in other fund categories up from their earlier target amount of 10 lakh and 1 crore respectively.

In our opinion the increase in the MTA by the SEBI would certainly preclude fund houses from launching products casually in aim to garner more Assets Under Management (AUM). This decision will also help make the mutual fund industry more competitive and weed out the redundant or pointless fund offers, thereby protecting the interest of the investors in the long run.
Franklin Templeton Mutual Fund has been the most active amongst the fund houses in fighting against management proposals that may hurt minority shareholder interests in its role as an institutional investor in various companies.

At various instances, Franklin has been active in opposing proposals, including payment of commission to non-executive directors of Reliance Communications; re-appointment of Mr. S. Bhattacharya as director at state-owned steelmaker SAIL; alteration of memorandum and articles by Tata Motors; and revision of promoter remuneration at tractor maker Escorts Ltd, data posted on its website shows.

It is indeed a very good example set forth by Franklin Templeton Mutual Fund for others to follow. By using the power of voting an investor can keep a check on unnecessary proposals or plans which may turn out to be detrimental to the health of the company and thus erode investors' wealth. Other mutual fund houses too, should take up this exercise in a thoughtful manner to promote long term wealth creation for the investor.
Peerless Mutual Fund (a fund house headquarter in Kolkata), launched its first diversified equity scheme - "Peerless Equity Fund" following a multicap style of investing. As per its offer document, the fund's primary investment objective is "to generate long term capital appreciation by investing in an actively managed portfolio predominantly consisting of Equity & equity related securities diversified over various sectors." As far as allocation of its assets between debt and equity are concerned, the scheme invests 80% - 100% of its total assets in equity and equity related securities and the rest (i.e. upto 20%) in debt and money market instruments.
"ICICI Pru Gold Savings Fund" was latest entrant to the category of gold savings funds, which is mandated to invest in the parent scheme of the fund house i.e. in ICICI Prudential Gold Exchange Traded Fund (IPGETF). As per its offer document, the investment objective of the scheme is "to generate returns by investing in units of ICICI Prudential Gold Exchange Traded Fund. However, there can be no assurance that the investment objectives of the Scheme will be realised.

The investments into underlying funds under the Scheme would, inter alia, be governed by:
- The investment management style of such scheme
- The tolerance and the risk profile of such schemes
- The asset allocation (such as equity or debt) of such schemes".
For benchmarking its performance, ICICI Pru Gold Savings Fund will track the domestic prices of gold, as its underlying fund – IPGETF too tracks the same.
DSP BlackRock Mutual Fund introduced a new Fund of Fund (FOF) scheme in its product portfolio named "DSP BlackRock World Agriculture Fund". It is a feeder fund which will predominantly invest in units of BlackRock Global Funds-World Agriculture Fund (BGF-WAF), and thus take opportunities emerging within the agriculture theme. As per the offer document the primary investment objective of the scheme is "to seek capital appreciation by investing predominantly in units of BlackRock Global Funds-World Agriculture Fund (BGF-WAF). The scheme may, at the discretion of the investment manager, also invest in the units of other similar overseas mutual fund schemes, which may constitute a significant part of its corpus. However, there is no assurance that the investment objective of the scheme will be realised. It shall be noted that similar overseas mutual fund schemes shall have investment objective, investment strategy and risk profile/consideration similar to those of BGF-WAF."

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