FUND FULCRUM
September 2010

The average asset under management (AAUM) of the mutual fund industry jumped 3.3% to Rs 6,89,542 crore in August 2010 on strong inflows from institutions and banks into ultra-short term funds. The fund houses attributed the rise to better liquidity but cautioned that the outflow was continuing. Though August 2010 brought some relief, the assets are still nowhere close to what they were in May 2010 (Rs 8.03 lakh crore). The drastic fall of close to 16% – the second-largest after the October crisis of 2008 – was in June 2010 due to advance tax numbers, auction of 3G spectrum, and banks pulling out money at the end of the quarter.

Out of the 41 players that operate in the domestic fund market, 10 registered a decline in their AAUM. However, the top five players registered positive inflows. Reliance Mutual Fund continues to be the largest fund house with average asset under management of Rs 1,04,511 crore, up 2.3% in August 2010, followed by HDFC Mutual Fund (Rs 90,178 crore, up 6.6%), ICICI Prudential Mutual Fund (Rs 68,795 crore, up 0.08%), Birla Sun Life Mutual Fund (Rs 64,247 crore, up 4.3%), and UTI Mutual Fund (Rs 64,172 crore, up 3.2%). Meanwhile, average AUM of Franklin Templeton Mutual Fund increased by 13% to Rs 40,908 crore in August 2010 as it surpassed SBI Mutual Fund to become the sixth largest fund house. Among the top 10 fund houses, LIC Mutual Fund witnessed the sharpest drop of 14.5% in average AUM during the month. Among the top losers were Deutsche Mutual Fund (down 22.12%), followed by Edelweiss Mutual Fund (down 21.15%), Fortis Mutual Fund (down 15.56%), and LIC Mutual Fund (down 14.47%).

New entrants into the industry have seen highest surge in assets in absolute terms. AAUM of Motilal Oswal Mutual Fund surged by 763.37%, followed by IDBI Mutual Fund (154.84%), Peerless Mutual Fund (77.85%), Axis Mutual Fund (33.52%), JPMorgan Mutual Fund (22.81%), Baroda Pioneer Mutual Fund (19.49%), JM Financial Mutual Fund (19.43%), and Shinsei Mutual Fund (18.59%) among others. Pramerica Mutual Fund which is a new entrant into the industry recorded AAUM of Rs 101.68 crore in August 2010.

Total monthly redemptions from equity mutual funds continue to be higher than inflows as August 2010 witnessed another net outflow of Rs 2,890 crore from these funds. However, overall the mutual fund industry reported a net inflow of Rs 36,185 crore on account of higher inflows than outflows into debt funds. Many investors, who were stuck in the market for the past two-three years and waiting for net asset values (NAVs) to touch levels at which they can book profit, are redeeming their investments in equity funds. Funds mobilized from 33 newly launched schemes in August stood at Rs 9618 crore, out of which Rs 7981 crore came from 28 income funds.

Piquant Parade

Local fund houses are expanding their fund management and advisory businesses to overseas destinations to boost profits and to expand their asset base. Top fund houses, such as Reliance Mutual Fund, ICICI Prudential Mutual Fund, Birla Sunlife Mutual Fund, HDFC, and UTI have plans to open offices in the UK, the US, Singapore, Japan, and the Gulf. Kotak Mutual Fund already has offices in London, New York, and Dubai, while UTI Mutual Fund has offices in a few capitals in Europe, including London. Kotak and Birla Sunlife are managing a few India-focused funds from these destinations. According to fund managers, HDFC Mutual Fund is also looking to set up offices in the Gulf, after it received the mandate to advise Abu Dhabi Investment Authority (ADIA) on India investments. Managing foreign investors’ money is a high-margin business for most asset management companies. Depending on fund performance, foreign investors are charged anywhere between 2.5% and 4% as asset management charges by domestic fund houses. Investment advisory business yields just about 1-1.5% as advisor fees. Apart from funds, subsidiary (branch) offices also sell private equity and PMS products (after getting regulatory approvals) in foreign markets. About 75 India-dedicated offshore funds beat the Sensex, which gained about 17% in one year. About 37 funds returned more than 25% — the average category returns posted by domestic equity funds.

Union Bank of India’s asset management company will start operations by December 2010 and plans to corner 3% of asset management business in the country within three years of its operations. The bank has got the Reserve Bank of India nod to open a branch in Brussels, for which it has already secured the necessary permission from the Belgian and EU authorities.

Regulatory Rigmarole

SEBI has asked mutual fund trustees to monitor and exercise judgement on whether to pay or withhold payment to RTAs, depending on compliance with updating of investor-related documentation. In an attempt to ensure adoption of uniform process by AMCs/trustees on the payment of commission to channel partners, AMFI has recommended that where channel partners have submitted 80% of documents to RTAs, the commission withheld till December 2009 may be released, on case-to-case basis. Where they have submitted 100% of documents to RTAs, 75% of commission withheld between January to March 2010 may be released again on a case-to-case basis. The industry body also said it recognised that transaction verification for MNC banks is an uphill task and in all probability, cannot be completed by November 15, 2010. AMFI will make representation to SEBI to either relax the time limit or to waive the requirements for transactions verification for the period prior to April 01, 2010. Channel partners/distributors will have to submit all pending documents by October 31, 2010, while R&TAs will have to complete the processing by November 15, 2010, in order to enable the Trustees to confirm compliance to SEBI by November 22, 2010.

SEBI has issued a new ruling, whereby, investors will be able to transfer their mutual fund units, held in demat form, to their spouse, parents, children or even near and dear ones directly from one demat account to another by October 1, 2010. AMFI has asked for postponement of this directive.

Shares of companies will be allowed to be traded in the normal segment of stock exchanges only if at least 50% of non-promoter share holding is held in dematerialised form. According to SEBI, this move would moderate sharp and destabilising price movements in shares of companies, encourage better price discovery, and would increase transparency in securities market. The SEBI circular said that companies are expected to satisfy the criteria in the latest shareholding pattern as on September 30, 2010. Those companies, which do not satisfy the criteria will be shifted to trade for trade segment (TFT) after the cut off date i.e. October 31, 2010. Trading in these scrips will then take place in the TFT segment. The TFT segment is one where delivery has to be taken and one cannot square off one's position on the same day. The circular also specified certain conditions under which stocks would be traded in the TFT segment for the first 10 days. These include merger, demerger, capital reduction, corporate debt restructuring, transfer of securities for trading from other stock exchanges, and those scrips whose suspension has been revoked. The stocks will be traded with the applicable price band while keeping the price open on the first day of trading. This means that intra-day trading cannot happen in these shares for the first 10 days. SEBI has asked the exchanges to issue necessary guidelines and to put in place adequate systems.

SEBI has asked the brokers to bar those traders and investors, who do not furnish the adequate proof for the source of their funds, from trading in derivatives market. The direction would be soon extended to the cash market segment also. The illustrative list of documents to be collected from the clients include copies of Income Tax Return (ITR) acknowledgement, annual accounts (for institutional clients), Form 16 for salary income, net worth certificate, salary slips, bank account statements for six months, demat account holding statements, and asset ownership certificates. Besides getting these documents at the time of opening an account for the client, the brokers have also been asked to collect fresh documents every year as part of an annual updation of financial information exercise.

IRDA issued a comprehensive order effecting several changes in the way unit-linked products are structured and sold by life insurance companies. It increased the minimum lock-in period of ULIPs from three years to five years, allowed for all charges to be uniformly distributed over the lock-in period, raised the minimum insurance cover from five times to 10 times the first-year premium, put a cap on surrender charges, and made it mandatory for all ULIP pension plans to guarantee a minimum 4.5% annual return. All these changes have become effective from September 1, 2010.

Tax-free dividends on equity mutual funds would be a thing of the past once the Direct Tax Code (DTC) comes into effect from April 1, 2012. The Direct Tax Code Bill proposes a 5% dividend distribution tax on equity mutual funds and ULIPs. At present, dividends on equity mutual funds are tax-free in the hands of investors. However, the 5% dividend distribution tax would not be a very big blow for investors as they can always opt for growth plans instead of dividend plans of an equity scheme. DTC has linked the short-term capital gains tax to an investor’s annual income. A short-term capital gains tax of 5% would be applicable for an investor in the income group of Rs 2-5 lakh, 10% in the Rs 5-10 lakh bracket and 15% for those with income over Rs 10 lakh. However, DTC has maintained the status quo on securities transaction tax (STT) and long-term capital gains tax, that is, while STT stays, there would be no long-term capital gains tax on equity and equity related instruments. Under the DTC, 80C-type benefits are limited only to term insurance, Provident Fund (PF), Public Provident Fund (PPF), and the New Pension System (NPS). Of these, only the NPS offers some equity exposure -- only up to 50% and with a lock-in to retirement age. The tax saving funds - the so-called equity-linked savings schemes (ELSS) funds - will be history after DTC comes into force.

According to data available with Computer Age Management Services (CAMS), a registrar and transfer agent (RTA), the number of new SIPs has been continuously increasing since August 2009. In August 2009, the number of new SIPs was 91,576, a sharp drop from 159,369 in July 2009. However, since then the number of SIPs has increased on an average by 5% every month barring a drop witnessed in March 2010. In July 2010, the number of new SIPs opened was 231,296 compared with 159,369 a year ago, a sharp jump of 45%. Since the beginning of the current financial year up to July 2010, a total of 781,349 new SIPs have been started. A welcome development in the mutual fund industry.

NFO NEST
September 2010

With the National Securities Depository Ltd and Central Depository Services (India) Ltd now offering demat account services for the mutual fund account holders, CAMS has started an initiative where NFOs can now be applied for by investors online. The initiative called the e-NFO will make the process of applying for new fund offers less cumbersome and time-consuming for the investors. Interested investors can log on to the CAMS web site and complete the application in less than five minutes. The initiative holds more significance in light of the new SEBI regulations which mandate that all fund allotments and dispatch of statements should be done within five business days from the closure of the NFO. The initiative also provides ease of payment as the investor can choose the mode of investment – cheque/DD/online fund transfer.

Reliance Index Fund - Sensex and Nifty
Opens: September 9, 2010
Closes: September 23, 2010

Reliance Index Fund is an open-ended index fund which will invest in companies whose securities are covered in the Nifty and the Sensex. The schemes propose to invest 95-100% in equities and equity-related securities covered by the Nifty and the Sensex. They will further allocate up to 5% of assets in Cash/CBLO/Repo and Reverse Repo and Money Market. Initially, the fund house will not charge any asset management fees for this fund in their effort towards financial inclusion and to make this product more attractive for investors - especially in smaller cities or first time investors who have not participated in the success of capital markets in India. This will create a positive impact on the expense ratio. However, investors will be notified about any change in this fee structure, if proposed in future, on the company’s website at least three months in advance. Another unique feature is that dividend payout option will also be provided with quarterly, half-yearly, and annual dividend frequencies. Reliance Index Fund provides investors an opportunity to participate in India's growth story by investing in well-diversified portfolio of fundamentally strong, highly liquid and well-known companies. The biggest advantage of investing in an index fund is that firstly one knows exactly the shares the fund will invest in. Besides, for an individual investor, it is practically impossible to create a portfolio that matches an index fund portfolio. The funds will maintain the portfolio of all the securities in the same proportion as in the benchmark index. So the risk profile of this fund is less than the actively managed funds. The Scheme`s NAV may react almost in line with its benchmark. It is suitable for conservative investors especially for those who want to grow their investment in line with the index. The schemes will be benchmarked against S&P CNX Nifty and BSE Sensex respectively and both schemes will be managed by Mr. Krishan Daga.

Infrastructure Benchmark Exchange Traded Fund
Opens: September 9, 2010
Closes: September 23, 2010

Infrastructure BeES Fund is an open-ended exchange traded fund with investment objective to provide returns that, before expenses, closely correspond to the total returns of the securities as represented by the CNX Infrastructure index by investing in the securities in the same proportion as in the index. The scheme offers only growth option with minimum application amount of Rs 10,000. The scheme will allocate 95 to 100% of assets in securities covered by the CNX Infrastructure Index. It will further allocate up to 5% of assets in money market instruments, G-secs, Bonds, Debentures and cash at call. The notional exposure of the scheme in derivative instruments shall be restricted to 10% of the net assets of the scheme. The Indian economy has shown strong growth momentum over the past few years. India is an infrastructure constrained country and suffers from capacity constraints in several sectors. Hence, sustaining high economic growth requires substantial investments in the country`s underlying infrastructure. Realizing this, the government is actively emphasizing the need for faster infrastructure buildup through a combination of public and public-private initiatives. In these efforts, the government is encouraging investments in development of ports, roads, airports, electricity, etc. In doing so, it hopes to release some of the emerging bottlenecks and set the ground for sustained economic prosperity. So, one can expect that there will be a significant pick up in infrastructure spending in the coming years. This has opened doors to many opportunities for companies in such sectors. The scheme will be benchmarked against CNX Infrastructure Index and will be managed by Mr. Vishal Jain.

Pramerica Ultra Short-term Bond Fund
Opens: September 16, 2010
Closes: September 23, 2010

Pramerica Asset Managers (P), the Indian asset management company of U.S. based Prudential Financial, Inc. (PFI), launched its second product offering for the Indian market `Pramerica Ultra Short Term Bond Fund`. The objective of this open-ended debt scheme will be to provide reasonable returns, commensurate with a low to moderate level of risk and high degree of liquidity, through a portfolio comprising money market and debt instruments. This fund will provide still higher tax benefits as compared to liquid funds under the current tax laws. This fund will invest at least 80% in debt securities having maturity up to 400 days. The balance 20% may be invested in debt securities with maturity up to 3 years. The fund`s portfolio will focus on highly rated instruments and has already received the highest credit rating of AAA from CRISIL. The scheme will be benchmarked against the CRISIL Liquid Fund Index and managed by Mahhendra Jajoo, executive director & chief investment officer - fixed income of Pramerica Asset Managers.

Baroda PSU Equity Fund
Opens: September 13, 2010

Closes: September 24, 2010

Baroda Pioneer PSU Equity fund is an open-ended scheme which will invest in a diversified basket of equity stocks of domestic public sector undertakings (PSUs). The primary objective of the scheme is to provide investors with opportunities for long term growth in capital along with liquidity. PSUs operate in high growth sectors such as banking, infrastructure, oil and gas, power, minerals and are, thus, highly diversified. Only a few of the consumer-related sectors are not included in the PSUs basket. The scheme will invest 65% to 100% of assets in equity and equity related securities covered under the universe of Public sector undertakings (around 35 stocks) including derivatives with medium to high risk profile. It will further allocate up to 0% to 35% of assets in debt & money market instruments with low to medium risk profile. The scheme will be benchmarked against BSE PSU Index and will be managed by Mr. Dipak Acharya.

Fidelity India Children’s Plan (Education Fund, Marriage Fund, and Savings Fund), L&T Double Advantage Fund (Balanced Plan and Opportunities Plan), L&T MIP Advantage Fund, Birla Sunlife Infrastructure ETF, Birla Sunlife Nifty ETF, IDFC Small Cap Equity Fund, Peerless Child Plan, Pramerica Dynamic Monthly Income Fund, Kotak Dynamic Bond Fund, Baroda Pioneer Sector Focus Fund, IDFC Retirement Fund, Religare Nifty Exchange Traded Fund, Tata Natural Resources Fund, Canera Robeco Yield Advantage Fund, Benchmark Multi Asset Solutions Fund, PNB Suraksha Fund, IDFC India Consumption Fund, IDFC Infrastructure Fund, Axis Gold ETF, HDFC Cancer Cure Fund, IT BeES, FMCG BeES, Services BeES, Energy BeES, Pharma BeES, and Realty BeES are expected to be launched in the coming months.

GEM GAZE
September 2010

Looking to earn realistic risk-adjusted returns? Hold your equity fund for the long term and stick to a solid portfolio with the GEMs in the diversified equity category as the core. That seems to be the lesson from the 10-year performance of open-end equity funds that have a long track record. 58 of the 360 plus equity funds in India have been in existence for ten years or more. These funds averaged a return of nearly 13% (compounded annually) over the ten-year period, beating the Sensex and Nifty (11%) and easily outpacing the broader BSE 100 (9%).

The five GEMs of September 2009 have held on to their elevated position by virtue of their continued winning streak in September 2010 also.

HDFC Equity Fund Gem
Star studded

One of the mutual fund industry’s sturdiest shops, HDFC Mutual Fund, has historically been a consistent outperformer. Thanks to its focus on value, it has consistently been beating the category average at various time periods. HDFC Equity Fund focuses on investing in quality companies that are reasonably valued and have a growth bias. On a monthly rolling returns basis over the last five years, it has surpassed its benchmark six out of ten times. In 2009, the return of 106% put it way ahead of the category average of multi-cap funds and its benchmark (S&P CNX 500) by 23% and 17%, respectively. The focus on value and not on the direction of price movement resulted in the fund being fully invested in the down markets of 2008-'09. Being fully invested certainly helped when the market picked up in March 2009. The fund's strong point seems to be its ability to wade through periods of market volatility. It has unfailingly contained downsides better than its benchmark during most corrective periods in the recent past. With net assets of Rs 6525.77 crore, the one-year return of HDFC Equity has been 41.82% as against the category average of 27.97%. Finance, energy, and health care form the top three sectors accounting for nearly 50% of the net assets of the scheme. Nearly 60% of the portfolio comprises of large caps with the remaining in mid and small cap stocks. The large corpus has led to it being more diversified. With less than 20 stocks in the portfolio till 2003, the fund manager has increased it to around 60 stocks at present. The top 10 holdings have averaged at around 40% over the past one year.

Magnum Contra Gem
Back on track

What you will find in Magnum Contra is a diversified, multi-cap portfolio with a cautious view on contra bets. Magnum Contra sports net assets of Rs 3679.37 crores. In the past three months, the fund has generated about 25% returns against the Sensex’s 28% and Nifty’s 27%. The one-year return of the fund is 23.81% as against the category average of 29.82%. But its three-year and five-year returns are 10.5% and 22.47% as against the category average of 8.44% and 18.12% respectively. Moreover, the fund’s massive diversification dilutes risk to an extent. It has a portfolio of over 80 stocks and has limited the exposure to a single stock to about 5%. That one-half of the stocks in the portfolio account for less than 1% each of the assets explains the extent of the fund's diversification. The fund’s large-cap bias is also evident, with nearly 63% of its equity holdings comprising large-cap stocks. Close to 50% of the assets are invested in sectors such as energy, financial services and capital goods. The top ten stocks in the portfolio account for 38% of the assets. Given its past performance, the fund is expected to be back on track with the market showing signs of improvement.

ICICI Prudential Dynamic Gem
Defensive Play

ICICI Prudential Dynamic Fund invests across sectors, market capitalisation and in value and growth stocks. The fund's investment strategy of taking higher exposures to equity when the valuations are low or when the stocks are not favoured by the market may reap rich benefits albeit after a lag. However, the fund also picks growth stocks to catch market rallies to ensure returns that are in line with its benchmark during the short-term. The fund has a defensive nature - underweight on domestic consumption, interest rate cyclicals, etc. The fund, over three and five year periods, comfortably outpaced its benchmark S&P CNX Nifty by 5% and 7% respectively. The fund's five year performance places it in the top quartile of the performance chart of diversified funds. When the markets are falling, ICICI Prudential Dynamic is the fund to go with. The fund stood out in 2008 by limiting its fall to just 45% (category average: -54%). Over a one year period ICICI Prudential Dynamic generated an absolute return of 63% and bettered its benchmark by 22%. The fund's portfolio is represented by 37 stocks and 18 sectors. The top ten stocks accounted for close to 55% of the assets invested in equity. The top three preferred sectors were banking, pharma, and software. The fund often prunes its holding in individual stocks when its objects are met. This is evident in its portfolio turnover. Over a five-year period, this conservative fund has a better potential for outperformance than other funds.

DSP BlackRock Equity Fund Gem
Disciplined display

DSP BlackRock Equity Fund, a diversified equity fund with assets under management of Rs 2021.49 crore, is among the few consistent performers on the CRISIL~Composite Performance Ranking (CPR) with CRISIL~CPR 1 rank in 11 out of the last 12 quarters. CPR is a relative performance ranking of mutual fund schemes within a peer group. The fact that DSPBR Equity has ranked consistently in the top 10 of its peer category indicates that the fund has combined superior performance with disciplined portfolio management. The fund has beaten its benchmark, the Nifty, consistently over one-, three- and five- year periods. Over a five-year period, the fund has delivered a compounded annual return of nearly 21% that places it among the top few funds in the diversified category. The advantage of DSPBR Equity is that the fund prefers to stay invested in equities irrespective of the market condition and despite the presence of the mid and small-cap stocks (this segment being more prone to volatility). This demonstrates the fund's conviction in its investment strategy. Even during 2008, with reasonable exposure to mid and small-cap stocks and lesser cash position it withstood the market correction and contained losses. Clearly, stock-picking strategy has held the key. Though the fund is benchmarked against Nifty, one-third of the assets are invested outside the Nifty basket. Its one-year return was 37.52% as against the category average of 29.5%. The top three sectors, finance, energy, and engineering, constituted 40% of the portfolio. Single stock allocation has never crossed 5% barring a few large-caps. Exposure to the top 10 stocks is currently at 26%. From over 80 stocks over a year ago, the number of stocks is 67 at present. The diversification in terms of sectors invested is quite high, with as many as 26 of them in the portfolio.

Birla Sunlife Frontline Equity Fund Gem
Steady frontrunner

A long-term track record of good performance, proven ability to ride out corrections better than most peer funds and benchmark each year in the last five years, and a focused exposure to blue-chip equities makes Birla Sun Life Frontline Equity Fund an apt investment option. The fund's consistent performance not only lends credence to its ability to spot investment themes on time, but also puts in better light its ability to address downside risks. Over a five-year period, the fund has delivered a compounded annual return of about 25%, which places it among the top few funds in the diversified category. Birla Sunlife Frontline Equity Fund has net assets of Rs 2447.06 cr. Its one-year return is 26.99% as against the category average of 28.95%. But its three-year and five-year returns of 13.81% and 24.35% surpass the category average of 8.86% and 18.12% respectively. More than three-fourth of its portfolio is invested in companies with market capitalisation of more than Rs 7,500 crore. The fund’s large-cap intensive portfolio could restrain its participation in secular rallies. The fund, therefore, is best suited for low-risk appetite investors looking for steady returns. While little under 10% is invested in cash and equivalents, the rest is spread out among select mid and small-cap stocks. The top three sectors of finance, energy, and technology constitute almost 50% of the portfolio. The fund diversified from 35 to 60 stocks in one year. Apart from Reliance Industries, Bharti Airtel and Infosys, no stock has accounted for more than 5% in the last two years. And, concentration of the top five stocks has been lowered to around 18%. High returns, low risk and a diversified portfolio make this a worthy fund.

FUND FLAVOUR
September 2010

Evergreen Equity Funds…

Diversified equity mutual fund schemes offer good diversification, sound money management skills, experienced money managers, good investor-friendly practices, advantage of thorough research teams, etc. The important parameters to be considered are: the experience of a strong fund management team, the track record of the fund manager in different market cycles and the methodology and processes followed by the fund house, among others. What matters in long term investing is identifying good companies and not what is “in” or “out” of fashion. Diversified funds are safer and better suited to accomplish this long-term objective compared to sector focused ones. On an average, diversified equity schemes have generated far superior returns than index funds and market indices. They are much better positioned to tackle market risks. This is because the constituents of an index or an index fund are determined by the exchanges to include scrips/companies which have good trading volumes, are highly liquid and have reasonable market share. The constituents of a diversified equity scheme, on the contrary, are determined by the fund manager, with an aim to encash upon the opportunities thrown open by the market from time to time. The fund manager here is at liberty to reduce the weightage of non-performing or volatile sectors / stocks in the portfolio and increase the weightage of the hot and roaring sectors. As such, you will be better off considering diversified equity mutual funds for your equity portfolio within your overall asset allocation, risk profile, and risk appetite. Equity funds that are fully invested with judicious levels in defensive sectors are expected to outperform over the long run, thereby adding more value to your portfolio.

Wading through the waves…

The equity mutual fund universe not just tracked the market triumph in 2009, but actually beat it. September and October 2009 were dull months but mutual funds started looking up in November 2009. As of December 31, 2009, diversified equity funds were up by as much as 84.48%, which is better than the gain logged by Sensex at 81.03%. This may be attributed to the fact that the mid- and small-cap allocations in diversified equity funds helped them race past the Sensex.

January 2010 saw diversified equity funds fall by 4.19%. Seen in conjunction with the category's robust returns for the entire 2009, when it gained by 84.48%, this was surely a disappointing result. The fall spanned the industry - out of a total of 256 funds in this category, only four managed to stay in the green. But they too were positively borderline cases.

In February 2010 diversified equity funds fell by 0.21%. Out of the total funds in this category, 134 managed to stay in the green while all the rest posted negative returns.

Equity diversified funds ended their losing streak of the first two months of 2010 by posting a gain of 6.03% in March 2010. Riding the upsurge in the equity markets in March 2010 (the Sensex and the Nifty gained 6.68% and 6.64% respectively), all mutual fund categories ended the month in the positive (going by their category average results). All the funds in the diversified equity category remained in the green. However, mutual fund investment into equities remained negative in March 2010 registering net outflows of Rs 4082 crore. The outflows had accelerated from Rs 697.20 crore in February 2010.

April 2010 threw up many surprises, which reflected in the performance of both equity as well as some categories of debt funds. Equity funds' exceptional performance was obviously due to the stock market rally that was led by small and mid-cap stocks. The National Stock Exchange's Nifty gained 15% while the Bombay Stock Exchange's Sensex gained slightly higher at 17.46%. This was Sensex's best monthly performance in the last 10 years. Diversified equity funds logged a 14.12% gain in April 2010, capturing 80% of Sensex appreciation. However, out of the total number of diversified equity funds, just 27 managed to beat the BSE Sensex, while 77 funds were able to better S&P CNX Nifty, which is broader than the Sensex. The stock market euphoria was also reflected in the fact that nine diversified equity funds were able to gain in excess of 20%, most of them being mid- and small-cap funds.

Equity fund categories felt the heat of the global cues as their performance slipped in May 2010. Heavy sell-off across the globe was witnessed in reaction to the Euro zone debt worries and liquidity tightening in China. The equity markets also showed less enthusiasm since, March 2010 IIP (Index of Industrial Production) numbers (declared in the month of May 2010), also reported some slow down, which eventually did not appeal to the FIIs. The Index of Industrial Production (IIP) for March 2010 slowed to 13.5% (from 15.1% in February 2010) over the last year's figure in March 2009, on account of fading of overall base effect. However, strong manufacturing growth and sectoral output were positives. Foreign institutional investors, who invested Rs 8,415.9 crore in April 2010, pulled out around Rs 9,975.4 crore from equities in May 2010. Moving in tandem, the equity diversified category of mutual funds plunged 3.59% in May 2010. This marked the end of their winning streak during the preceding two months. Out of 256 diversified funds, only two funds ended the month in the green. All the rest ended the month in the red.

As the equity markets rallied up, in the month of June 2010, equity oriented mutual funds across all segments, gave handsome returns in the range of 5.0% - 15.0%. All equity-oriented funds ended in the positive terrain, as the Indian equity markets rebounded in the month of June 2010. The first quarter of the financial year 2010-11 witnessed volatility at its best as it rendered most of the major market indices with flat returns. The Sensex and the Nifty returned just about 1% and 1.2%, respectively for the three months ended June 30, 2010. On an average, diversified equity schemes returned about 3.76% for the quarter. These are just the average returns as there are certain diversified equity schemes that have returned as high as 10-11% for the quarter.

The diversified equity fund category registered a growth of 4.6% during July 2010. All the 259 diversified funds ended the month in the green.

Stock-specific movement skewed towards the banking sector helped diversified equity funds post a 2.09% increase in August 2010 as compared to a mere 0.7% increase in the case of BSE 100 index.

…etched forever in retail investors’ portfolio?

Equity funds have the lowest rate of survivorship over a five-year period when compared to hybrid or fixed income fund categories, according to Standard & Poor's-Crisil survey report. “S&P Crisil Spiva” performance scorecard presents the performances of actively managed mutual funds in India as compared to benchmark indices (S&P CNX Nifty and S&P CNX 500). The scorecard also shows both equal and asset weighted averages unlike the usual practice of calculating average returns using only equal weighting. Benchmark indices have outperformed a majority of funds in most categories across one-year, three-year and five-year time periods. The S&P CNX Nifty index has outperformed at least 55% of active large cap equity funds across all observed time periods and 70% of large cap funds under performed the S&P CNX Nifty Index over a 5-year period. Large cap and diversified equity funds only have a 74% and 85% of survival over 5-year periods respectively. On the other hand, ELSS funds enjoyed a 100% survivorship rate across all time horizons due to mandatory 3-year commitment for investors to invest in ELSS funds for availing tax benefits. All said and done, among all fund categories, equity funds have the highest concentration of retail investors – the jewel in the crown.