Monday, September 05, 2011

September 2011

Low risk in the long-term…

Diversified equity funds are those funds that spread investments across different sectors such as IT, pharma, banking, oil & gas, real estate, telecom and FMCG. One of the major advantages of this type of funds is that they minimise the risk of over-concentration in one particular sector. At any given point of time, if a part of the portfolio is down these funds ensure that a larger part of the portfolio is up and the investment is performing well. Diversified equity funds are best suited for investors looking for long-term wealth creation.

No-show in the short-term…

With the markets remaining patchy and volatile, the first half of 2011 has turned out to be almost a no-show for equity mutual funds. Only two diversified equity mutual funds have managed to remain in the green during January-June in 2011, the worst six-month performance since the second half of 2008 when the markets nosedived following the global recession. Incidentally, 294 out of the 310-odd diversified equity mutual funds were in the green in January-June 2010 with nearly 50 funds generating double digit returns. Diversified equity funds, the largest category of equity schemes by number and assets, lagged the benchmark return in the latter half of 2010, with funds having higher exposure to mid- and small-cap stocks significantly under performing their large-cap cousins. In all, 93 of the 335-odd equity funds dropped by more than 10% but a majority of them declined at a lower rate than the benchmark indices. Sensex and Nifty slipped 8.1% and 7.9% respectively in 2011 (till June 30). The consistently-high inflation and a series of rate hikes impacted market performance adversely. Moreover, stocks of several big companies have seen downgrades as their performance remained well below expectations. A lot of projects did not take off and inflows from foreign institutional investors also were mostly flat. Domestic institutional investments, which usually pick up towards the end of the fiscal year also remained sluggish.

Gyrations in the year gone by…

As the Indian equity markets oscillated with an upward bias in October 2010, the diversified equity funds following quant models for investing, delivered appealing returns. The equity markets, however, ended the month marginally in the negative terrain, with all equity funds barring banking and mid cap funds ending the month with negative returns.

As the Indian equity markets, shivered due to the economic and political factors in November 2010, most diversified equity funds delivered negative returns.

Contrary to muted FII activity, the domestic equity mutual funds evinced interest in the Indian equity markets as the GDP growth rate data and the IIP number revealed a robust economic outlook. With the Indian equity markets ending the month of December 2010 in the positive terrain, diversified equity funds delivered appealing returns.

In January 2011, most open-ended equity funds felt the impact of the downturn of the Indian equity markets which were conscious about inflation and IIP numbers released, and washed out gains.

In February 2011, most open-ended equity funds felt the pressure as the bears tightened their grip. Diversified equity funds too were not spared despite having a fairly diversified portfolio.

In March 2011, diversified equity funds gave quite enticing returns as the Indian equity markets bounced back.

In April 2011, diversified equity funds led by those in the mid and small cap space gave enticing returns as buying activity was evident in mid and small cap space.

Despite the corrective phase in the Indian equity market in May 2011, most diversified equity funds did perform well. But diversified equity funds across styles and capitalisations (i.e. large caps, mid caps and small caps) on an average were losers.

As far as the performance of the funds in June 2011 are concerned, most diversified equity funds did manage to create wealth for investors, as the Indian equity market surged upwards. 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.

In the diversified equity funds category only those in the mid and small cap domain managed to create wealth for investors in July 2011.

Despite a recovery in the last two trading days of August 2011 that helped in reducing losses, equity mutual funds ended with their worst monthly show since January 2011. Returns from diversified equity funds dipped 8.1% on an average during August 2011. A combination of factors including a slowdown in global growth and the impact of higher input and interest costs on corporate earnings led to the fall. But the overall mood is one of caution because of the global uncertainties. Despite the poor show, a vast number of diversified equity mutual funds and large-cap funds have declined at a much slower pace than key indices. More than 300 out of the 340-odd equity mutual funds, which are not focused on specific sectors, saw lower erosion in their values compared to Sensex and Nifty. While diversified funds and large-cap funds have dropped (net asset value) 16%- 17% so far in 2011, banking funds, which were among the worst performers, lost 20% as concerns about high inflation and interest rates spooked investors. But the recent drop offers a good entry point for investors, especially those with a long term investment horizon. This is a good time to start SIPs.

Global glory galore!

Even as their assets under management dwindle, equity mutual funds have something to cheer about. A study conducted by iFAST Financial has revealed that Indian diversified equity mutual funds are among the top performers globally in the last one year compared to their counterparts in other advanced markets. If one considers the returns given in the last one year as a benchmark, Indian and Indonesian funds clearly dominated the list of 20 top performing equity funds. There are 13 Indian funds in the top chart, followed by 6 from Indonesia and one from Philippines. The Indian funds that made it to the list include DSP Black Rock Small & Mid Cap, Reliance Equity Opportunity (growth), HDFC Mid Cap, UTI Mid Cap growth, ICICI Prudential Emerging STAR, IDFC Small & Mid Cap, Kotak Mid Cap growth, Franklin India Prima and Principal Emerging Bluechip. As per the study, the top performing Indian funds are those that maintained higher exposure to mid cap and small cap stocks. BSE Mid Cap and BSE Small Cap have delivered 40.8% and 58.03% returns respectively over a one-year period, which is the key to the success of diversified mutual funds with high exposure to mid and small caps. Cheerful indeed!

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