Monday, September 24, 2012


September 2012

The mutual fund industry has, for the second month in a row, seen an increase in its assets under management. At the end of August 2012, the AUM stood at Rs 7.52 lakh crore, up 3%. At the end of July 2012, the industry AUM was Rs 7.3 lakh crore. Between June and August 2012, the industry AUM has grown by about 10% from Rs 6.88 lakh crore in June 2012 to Rs 7.52 lakh crore in August 2012.
The industry has about 4.6 crore folios of which less than two crore are unique investors. This includes both retail and institutional participants. In the last one year (August 2011-2012), the equity AUM has fallen by 1.5% while that of the income schemes has increased by 9.8%. During the same period, liquid and money market schemes have seen a rise of about 14%. In August 2012, in one of the sharpest declines in the number of equity folios, the industry lost 460,000 folios (including those of equity-linked saving schemes).
SEBI data shows that despite a dip in equity folios and decline in markets, retail investors’ share in mutual funds has seen a rise from 23% in FY11 to 48% in FY12. Unit holding pattern data of mutual funds for 2011-12 shows considerable improvement in the share of retail investors in the net assets of mutual funds. Individual investors accounted for 95% of the total number of investors’ accounts and contributed 48% to total net assets compared to 23% of total net assets a year ago. Corporates constituted 3% of the total number of investor’s accounts, contributing 45% of the total net assets in the industry. Corporates predominantly invest in debt schemes. Debt funds constitute 71% of the total assets in the industry. Equity folios dipped to 3.76 crore in March 2012 from 3.92 crore the previous year. Retail assets have moved from equity to fixed income due to risk aversion. Investors have not made money in equity funds over the last two-three years. A lot of money is chasing debt investments.
SEBI’s report shows that private sector mutual funds hold 66% of folios as compared to public sector AMCs, which hold 34% folios. The private sector mutual funds managed 82.4% of the net assets as against 17.6% of net assets managed by public sector mutual funds. While individual investors held 51.2% of the net assets in public sector mutual funds, their share in private sector mutual funds was 47.4% as on March 30, 2012. SEBI report shows that mutual fund assets constitute 6.6% of GDP, relatively low compared to other emerging market economies.

Piquant Parade

With the SEBI regulations emphasising on higher participation from rural areas, mutual fund houses are further strengthening bank partnerships. In the last month, fund houses have been tying up with banks in a bid to increase their rural reach. SEBI, in August 2012, had issued regulations asking fund houses to ensure 30% of the inflows from beyond the top 15 cities.
SBI Mutual Fund and Ratnakar Bank have entered into an alliance to offer the entire bouquet of SBI Mutual Fund's schemes through the branches of Ratnakar Bank. This tie up will facilitate distribution of various products of SBI Mutual Fund across asset classes such as equity, debt, and gold to customers of Ratnakar Bank. 

Reliance Mutual Fund has entered into a distribution tie-up with Indian Overseas Bank(IOB). As per the agreement, IOB will sell Reliance Mutual Fund products through its 2,689 branches. This agreement would help Reliance expand its customer base, especially in tier II and III cities, leveraging on the wide network of the bank. This would enable the bank to operate as a financial super market and help in strengthening the relationship of the existing and potential customer base, providing an opportunity to cross-sell.

HDFC Mutual Fund, IDBI, Birla, UTI, and Reliance will now be using the Syndicate Bank platform for the distribution of their products. Syndicate Bank, with a network of more than 2,700 branches, is known for its good presence in the tier-II and tier-III cities.

The most recent tie-up announced was that of Peerless Mutual fund with Allahabad Bank.
SEBI is planning to offer its website in as many as 13 Indian languages, besides the existing one in English, to spread awareness among investors and to help resolve their grievances. While a decision to this effect was taken long ago by SEBI's board, along with plans to offer investor help line services in 13 Indian languages along with English, the Securities and Exchange Board of India has now begun the search for an agency to translate its website into local languages. The 13 languages, in which SEBI wants its English language investor website to be translated and dynamically updated into, include Hindi, Assamese, Bengali, Gujarati, Kannada, Kashmiri, Malayalam, Marathi, Oriya, Punjabi, Tamil, Telugu, and Urdu.

ICICI Prudential Mutual Fund, in association with My Financial Advisor, has taken an innovative initiative to spread awareness on the importance of investments and financial literacy through an indoor cricket board game -Financial Premier League (FPL).
Regulatory Rigmarole

The Finance Ministry has decided to allow niche mutual funds into Rajiv Gandhi Equity Savings Scheme, which was announced in the budget to attract first-time investors into equities. Exchange-traded funds and mutual funds listed on an exchange and invested only in BSE 100, CNX 100, and blue chip public sector stocks would be allowed tax rebate under the scheme. The scheme allows 50% tax rebate to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. Investments in the scheme will be locked-in for three years, but investors may be allowed to churn their portfolio after completion of one year.

Existing KYC compliant mutual fund investors who wish to invest in schemes of an AMC where they have not invested so far will have to provide additional details including in-person verification (IPV) by November 30, 2012. SEBI, through its circular dated April 13, 2012 had asked AMCs to update KYC details of new investors by November 30, 2012. Existing retail investors are not required to provide any additional information if they are already KYC compliant. However, if they want to invest in any other scheme of another AMC, they need to provide additional details like father’s/spouse name, marital status, nationality, annual income, and in-person verification (IPV) details. Investors can update this information through a ‘KYC detail change form’ available on AMC’s websites. Non-individual customers have to do their fresh KYC again. They are required to provide their balance sheets for the last two fnancial years, copy of the latest share holding pattern, among other details.

SEBI has released the actual notification that sets in motion the recommendations that its board made in its meeting on August 16, 2012. The actual notification has by and large followed the recommendations albeit with a few significant differences. SEBI is silent on important issues such as charging additional total expense ratio (TER) to the extent of 20 basis points and fungibility of expenses. The incentive system for encouraging AMCs to expand their investor base to beyond the top-tier cities has been made tougher. The new rules are effective October 1, 2012.

Funds can charge an extra expense of 0.30% if 30% of their fresh inflows or 15% of their average AUM, whichever is higher, comes from locations outside the top 15 cities. Additional TER can be charged up to 30 basis points on daily net assets of the scheme if the new inflows from beyond top 15 cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. In case inflows from beyond top 15 cities is less than the higher of (a) or (b) above, additional TER on daily net assets of the scheme shall be charged as follows: Daily net assets X 30 basis points X New inflows from beyond top 15 cities / 365 X Higher of (a) or (b) above. The top 15 cities would be decided on the basis of data compiled by the Association of Mutual Funds in India (AMFI) data for 'AUM by Geography - Consolidated Data for Mutual Fund Industry' as at the end of the previous financial year.

Mutual Funds would need to make complete disclosures in their half yearly report to SEBI regarding the efforts to increase geographical penetration and the details of opening of new branches, especially those beyond top 15 cities.

Service tax can be charged from investors on investment and advisory fees, over and above the maximum permitted expenses. Service tax on any other service will have to be borne by the AMC.

Starting January 1, 2013, all funds shall have a direct plan, which will be meant for investors who do not go through a distributor or other intermediary. This plan will have a lower expense ratio excluding distribution expenses and commissions. It will have a separate NAV. There will be no plans that are based on investment size (institutional, super institutional, retail etc.). In all existing funds, fresh investments will be accepted only in one normal plan and one direct plan.

A new cadre of distributors, such as postal agents, retired government and semi-government officials, teachers and bank officers with a service of at least 10 years, and other similar persons (such as Bank correspondents) may be allowed to sell units of simple and performing mutual fund schemes. These will include diversified funds, FMPs and index funds, which have a three-year track record of beating their benchmark index. According to SEBI, this new cadre of distributors would require a simplified form of NISM certification and AMFI registration.

AMFI should create a unique identity number of the employee/relationship manager/ sales person of the distributor interacting with the investor for the sale of mutual fund products, in addition to the AMFI Registration Number.

SEBI has asked mutual funds to annually set apart at least two percentage points on daily net assets within the maximum limit of TER for investor education and awareness initiatives.

Besides, mutual funds have been asked to make monthly portfolio disclosures for all their schemes "in a user-friendly and downloadable format (preferably in a spreadsheet)" and in the same format as that of half-yearly portfolio disclosures.

Mutual funds may have to disclose certain additional information such as charges and fees as well, subject to compliance with the Advertisement Code.

In order to help enhance the reach of mutual fund products amongst small investors, who may not have PAN/bank accounts, such as farmers, small traders/businessmen/workers, SEBI has allowed cash transactions of up to Rs 20,000 per investor in a mutual fund every year. However, any repayment like redemptions and dividend with respect to such investments would be paid only through banking channel. SEBI has also set certain prudential limits and disclosure norms for portfolio concentration risk in debt-oriented mutual fund schemes. It has asked mutual funds to ensure that total exposure of debt schemes of mutual funds in a particular sector, barring a few exceptions, shall not exceed 30% of the net assets of the scheme.

For transaction charges, distributors shall have the option to either opt in or opt out of levying transaction charge based on type of the product.

Mutual funds would need to make half yearly disclosures of their unaudited financial results, along with additional details like total commission and expenses paid to distributors, distributor-wise gross inflows, net inflows, and average assets under management. In case the data suggests that a distributor has an excessive portfolio turnover ratio, say more than two times the industry average, AMCs shall conduct additional due-diligence of such distributors.

For harmonising the applicability of NAV across schemes, SEBI has said that in respect of purchase of units of mutual fund schemes, the closing NAV of the day on which the funds are available for utilisation shall be applicable for application amount equal to or more than two lakh, irrespective of the time of receipt of such application.

Taking note of retail mutual fund assets accounting for as high as 74% of GDP in the US and 42% in the UK, the Mutual Fund Advisory Committee (MFAC) of SEBI has pitched for a need to undertake various long-term and short-term measures to boost mutual fund investment flow. It has been recommended by MFAC that long-term measures will be required to channelise the retail savings in a major way into investments in mutual fund schemes. SEBI is of the view that further focused deliberations need to be undertaken by the MFAC for this purpose. Consequently, SEBI has proposed that MFAC undertakes study of regulatory provisions prevalent in the international jurisdictions and submit its recommendations by way of a report within a time frame of three-to-four months. MFAC, which comprises of members from the industry and other experts, is mandated to advise SEBI in matters relating to regulation and development of the mutual fund industry, their disclosure requirements, and investor protection measures. Besides, it also advises SEBI on measures that are required to be taken, for change in the legal framework to introduce simplification and transparency in the mutual fund regulations.

Monday, September 17, 2012


September 2012

Fixed Maturity Plans (FMPs) have been an asset gathering tool for many fund houses in volatile times in equity markets. However, they went off radar as financial markets started expecting a cut in key interest rates a few months back. FMPs are back after a lull of almost a month when the Reserve Bank of India in its monetary policy review maintained 'status quo' in the key interest rates on July 30, 2012.

There is a sole hybrid capital protection-oriented NFO amidst the deluge of FMPs in the September 2012 NFO NEST.

Union KBC Capital Protection-oriented Fund – Series 1

Opens: September 3, 2012
Closes: September 17, 2012

Union KBC Capital Protection-oriented Fund - Series 1, a close ended capital protection oriented fund, will have a duration of three years from the date of allotment. The investment objective of the fund is to seek capital protection by investing in fixed income securities maturing on or before the tenure of the fund and seeking capital appreciation by investing in equity and equity related instruments. The fund would allocate 83% to 100% of assets in debt and money market instruments with low to medium risk profile and up to 17% in equity and equity related instruments with low risk profile. Of the investments in debt instruments, up to 5% of assets would be invested in AAA/A1+ rated certificate of deposits, up to 5% in AAA/A1+ rated commercial papers, 95% to 100% in AAA/A1+ rated non-convertible debentures, and 5% in CBLO. By investing a majority of the funds in highly rated debt and money market instruments, the scheme aims to protect the capital at the time of maturity. The remaining proportion of the funds will be invested in equity and equity related instruments, which may generate a positive return on the initial investment and grow the money. This fund is open for investment to individual and non-individual investors and is ideal for investors who do not want to take a major risk on their invested capital but would like exposure to equities. It is also aimed at first time mutual fund investors who have traditionally only invested in fixed income instruments, but would like to participate in the returns offered by the Indian equity markets. CRISIL MIP Blended Fund Index is the Benchmark Index for the fund. Ashish Ranawade and Parijat Agrawal will be the fund managers.

IDBI Balanced Fund, Goldman Sachs Gold Fund of Fund, SBI Gsec Fund, BNP Paribas India Consumption Fund, Reliance Retirement Fund, Franklin Templeton India Allocation Fund, Union KBC Asset Allocation Fund, Reliance Infrastructure Debt Fund, Religare Bank Debt Fund, ICICI Prudential Cash Management Fund, UTI Regular Income Fund, JP Morgan India Focus Fund, Sundaram Dynamic Bond Fund, JP Morgan India Low Duration Fund, JP Morgan India Medium Term Bond Fund, ICICI Prudential Multiple Yield Fund, IDBI Debt Opportunities Fund, and IDBI CD Liquid Fund are expected to be launched in the coming months.

Monday, September 10, 2012


September 2012

The market volatility, notwithstanding, the five GEMs of September 2011 have retained their esteemed status by virtue of their consistent performance and they continue to occupy the coveted  position  in the September 2012 GEMGAZE.

HDFC Equity Fund Gem
Consistent in the constellation

With net assets of Rs 9719 crore, the one-year return of HDFC Equity has been –0.39% as against the category average of 2.37%. It has fared marginally worse (by 2 percentage points) than the category average and has under performed 68% of its large cap category peers. The relative underperformance can be attributed to two key factors. First, despite the downturn in equities, manager Prashant Jain has chosen not to take cash calls in line with his long-held investment philosophy. The fund’s average allocation to cash/current assets (roughly 3%) is lower than the category norm of 8%. Second, the fund’s top holding, State Bank of India, has had a terrible year. The public sector bank’s poor results for the March 2011 quarter hurt the stock price, as did subsequent news on rising non-performing assets. Finance, energy, and technology form the top three sectors accounting for nearly 45% of the net assets of the fund. Nearly 70% of the portfolio comprises of large caps with the remaining in mid and small cap stocks. With less than 20 stocks in the portfolio till 2003, the fund manager increased it to around 60 stocks in 2010. At present, there are only 32 stocks in the portfolio. The top 10 holdings have averaged at around 47% over the past one year. The large corpus has led to it being more diversified. The expense ratio of the fund is 1.78% and the portfolio turnover ratio is 31.26%.

HDFC Equity definitely boasts a long experience having faced both the bullish and the bearish phases in its 16-year-long journey. It is predominantly a large-cap oriented, actively managed, diversified equity fund. The fund has a clear bias towards growth investing given the good economic growth that India is experiencing. However while investing in growth, the fund does not want to overpay the growth and seeks to move out of growing companies when they become very expensive. Over three and five-year periods, the fund delivered 13% and 9%, respectively, and bettered its benchmark CNX 500 by nine and six percentage points. In the past five years the fund unfailingly contained downsides better than its benchmark during most market falls. On a monthly rolling return basis over the last five years, it has surpassed its benchmark seven out of ten times. The fund has not only successfully beaten its benchmark indices and cushioned its fall during the dot com bubble of year 2000-01, but also made a steadfast recovery in the immediately following years of 2002-03, when Prashant Jain started managing the fund. Jain’s enduring association with this fund has ensured stability and consistency in investment style and performance.
Sundaram Midcap Fund Gem
Quality with Integrity under question?

Sundaram Midcap Fund sports net assets of Rs 1977 crores. The one-year return of the fund is 2.51% as against the category average of 2.56%. Its three-year and five-year returns are 9.71% and 8.29% as against the category average of 8.56% and 4.31% respectively. The fund has recorded a compounded annual return of 30.87% since launch in July 2002. Sundaram Select Mid Cap is a dedicated mid-cap fund. This style integrity, which has been maintained since launch, and the track record, places the fund as an appropriate vehicle for defined asset allocation decision by investors. 39% of the assets are invested in sectors such as finance, engineering, and healthcare. The top ten stocks in the portfolio account for 38% of the assets. The fund’s massive diversification with 61 stocks dilutes risk to an extent. The expense ratio of the fund is 1.89% and the portfolio turnover ratio is 48%.

The fund delivered 9.5% and 6.9%, respectively, over a three- and five-year period, outpacing its benchmark by over five percentage points. While this performance is better than broad market returns, over a three-year period, more than half a dozen funds delivered twice the returns of Sundaram Midcap. Over a three-year period, although stock markets remained highly volatile, the category average return of mid-cap funds was eight percentage points higher than the CNX Nifty, demonstrating the ability of mid-cap funds to outperform by a good margin even during volatility. Sundaram Midcap's performance in any ensuing market rally will prove whether it manages to catch up and outperform peers.
ICICI Prudential Dynamic Fund Gem
Deft defence

With net assets of Rs 3,999 crore, the one-year return of ICICI Prudential Dynamic Fund is 8.55% as against the category average of 4.09%. The fund's portfolio is well diversified and is represented by 69 stocks. The top ten stocks accounted for close to 49% of the assets invested in equity. The top three preferred sectors were technology, energy, and finance. The fund often prunes its holding in individual stocks when its objects are met. This is evident from its high portfolio turnover of 138%. The expense ratio is 1.82%.

The fund has a reasonable track record, outperforming its benchmark, the Nifty, over three- and five-year time frames. The fund has delivered returns of about 4%, 12%, and 8% over one-, three- and five-year periods. In each case, ICICI Dynamic’s returns surpassed the category average returns. While the returns have bettered the Nifty over three- and five-year timeframes, they have just matched the benchmark in the past year. One reason could be that the fund was not fully invested in the market, considering the volatility. During the last year, cash holdings have ranged from 7-24%. Besides, the fund’s sector choices could have hurt performance. For example, many funds benefited by increasing exposure to the defensive FMCG sector in the last one year. ICICI Dynamic’s FMCG exposure remained less than 1% throughout this period. Its year-to-date return of about 18% beats the Nifty returns of 15.5% for the same period as increasing equity holdings helped regain returns.
DSP BlackRock Equity Fund Gem
Temporary lull?

DSP Black Rock Equity Fund is a diversified equity fund with assets under management of Rs 2,531 crore. Its one-year return was –0.07% as against the category average of 2.37%. The top three sectors, finance, energy, and technology, constituted 45% of the portfolio. Exposure to the top 10 stocks is currently at 38%. The number of stocks is 73 at present. The expense ratio of the fund is 1.75% and the portfolio turnover ratio is very high at 208%.
DSP Black Rock Equity had a great run for years, but has under performed recently. The numbers are pretty middle-of-the-road when compared with the category average but it has beaten the benchmark, S&P CNX 500. It handled the downturn of 2008 very well and despite the change in market direction catching the fund manager on the wrong foot in 2009, he managed to steady himself and reposition the portfolio to a growth orientation. By upping the equity exposure and reducing allocation to defensives like FMCG and Healthcare, he impressed that year too. In the past two years, the fund’s performance has been more or less average. Over the 5- and 10-year periods, this fund features amongst the top five performers. In its existence of 14 years, it has outperformed its benchmark in 11. In fact, its strong showing through good and bad times makes it a choice as one of the core holdings of the portfolio for an investor.
Birla Sunlife Frontline Equity Fund Gem
Remarkable record

Birla Sunlife Frontline Equity Fund has net assets of Rs 2772 crore. Its one-year return is 6.25% as against the category average of 4.09%. But its three-year and five-year returns of 6.98% and 7.24% surpass the category average of 5.38% and 3.93% respectively. Nearly three-fourth of its portfolio is invested in large cap stocks. The top three sectors of finance, energy, and technology constitute 50% of the portfolio. The fund has 65 stocks in the portfolio. High returns, low risk, and a diversified portfolio are the hallmarks of the fund. The expense ratio of the fund is 1.86% and the portfolio turnover ratio is 94%.

Last year’s performance was not spectacular and this year it finds itself in a very average spot. But, when compared with the benchmark, it had just one annual underperformance (2003) in eight years. The fund surpassed the returns of its benchmark, the BSE 200 Index, over one, three- and five-year timeframes. Its 7.8% return in the last five years places it in the top quartile of large-cap oriented funds, categorised by returns. On a rolling return basis, the fund’s annual return has outperformed its benchmark 94% of the time in the last five years. Hence, this fund best suits investors with a limited appetite for risk and with moderate return expectations. Over one-, three- and five-year time frames, BSL Frontline made returns of 7.3, 6.9, and 7.8%, respectively. 

Monday, September 03, 2012

September 2012

If there is one element that makes a diversified equity fund evergreen in an investor’s portfolio, it is its adaptability, i.e., these schemes hold sway across the board.
The evergreen adaptor…

In 2011, the funds that hold a well-diversified portfolio and follow a defensive strategy outperformed the broader markets and even their peers in the sector and thematic category. In the diversified equity funds segment, the large cap funds category lost around 23%, mid and small cap funds lost over 25%, while those having multi-cap portfolio lost around 24% of their value on an average in 2011. The year was far worse for the thematic funds like infrastructure, power, and banking which on an average lost over 30% to 33% of their value, while those focusing on capital goods sector lost over 40% of their value in 2011. Some defensive sector funds like FMCG bucked the trend and ended in positive 8%, while Pharma funds were better-off and limited their losses to around 10%, whereas I.T. funds were supported by the spur in USD against INR and fell less than 20%. Balanced funds, belonging to the defensive category with a mix of equity and debt, on an average lost around 16% of the value. Even as equity markets were in a negative terrain throughout 2011, a good number of diversified equity mutual fund schemes can be said to have outperformed the markets, in terms of showing good resilience or curtailing their downfall. These include Magnum Emerging Businesses, UTI Opportunities, Canara Robeco Large Cap, and Axis Long Term Equity


In a clean-up exercise, partly prompted by regulatory pressure, mutual fund houses have eliminated one-tenth of the equity schemes in operation in 2011. As many as 33 equity funds were merged with other schemes in 2011, even as fund houses made fewer new fund launches. Fund houses have resorted to merger of narrowly defined sector funds with diversified equity funds, because the latter deliver steadier long-term returns. For instance, Franklin Templeton merged its FMCG and Pharma funds into its successful diversified equity scheme Franklin India Prima Plus in August 2011.

Quick comeback…

After a lacklustre year in 2011, diversified equity funds have made a quick comeback in the first six months of 2012. This is evident from their six-month returns as against the less inspiring one-year returns. While diversified equity funds, on an average, lost 5.5% in the past 12 months, they have gained 4.75% in the last six months.
… in 2012
Those who continued to stay invested recovered some of their losses as the markets grossed over 11% gains in January 2012 to record their best monthly performance since May 2009, according to data from fund tracker Lipper, a Thomson Reuters company. This out-performance can be attributed to fund managers positioning towards high quality mid cap stocks and low-beta (volatility) sectors. Among the top performing funds, one theme is common - their preference for mid cap consumer themes and low leverage stocks. UTI MNC Fund, SBI Magnum Gold Fund, and IDFC Premier Equity fund - all of them have exposure to consumer-oriented quality names.
Diversified funds, the largest category of stock funds in India by number and assets, returned an average of 4.8% in February 2012, according to Lipper. These funds outperformed the benchmark index, which rose 3.25% on robust inflows from foreign institutional investors (FIIs) and hopes of easing monetary policy.

Diversified funds fell 5.65% in May 2012, their worst monthly performance since November 2010 and the third consecutive month of decline, according to data from Lipper. In comparison, the main BSE index fell 6.4%.

Diversified equity funds recorded an average of 6.01% in June 2012, according to the data from fund tracker Lipper. New measures to ease the euro zone crisis and expectations that the Government may review economic reforms helped the benchmark BSE Sensex gain 7.5% in June 2012.

Stay with Diversified Equity Funds to tide over divergence

There is a yawning chasm between returns delivered by the best performing equity fund and the worst performing one. In the past five years, for instance, the top five funds each year outperformed the bottom five by anywhere between 22 and 90 percentage points. In the market rebound of 2009, the top diversified equity fund — Principal Emerging Bluechip — delivered a 147% gain to its investors. The worst performers managed less than 50%, a third of that! But return divergence is quite high in more sober market conditions, too. Take 2011, when the Sensex lost 24% in value. The same year, the top five funds contained their losses to 7% while the five biggest laggards saw their net asset values fall 45%. This is because most active equity funds invest aggressively outside of the Sensex and Nifty baskets in their hunt for that extra return.

A run-down of the return rankings over the past five years clearly shows that both the best and worst performing equity funds each year tend to be thematic funds. For instance, funds focused on MNC stocks have done exceedingly well in 2012, with returns of 14 to 18%. Those betting on infrastructure were predictably the worst performers with most suffering declines. In 2009, roles were reversed. MNC funds were laggards while infrastructure funds delivered the goods. This suggests that if you want to avoid large gaps between the performances of the funds you hold and that of the market as a whole, it is best to stay with diversified equity funds.

Equity funds as a category cannot boast of beating inflation in the last five years. Still, given the poor equity market conditions that prevailed in these years, the performance was not dismal. Diversified equity funds on an average delivered 6.2% annually in the past five years, beating the Nifty returns of 5.5% and BSE 500 returns of 4.1%. A hundred and forty diversified equity funds, excluding sector funds and index funds, were analysed for this purpose. These funds also beat the markets in the last three years. Almost 18% of the funds delivered double-digit returns in the five-year period suggesting that you would still have beaten inflation, had you held well-established funds. But at least 12% of this collection either lost value or delivered returns below 1%.

But how do you separate the wheat from the chaff?

To pick the best funds, go through their capture ratios. The best bets are those, which record a high value during the bull market and a low value in the bearish phase. To truly understand how your fund manager tackles market cycles, you will have to categorise the performance according to the bull and bear periods. This comprehensive research can be achieved by looking at the 'upside capture' and 'downside capture' of these funds.

When you invest in an actively managed mutual fund, you expect the manager to beat the broader market. So, the fund should not only capture the market's returns but also give something extra. This is indicated by the capture ratio, a simple measure that tells you how much of the market's move your fund has experienced. For instance, if during a period, the market moves up by 20% and the fund moves up by 25%, it means that the fund has captured 125% (25% of 20%) of the market's move, resulting in a capture ratio of 1.25. As the market has gone up during this period, it is referred to as the upside capture and it indicates the percentage of the market's gain that has been captured by the fund. Similarly, if the market goes down by 10% and your fund value drops by 8%, the fund would have a downside capture of 80%. This tells you the percentage of the market's fall that was captured by the fund. So, while an upside capture of over 100% indicates that a fund has outperformed the benchmark or category average during periods of positive returns, a downside capture below 100% indicates that a fund has lost less than its benchmark or category average during periods that the market has been in the red.

Morningstar India considered the up and down capture ratios for different categories of equity diversified funds from May 1, 2007 to April 30, 2012, to get a better idea of the abilities of various funds to handle different market climates. For large-cap funds, the index used for calculating the capture ratio is BSE-100 and for small land mid-cap funds, it is CNX Midcap. Based on the data, the funds have been divided into the following categories.
High upside, low downside
When you come across a fund that has the ability to not only deliver higher returns during a bull phase, but also to limit the losses during a downturn, it warrants a closer look. Consider Reliance Regular Savings Fund, a largecap equity fund, which had a high upside capture of 112% and a low downside capture of 96% during the given five-year period. In the mid-cap segment, IDFC Premier Equity has done particularly well, limiting the down capture to 74%, while giving a healthy up capture of 97% over the five-year stretch.
Low upside, low downside
Funds that can withstand downturns also make for good bets for conservative investors over the long term. The UTI MNC Fund, for instance, boasts a low down capture of 50% over the past five years and also a low up capture of 69%, yielding a healthy annualised return of 14.6%. Birla Sun Life Dividend Yield Plus and UTI Dividend Yield are some other funds that have done well on this front.
High upside, high downside
Typically, funds with a high upside are not able to limit their losses when the markets turn bearish. Consider L&T Opportunities, which has an upside capture of 113%. But the fund has an equally high downside capture of 110%. In other words, the fund has clocked big gains in bull markets, but has also suffered painful losses in downturns. Taurus Starshare, L&T Growth, and LIC Nomura MF Equity are some other funds that came a cropper while dealing with a declining market.
Low upside, high downside
This is the worst kind of fund to have in your portfolio. It not only captures very little of the market's gain during a bull run, but falls much more than the market when it is going south. For instance, JM Basic, a mid-cap fund, has had a relatively low up capture of 97% during this period, and has suffered from a very high downside capture of 137% over the same period. Among others, LIC Nomura MF India Vision Fund has shown a low up capture of 90%, while providing a down capture of 113%.
How capture ratio can help you
Investors can consider the upside and downside capture to make a smart choice while buying mutual funds. Theoretically, this can tell you if an investment is more aggressive or defensive in nature, which will help determine whether the investment is the right fit for your risk profile. You should ideally hold funds that consistently beat the benchmark in both bullish and bearish markets. These consistent performers are likely to deliver good long-term results. Investors can go through these ratios while choosing funds on Morningstar's website (, which displays the upside and downside capture ratios over one-, three-, five-, 10-, and 15-year periods.