Indian Mutual Funds: Rankers & Failures

It is said that in the equity markets higher the risk, higher are the returns. However, being volatile in nature, not everyone is comfortable with taking the kind of risk involved in investing in equities. The primary reason for this is the lack of expertise in taking equity investment calls.

For such investors, mutual funds are the right instruments to take exposure to the equity markets. There are many advantages of taking exposure through the MF route. First and foremost is that your investments are in the expert hands of highly qualified and professional fund managers who have good experience in the field. Secondly, individual investors may not be able to diversify their portfolios with the miniscule amounts they can invest. Thirdly, fund managers have direct access to the managements of companies they invest in, which is hardly possible for individual investors. Apart from these factors, the MF industry is highly regulated, which provides solace to investors. For those who cannot follow the equity markets vigilantly and wish to take exposure in the equity markets, MFs are a prudent option.

The types of mutual funds include debt funds and equity funds. Equity funds have subsets like diversified funds, sector funds and exchange traded funds (ETFs). Though MF investments are made with a long-term horizon, there are many investors who wish to take a short-term view on these. Another factor to take into consideration is that the equity as well as bonds markets have remained highly volatile over the past one year. Hence, posting a strong performance in the past one year is a highly creditable feat. 

Ahead in this story, we have mapped the performance of mutual funds over the past one year to come out with a list of the top performing funds in the four subsets, viz. Equity Diversified Funds, Sector Funds, ETFs and Debt Funds.

Equity Diversified Scheme

• Equity diversified schemes provide the dual benefit of providing exposure to equities, along with risk management by expert professionals handling the portfolio. 

Equity Diversified Scheme, by its very name, suggests investment in equities. This typically tends to be a high-risk proposition. But going by the logic of higher risks aligning with higher returns, equity diversified schemes are a good bet. In fact, these schemes come with the dual benefit of providing exposure to equities, with the risk mitigated by expert professionals handling the MF portfolio.

The appetite for equity diversified schemes is also visible from the fact that there are totally 224 such schemes offered by different Asset Management Companies (AMCs). The main factor behind their popularity is the kind of returns some of the schemes have provided. To quantify this, there are 18 schemes that have generated returns of more than 20 per cent annually since their inception. This is much ahead of the nearly 16 per cent CAGR that the Sensex has provided since its inception. Apart from that, there are around 92 schemes that have provided more than 10 per cent (but less than 20 per cent) returns. This is averaging around 200 basis points higher than what the risk-free returns are. While these figures may look miniscule on a one-year basis, it makes a lot of difference in the long term. If we take a horizon of say 10 years, Rs 100 invested in 2003 would have grown to Rs 620 in 2013. This is a six-fold return, which even the Sensex has not provided in that duration. This is what we call wealth creation!

However, this does not mean that all schemes would provide these sort of returns. Certain funds like JM Core 11 Fund, Baroda Pioneer PSU Equity Fund and Reliance Equity Opportunities Fund have depreciated by more than 10 per cent annually. This clearly indicates that investors need to be selective and should opt for schemes according to their investment objectives.

Here, we have provided a list of the top five performers in the equity diversified segment and have also tried to find out the factors behind their superlative performance. To keep the selection parameters clear and simple, we have only considered the equity diversified growth schemes and ranked them on the basis of the change in NAV on a one-year basis (as on September 20, 2013).

In the lead is the ‘ICICI Prudential Exports and Other Services Fund’, with an appreciation of 31.16 per cent. The name of the scheme itself suggests the reason behind its better performance. It aims to invest predominantly in equity or equity-related securities of the companies belonging to the service industry (especially exports). With the INR depreciating significantly in the past one year, export-oriented companies have performed well on the bourses. With its top five holdings including Dr Reddy’s Labs, Infosys, Tech Mahindra, Sun Pharmaceuticals and Lupin, no wonder the fund has managed to put in a strong performance.

Second on the list is Axis Equity Fund. The scheme aims to generate regular long-term capital growth from a diversified and actively managed portfolio of equity and equity-related securities. Invested in strong large-cap and consistent companies like ITC, Infosys, HDFC Bank, TCS and HDFC, the scheme has managed to secure its position at second slot.

Third in line is Religare Invesco Equity Fund, which aims to generate long-term capital growth by investing in equity instrument of companies across market capitalisations. In order to ensure sufficient diversification, the scheme invests in companies from across not less than five and not more than 10 sectors. Exposure to the IT, Auto and Telecom sectors has helped the fund to generate more than 14 per cent returns in the past one year.

One surprise entry is Tata Ethical Fund Plan A. This fund aims to provide medium-to-long term capital gains by investing in Sharia-compliant equity instruments of well-researched value and growth-oriented companies. The exposure to large-cap counters has been the primary reason for its superior performance.

Franklin India High Growth Companies Fund comes in at fifth place. This fund seeks to achieve capital appreciation through investments in Indian companies with high growth rates or potential. It focuses on companies offering the best trade-off between growth, risk and valuation. With its mix of the top-down and bottom-up approach, the scheme has managed to outperform the broader market.

While these are the funds that have managed to put in a better show, there are some failures too. Our readers would be surprised with the bigger names like Reliance and HDFC not making the cut. The DSP BlackRock Natural Resources & New Energy Fund has in fact destroyed wealth. This fund invests in companies whose predominant economic activity is in the discovery, development, production or distribution of natural resources, viz. energy, mining, etc. With commodity prices declining and uncertainty on the gas pricing front, the scheme failed to perform. Similar has been the story of Sundaram CAPEX Opportunities Fund, which invests in capital goods companies. The halted capex cycle in India has robbed the scheme of its sheen. With the Mid-Cap index underperforming the broader market, even the HSBC Mid-Cap fund saw a decline on the NAV front.

Note that not all these schemes were underperformers since inception, and they have generated returns for investors in the past. It is only in the short term that their performance has been impacted. In the long run, the scenario changes and so does the performance. So, it makes sense to have a long term horizon while investing in mutual funds. If you plan on investing for the short term, playing along the trend will help.
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Sector Funds: The Fashion Chasers

• Despite the criticism they receive, investing in the right kind of sector funds can earn you sizeable gains provided you sense the direction of the winds early on in the economic cycle.

Chasing fads is a way of life for many. Being there and doing that has always been the “in thing”, especially with the younger generations of the 21st century. But did you know that there is one rare quarter where this characteristic is a quintessential – mutual funds. Surprised? Do not be. Here is what we mean.

Have you heard of sector funds? If you have been a regular MF investor, you surely would have heard of them. Sector funds are specialised fund schemes launched by mutual fund houses with the intent of investing only in a specific sector.

So, how are these any different from regular schemes, and how does one benefit from investing in sector funds? Well, as you know, at various points of the economic cycle, different sectors get opportunities that are disproportionately higher than what other sectors get at that time. While certain sectors may be in demand at times for the growth opportunity that they offer, others fall out of demand because of a diametrically opposite view.

It is to benefit from these cycles that funds houses launch sector-specific schemes. These schemes have a mandate invest their corpus in stocks belonging only to those specific sectors to which they are dedicated, and nowhere else. Investors wishing to take exposure to particular sectors, typically to ride a wave, often invest in these types of funds.

As mentioned earlier, these funds do well only when that particular sector is doing well and the stocks are in demand. So what has been the performance of these sectoral funds over the past one year? Let’s take a look.

There are total of 49 sector funds on offer to investors today. The range of sectors that you can take exposure to via these funds is quite wide. Take your pick from sectors including Energy, Power, Infrastructure, Banking, Pharma, FMCG, Infotech and Services to invest in any of these 49 funds. The best way to play sector funds is to tap correctly into the fancy for a particular sector.

In volatile markets like the current one, defensive stocks are the safest bets. Obviously the sectors to play on would be the defensive ones, the best example of which are the pharma stocks. If you look at the performance of sector funds over the past one year, you would see that two out of the top five best performing sector funds have been from this sector.

The SBI Pharma Fund has returned a healthy 14.48 per cent over the past one year between September 20, 2013 and September 20, 2012, while the UTI Pharma & Healthcare Fund was up 12.40 per cent over the same period. The other three among the top five include Franklin Infotech Fund (up 20.30 per cent), Birla Sun Life New Millenium Fund (up 6.32 per cent) and ICICI Prudential FMCG Fund (up 18.58 per cent).

One look at the top 10 of this segment will tell you precisely how to play the sector fund game. Technology stocks have done extremely well over the past couple of months, thanks to the roaring dollar. The rupee-dollar equation is the best measure of how technology companies are likely to fare going forward. The markets have obviously taken note of this, and the stocks have started moving up. This is what is keeping the technology sector funds in high spirits.

Now, let’s take a look at the losers list. All of the funds in the bottom 10 come from a single sector – infrastructure. Delays in project execution, the tight liquidity situation, an uncertain political environment and many more reasons have seen this sector underperform in a big way over the past year. The impact of this is obviously being felt by the funds that had been devised to ride the upside of this sector.

Does this in any way mean that investing in the depressed funds is of no use at all? Well, tides change, especially so in the case of the markets. The moment that happens, these other sector funds are sure to find favour again.
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Fixed Income Fund Schemes

• Volatile equity markets and a difficult macro-economic situation make fixed income funds an attractive proposition for investors due to the assurance they offer as far as the returns go.

There are various asset classes that are available for investors in present times. Of these, mutual funds are considered to be among the preferred routes for investor. Mutual fund investments are divided into two broader parts, viz. equity and fixed income, with the latter in focus in recent times.

There are various reasons that have made fixed income funds popular. The current macro-economic scenario is primary among these. The other reason is the assured returns that they provide. This is one of the main factors that investors look to in difficult times. Also, when the interest rates are moving up, parking your funds in the debt instruments keeps you insulated from the volatility witnessed in equity markets.

Alok Singh, CIO – Fixed Income, BOI AXA Investment Managers provides perspective on whether this is an opportune time to invest in the debt markets. He says that at this juncture, “Short-term bonds attract a lot of value. The yield curve is inverted right now. Once it becomes flat, there is no point in taking positions in long duration risks. A short duration would give you enough accrual commensurate to the risk you are taking. With fixed income, you can stay invested in the short-term part of the curve depending on the short-term incomes”.

As per the recent monetary policy by the central bank, it will be injecting Rs 1.5 lakh crore into the system on a daily basis through the liquidity adjustment facility (LAF), the export credit refinance (ECR) facility and the marginal standing facility (MSF). In the mid-quarter monetary policy review, the MSF rate was reduced to 9.5 per cent from the earlier 10.25 per cent. This move was intended to bring immediate relief to banks in terms of their cost of funds. Following this, the bond yields were expected to cool down. Instead, they have been rising. The RBI has attributed the rise in yields to uncertainty around the government’s borrowing programme for the second half of this fiscal.

That was as far as the broader perspective goes. Now, let us take a look at how the funds in the debt market segment have performed over the last one year. The list is topped by ICICI Prudential Multiple Yield Fund Series 2 Plan F, which has provided a return of 19.03 per cent. This is almost 351 basis points higher than the returns provided by the fund since its inception. At present, the fund has invested 77.66 per cent of its portfolio in debt instruments. The top five holdings make up 77.37 per cent of the portfolio. The Assets Under Management of the fund scheme stands at Rs 103 crore as of June 2013.

In second place, we have the Edelweiss Monthly Income Plan. With a corpus of Rs 46 lakh, the scheme has provided a return of 15.66 per cent in the last one year compared to a return of 8.84 per cent generated since the inception of the fund. 

Featuring third in our list is the DWS Hybrid FTF Fund, which has yielded a return of 11.37 per cent. This is the only fund in the top five whose one-year return is much lower as compared to the returns it has provided since inception. Its Assets Under Management stand at Rs 118 crore and the expense ratio is at 2.49 per cent.

The other two funds that are in the top five of our list are Tata Dynamic Bond Fund - Plan A and Morgan Stanley Active Bond Fund. Tata Dynamic Bond Fund has provided a return of 11.20 per cent, 511 basis points higher than the returns provided by the scheme since inception. Morgan Stanley Active Bond Fund has been able to generate a return of 11.01 per cent in the last one year. The fund has generated a return of 5.46 per cent since inception.

What should investors do at this point? Ganti Murthy, Head- Fixed Income, IDBI Asset  Management opines, “For investors in debt markets, we suggest investments in short-term funds, which offer a better risk-reward trade-off given the current risk scenario.”
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Exchange-Traded Funds

• ETFs are a good investment choice for those who wish to replicate the returns of the broader market or a specific index or commodity in a hassle-free manner.

The last year has proven to be a rather volatile yet rewarding one on D-Street. In spite of meeting bumps on the way, many investors managed to earn handsomely due to the stellar performance of certain corners of the markets. Here, we take a look at the performance of select exchange traded funds (ETFs) on the Indian exchanges.

An ETF is like a mutual fund that tracks an index, a commodity or a basket of assets such as an index fund, but trades as a stock on an exchange. ETFs change their prices throughout the trading session as they are bought and sold on exchanges. When investors buy shares of an ETF, they are buying shares of a portfolio that tracks the yield and return of its native index. The major difference between ETFs and index funds is that ETFs don't try to outperform their native index, but simply to replicate its performance. Similarly, ETFs don't try to beat the market, rather they try to be the market.

Here are the top five out of the 33 ETFs traded over Indian exchanges over the last one year. In this period, the American and Singaporean equity markets outperformed the domestic markets, which yielded only 10.43 per cent (Sensex returns).

Goldman Sachs Hang Seng Exchange Traded Scheme (GS Hang Seng BeES) tops our list of best performing ETFs over the last year. The investment objective of this ETF is to provide returns that closely correspond to the total returns of securities as represented by Hang Seng Index of Hang Seng Data Services by investing in securities in the same proportion as in the index. The top three sectors in this ETF are Financials (44.96 per cent), Energy (10.38 per cent) and Properties & Construction (10.07 per cent). Its Assets Under Management stand at Rs 11.85 crore. Over past one year, it has given 33.78 per cent returns to investors despite having the highest expense ratio of 1.03 per cent on an annualised basis among the five best performing ETFs.

Motilal Oswal MOSt Shares NASDAQ-100 ETF (MOSt Shares NASDAQ 100) is next in order of performance. This ETF seeks investment returns that correspond generally to the performance of the NASDAQ-100 Index. Interestingly, at Rs 65.58 crore, the Assets Under Management of this ETF are the highest among those of the five top performing ETFs. The top three sectors represented in this ETF are Software & Services (24.70 per cent), Technology Hardware & Equipment (22.21 per cent) and Pharmaceuticals & Biotechnology (9.03 per cent). Over the past one year, this ETF has given 29.78 per cent returns to its investors despite having an expense ratio of one per cent per annum.

In third place is Goldman Sachs CNX Nifty Shariah Index Exchange (GS Shariah BeES), whose investment objective is to provide returns that closely correspond to the total returns of securities as represented by the CNX Nifty Shariah Index. This is achieved by investing in securities that are constituents of the CNX Nifty Shariah Index in the same proportion as in the index. However, note that GS Shariah BeES is not a Shariah-compliant fund. The major sectoral contituents of this ETFs are Petroleum Products (24.88 per cent), Software (23.28 per cent) and Pharmaceuticals (12.26 per cent). The ETF has yielded 15 per cent returns over the last one year, but the ETF's Assets Under Management are just Rs 0.70 crore, the least among those of the five top performer ETFs. The expense ratio of this ETF is 0.90 per cent on an annualised basis.

The Kotak Sensex ETF tracks the BSE Sensex, and the fund manager would invest predominantly in stocks forming part of the underlying index in the same ratio. This ETF appreciated by 11.89 per cent against the Sensex returns of 10.43 per cent over the last one year. The Assets Under Management of this ETF stand at Rs 5.98 crore, and it has an expense ratio of 0.50 per cent. The top three sectors are Finance (22.68 per cent), IT (19.31 per cent) and FMCG (15.05 per cent).

The SENSEX Prudential ICICI Exchange Traded Fund (ICICI Prudential SPICE Fund) is an open-ended ETF and offers a passive choice to investors who prefer that their portfolio closely maps the market index, the BSE Sensex. This fund seeks to replicate the BSE Sensex by buying the same 30 stocks in the same proportion as in the index. The fund is therefore not actively managed, but passively replicates the index as its objective is to closely track the index. The top three industries in this ETF are Software (18.25 per cent), Banks (14.75 per cent) and FMCG (14.20 per cent), and it has an expense ratio of 0.38 per cent. It has returned 11.79 per cent over the past one year and the Assets Under Management under this ETF are Rs 0.94 crore.

As for the worst performing ETFs over the past one year, these are mostly those that were tracking the Indian banking index and gold returns. Over the last one year, the CNX Bank Index is down by 7.93 per cent and gold prices are down by almost 12 per cent. Corresponding with this, the five worst performing ETFs are Kotak PSU Bank ETF (-24.62 per cent), GS PSU Bank BeES (-24.49 per cent), MOSt Shares Gold (-7.73 per cent), IDBI Gold ETF (-7.47 per cent) and HDFC Gold ETF (-7.44 per cent).

Banking stocks are still beaten down due to the negative sentiment and concerns over increasing NPAs, increasing interest rates and the tightening liquidity position. However, these concerns are temporary and investors can look at the current distressed valuations as an investment opportunity in the banking sector over a longer period (more than five years). As regards gold, it can be a constituent of your overall portfolio with limited weightage, considering that gold investments should be looked at from a longer term perspective.