US credit downgrade: Impact on MFs, gold

With fears of a slowdown looming, a steep fall in world's markets last week and the US being downgraded first the time in seven decades, domestic retail investors have made losses in their most-favoured schemes this year.

Indian investors accessing equities through the mutual fund route have been sitting on negative returns in the country's top-ten equity schemes this year. The year-to-date (YTD) loss is in the range of 8-25 per cent.

However, a positive amid negative factors that should give some cushion to investors is that a majority of the most-favoured equity schemes has performed better than benchmarks and beaten BSE Sensex and CNX Nifty.

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These top-ten mutual fund schemes, in terms of assets under management, make up close to a third of the total equity assets of the fund industry.

India's largest equity fund HDFC Top 200, which has assets under management of Rs 10,507.61 crore as on June 30, has given a negative return of 11.37 per cent so far this year, while the third-largest, Reliance Growth, has fallen short of its benchmark, with a negative return of 14.85 per cent. Similarly, returns in Reliance Regular Savings Equity and Fidelity Equity stand at -13.23 per cent and -10.94 per cent, respectively.

Dwindling fortunes Top 10 equity schemes on the basis of AAUM as on on June 30
Scheme	AAUM (Rs cr) Jun 30, '11	Fund YTD  Return (%)	NAV	Benchmark	Benchmark YTD  Return (%)
HDFC Top 200	10,507.61	-11.37	200.004	BSE 200	-15.01
HDFC Equity	9,220.20	-10.67	266.661	S&P CNX 500	-14.58
Reliance Growth	6,957.75	-14.85	426.429	BSE 100	-14.69
Magnum Taxgain	5,224.14	-13.33	56.57	BSE 100	-14.69
Franklin India Bluechip	3,841.20	-10.29	204.843	BSE Sensex	-15.62
ICICI Prudential Dynamic	3,814.40	-8.42	102.197	S&P CNX Nifty	-15.05
Reliance Diversified Power Sector Retail	3,403.41	-25.64	61.584	India Power Index	-
Reliance Regular Savings Equity	3,332.17	-13.23	28.845	BSE 100	-14.69
UTI Dividend Yield	3,304.26	-8.73	31.27	BSE 100	-14.69
Fidelity Equity	3,302.23	-10.94	33.802	BSE 200	-15.01
YTD and NAV as on 05th August 2011 Open-ended Equity funds have been considered                                                                                   Source: Value Research

Kaushik Dani, equity head at Peerless Mutual Fund, says: "It is mainly on account of the fact that equity markets began the current calendar year with a higher base. The market had discounted corporate earnings and margin of error then was little. However, with weak global cues, coupled with domestic issues of high inflation and monetary tightening, equities underperformed."

Retail investors have already distanced themselves from direct dealing in the stock markets for quite some time now, amid uncertain economic scenario - domestically as well as globally.

"There is global nervousness," says Nandkumar Surti, chief investment officer (CIO) at JP Morgan Asset Management.

"If risk aversion continues, markets are likely to go further down from the current levels," he adds. N Sethuram, chief investment officer of Daiwa Mutual Fund, agrees: "There is uncertainty across the globe. We believe the markets may further slide by 7-8 per cent as talks of a double-dip recession are resurfacing in the western world."

Equity schemes have lost investors' favour, not only because distributors are not willing to sell equity funds but also due to higher risk in the current market scenario.

Industry experts say, when risk premium has squeezed down to as low as 1-2 per cent, investors prefer fixed deposits, where returns are attractive at around 8-10 per cent, over equities.

This is evident from the dwindling number of folios and abysmal inflows in the equity schemes.

In the first quarter of the current financial year, net inflows stood at less than Rs 500 crore.

In June, the figures dropped to as low as Rs 20 crore, against over Rs 1,500 crore in May.

Overall, the equity assets have reduced to 25 per cent of the industry's total assets in June, compared with 29 per cent at the end of March.

Click NEXT to read the impact on gold...

Gold could be a major beneficiary of the US rating downgrade, being the usual investment alternative to the dollar. Any investor having dollar assets, and that includes central banks, would search for an alternative. As in the past, gold would be a safe bet.

Even after the 2008 crisis, gold has been the best performer among all assets class, giving 100 per cent return. Several central banks, led by those of China and India, bought gold in the past one or two years.

The central banks of emerging economies are expected to be the biggest price boosters. Mexico's central bank, for example, bought 93 tonnes of gold in a three-month period.

China, Russia, India, Thailand, Sri Lanka and South Korea have also been stocking on the precious metal, while industrial countries, especially from Europe, have stopped selling their gold reserves.

There are no equally big comparable economies where investment can be shifted as the US.

However, according to Gnanasekar Thiagarajan of Commtrendz Research, "central banks will start looking at gold as an alternate. Incremental reserve investment and diversification decisions could weigh higher in favour of gold." He includes the BRIC (Brazil, Russia, India, China) nations in this.

After the September-October crisis, gold fell marginally in immediate futures and has since more than doubled to $1,663.

It was $712 in November 2008. Not only central banks, investors in general would also be attracted.

"In case of downward macroeconomic sentiment, funds look for alternativee avenues. Despite gold prices moving around the record high, investors will continue to park their funds in this asset class until a new safe haven emerges. People would like to invest their savings in an asset class which has provided better returns and has such potential further. If the US economy loses lustre, gold will move up," said Kumar Dasgupta, partner, PricewaterhouseCoopers.

"In the US, there is no willingness to make the sort of cuts in spending that would be required and policy leaders are quite prepared to let the dollar sink."

Those who look for near-term weakness cited the potential for more selling of gold to meet margin calls and cover losses in other markets, as was reported during a decline from record highs last Thursday, when equities tumbled.

The market participants also cited potential for a technical correction in the market, with buyers perhaps hesitant to keep rushing in at the highs without some sort of pullback.

In the year 2000, according to Bloomberg, the price of gold fell to an average of $272 per ounce. But after the terrorist attacks of September 11, 2001, the trend reversed.

According to the World Gold Council, an independent association of gold producers, the US was hoarding 8,133 tonnes of gold in June, followed by Germany with 3,401 tonnes.

All the world's central banks together have stockpiles weighing 27,300 tonnes. Adding these to the International Monetary Fund's holdings and those of the Bank for International Settlements, the total amount kept in reserve is 30,800 tonnes, about a fifth of the 165,000 tonnes estimated to have been mined since record-keeping began.