Photographs: Rediff Archives Dhanashri Rane, Fundsupermart.co.in
As we enter into the second half of calendar year 2011 here is taking a look ay the winners and losers amongst mutual funds during the first six months of this year.
But before we get to the list of the best and worst mutual funds yet this year a brief discussion on what shaped this outcome is in place. It will not only give you a clear picture of what's happening in the world of Indian equities and mutual funds but give you some direction as to how the rest of the year is likely to progress.
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Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
The best and worst mutual funds of 2011 yet
Economy report
India has turned out to be the worst- performing market in the first half of 2011 (from January to June 2011). The benchmark BSE Sensex returned about -8.34 per cent till June end as the rush for investing into one of the high growth economies of the world witnessed a speed breaker in 2011.
High inflation and interest rate hikes by central banks in the emerging countries have resulted in an outflow of over US$ 8.9 billion from emerging market funds (source: EPFR, 22 June 2011).
The negative performance by Indian equities was also governed by weak macro-economic environment, lack of reforms and profitability concerns of India Inc. Furthermore, India being a large consumer of oil, the surge in global commodity prices added to the inflationary woes. Reserve Bank of India has taken a tough stance to contain inflation by raising interest rates continuously since 2010.
While equities lagged, the bond markets have witnessed tight liquidity and high yields. The depositors and pensioners cheered as the banks raised the fixed deposit rates. In the debt markets, the short-term rates have marched upwards and touched the double-digit return mark. However, the corporate sector did not share the same enthusiasm as the input costs for the industry have gone up, reducing their profit margins.
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The best and worst mutual funds of 2011 yet
Equity funds lag
As the markets have corrected, the performance of the equity funds has been lacklustre for the first half of 2011. The equity fund category has delivered negative absolute return of about -6 per cent to -7 per cent.
Contra fund category has showed no contrarian performance relative to the equity indices with a poor show of -7.76 per cent. Least affected of all fund categories, dividend yield funds have generated -4.58 per cent returns in the past six months.
Global funds have delivered -5.54 per cent but, for a period of one year, global funds have outperformed all other categories with 11.9 per cent returns, mainly due to the relative underperformance of India over other regions and assets.
Amongst sector funds, infrastructure is the worst affected returning a -10.91 per cent followed by banking at -4.52 per cent which has recovered from the dismal trend in the early months of 2011. On the other hand, the defensive sectors of FMCG and Pharma have given positive returns to investors. FMCG funds have given a whopping 11.26 per cent in the last six months, whereas pharma sector funds have managed 0.24 per cent. However, investors should be vigilant while taking an exposure to sector funds because FMCG funds though they have outperformed by a huge margin, the infrastructure funds on the other hand, seem to have lost steam.
Therefore, while the going is good, these funds perform extremely well but, when the sentiment is poor, these funds are affected the most.
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The best and worst mutual funds of 2011 yet
Fixed income rules
As nominal interest rates have gone up sharply in India, primarily to counter inflation arising from a steep increase in the commodity prices and less disposable cash available in the system, returns from short term fixed income funds have also become attractive.
The category average annualised returns from liquid, ultra short term and short-term income funds in the last six months are 6.98 per cent, 7.23 per cent and 6.72 per cent respectively. Thus, the returns from low duration debt funds are above the savings account rate of 4 per cent, an outcome of high yields prevailing in the market on short-term fixed income instruments.
Monthly income plans, a hybrid scheme with 80 to 85 per cent debt component and 10 to 15 per cent equity allocation, have performed fairly with 1.89 per cent. Although MIPs have protected the downside, the upside has been limited owing to poor returns from equities.
Other hybrid category, balanced funds with 60 per cent equity share, have given -1.94 per cent returns in the first half of 2011.
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The best and worst mutual funds of 2011 yet
Mutual fund score card
The performance of the fund categories in the table below is a reflection of risk-return trade-off. Liquid and short-term funds have less risk hence; they are low on return as well. Moreover, investors with an investment-holding period of less than one year should invest into these funds.
Conservative investors or those who are unable to understand stock market fluctuations but have a medium term horizon should opt for MIPs or balanced funds.
Long-term investors should consider equity funds and investors having an aggressive streak can add sector funds into their portfolio although, up to a certain limit. In the long term, equity would outperform other asset classes.
Thus, one needs to have patience while investing into equity funds.
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The best and worst mutual funds of 2011 yet
Normally, sector funds carry a greater impact by the upside or downside in the market as compared to diversified equity class.
Hence, we show the top performing funds within each fund category to avoid the bias of investing into sectors/themes that are current favourites among the market players.
ICICI Prudential FMCG Fund with 13.95 per cent is the best performer fund. Birla Sunlife International Equity Fund, SBI Magnum Pharma and SBI Magnum Emerging Businesses have given a positive and absolute return of 3.62 per cent, 1.17 per cent and 0.14 per cent respectively.
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Bottom performing funds in 2011
If we compare the top and bottom performing funds, and assess the variation in performance, we can notice a huge difference in the return during a six-month period. Reliance Infrastructure Fund and HSBC Midcap Fund have given an absolute negative return of -20.75 per cent and 20.48 per cent respectively.
Due to sharp drop in silver prices in May 2011 and relative underperformance of mining company shares, Birla SunLife -- Global Precious Metal Fund has returned -15.07 per cent.
However, the long-term performance of the funds, particularly for sector funds has been almost equivalent.
In fact, UTI Pharma and Healthcare Fund (26.51 per cent, 23.89 per cent) and Reliance Banking Fund (34.59 per cent, 32.28 per cent) have given impressive return over three and five year horizon.
Thus, investors should evaluate funds based on their medium-term performance and should not panic and sell them because of intermittent volatility. But, for certain fund categories such as mid-cap, the returns have been inconsistent even after 5 years. Thus, investors should re-examine their mutual fund holdings and make an exit call, in case of non-performance of a fund in comparison to the peer group considering a 3-5 year time frame.
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Looking ahead
Clearly, the bears outlasting the bulls have left a vast majority of retail investors wondering if they should take an exposure to equities or wait for further correction to happen. For investors who have already invested, the portfolios are in red.
However, the five-year average performance from each category of funds has managed to beat inflation and superseded FD rates. Despite recent volatility, the long-term investments show decent gains.
Unless macro-economic conditions improve, fixed maturity plans and ultra short term funds for intermediate investment goals should work.
A step-by-step approach through SIP and occasional, lump-sum allocation at market corrections, would help in creating wealth for investors in the long-term.
To avoid concentration risk of investing only in Indian equities, global funds that invest in other major emerging economies can be considered.
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