It was not a particularly easy year for the mutual fund industry. Regulatory changes at a frequency that was hard to keep pace with, fund manager churns, big ticket takeover and the constant uncertainty on the interest rate front that kept debt managers guessing, all caused plenty of anxious moments for the investor community as well.
Yet, focus on performance helped funds garner market-beating returns, thanks to the bounce back in the equity market and the price rally in some debt instruments in 2012.
With an average return of 28 per cent in the equity category and a good 9.6 per cent in debt, year to date in 2012 (up to December 25), mutual funds delivered well. The Sensex returned 24.5 per cent over this period while the CRISIL Composite Bond index rallied 9 per cent.
While the equity performance was a complete turnaround from 2011, when funds fell an average 23 per cent, the debt category saw a marginal improvement over last year (average return of 8.9 per cent in 2011), thanks to a stronger rally in gilt this year.
Banking theme tops list
The rally in a number of private sector banks led to funds with a banking theme topping the equity list in 2012. ICICI Pru Banking and Financial Services, Reliance Banking, UTI Banking and Religare Banking topped the list, delivering 55-70 per cent year-to-date.
Next in the list were mid and small-cap funds. Here the list appeared a bit tricky with less established ones such as HSBC Midcap Equity or Taurus Discovery making it to the top; ahead of more established peers such as IDFC Premier Equity or ICICI Pru Discovery by 10-12 percentage points.
It is to be noted that these toppers fell hard in 2011 and still lag the category average over a three-year period.
In the diversified fund category, while the oft-repeated names – Quantum Long Term Equity, HDFC Top 200, UTI Opportunities, Reliance Equity Opportunities all comfortably beat key indices such as the Sensex and Nifty, the outperformance was not as high as the above mid-cap list. Relatively subdued performance in the large-cap category coupled with the fact that these funds did not suffer too badly in 2011 (and hence did not have a low base) led to the diversified category throwing no surprise on the upside.
In all, about three-fourth of the 370-odd active equity funds we analysed beat key benchmark indices, Sensex and Nifty. But then, they were not so lucky with a broad benchmark such as S&P CNX 500. Only 38 per cent of this universe outperformed the S&P CNX 500’s return of 30.5 per cent. The CNX 500 is heavy on mid-cap stocks.
There were no surprises in the bottom of the list. Funds with the IT theme underperformed as stocks in this space languished in 2012. Funds that invest in international mining stocks, gold equities and energy stocks generated negative returns, in line with the respective sector performance globally.
Debt still shines
If 2011 was a year for short-term funds, 2012 saw gilt funds and income funds that took positions in gilt, emerge as winners. Funds such as Kotak Gilt Investment, L&T Gilt Investment and Reliance Gilt Securities delivered over 12 per cent returns, laden with government bonds that had average maturity between 10 and 20 years. It is noteworthy that the CRISIL 10-year gilt index by itself delivered 9.9 per cent.
A few income funds such as SBI Magnum Income, Reliance Dynamic Bond and Kotak Bond Plan A that had relatively higher exposure to long-dated government securities compared with peers, also delivered double-digit returns. Short-term funds, together with a few gilt funds were mostly the ones at the bottom of the list with 6-7 per cent returns.
In all, 73 per cent of the debt universe beat the CRISIL Composite Bond index return of 9 per cent. Liquid funds continued their joy ride delivering a little over 9 per cent on an average.
Gold glitters less
After couple of years of racy performance, gold funds and gold ETFs settled for an average 11.4 per cent return in 2012. HDFC Gold, ICICI Pru Gold Savings and Quantum Gold Savings topped the list with 12-12.5 per cent returns.
- Mutual fund flows in 2012 suggests that investors have redeemed more this year from equities and money has flown into debt. 2012 can be a good reminder that a hold in equities will work, after a tough year like 2011.
- Consistent funds may not strive to top the charts but provide benchmark and category-beating returns. The topper list is an ever changing list of return chasers. Betting on these funds may prove to be risky and call for active management, especially in the equity category.
- Themes that top the charts keep changing year after year. In equities it was FMCG and international funds in 2011 and in debt it was short-term funds. In 2012 it was banking in equities and gilt in debt. Chasing themes, unless you are an astute investor can be risky. Holding a diversified fund will ensure sufficient participation is such themes.
What the year ahead holds
- On the equity side, most diversified funds have shifted focus to cyclical sectors such as banking and energy from defensive ones such as FMCG and IT. With cyclical sectors typically outperforming in a rally, you may be best placed to capture any such rally by staying with established diversified funds. Shun funds that go too heavy on cash, unless they are mandated to hold them. This is the time to stay invested.
- What do you do if markets do fall? Besides staying invested in your SIPs, index ETFs/funds in Nifty Junior, may be a good bet, if you see a 5-10 per cent market correction. This index tends to bounce back in style. For the less adventurous, going for index funds based on the S&P CNX 500 is also a good idea. This index would provide exposure to stocks that account for over 90 per cent of market capitalization. It made a great comeback in 2012.
- While your exposure in debt will depend on your time horizon, be prepared for sober returns in short-term funds. If you wish to hold for the long term, income funds/dynamic bond funds may help capture some rally when interest rates fall.
- Discontinuation of the Systematic Investment Plan (SIP) of the Designated Schemes of MOMF
- Change in Maximum Subscription Amount of Aditya Birla Sun Life Medium Term Plan
Wealth Conversations – December 2024
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Nice analysis. But I would like to know how the funds have performed vis-a-vis the total return of indices. I think the outperformance may fall from 75 per cent to around 50 per cent.
While I hope active performance will continue to be in favor, the likelihood of funds with higher expense structure beating the TRA indices may reduce considerably going forward.
Santosh, as you may be aware, the Total returns of all indices is not a readily available data on stock exchanges. Also funds themselves do not use this as a benchmark. Hence, while it is a good way to test true performance, it may be unfair to use something other than key benchmarks that funds use. A comparison with what is available – the Nifty TRI keeps the out performance ratio to 74%% as the TRI returns is only 1.5 percentage points more than regular Nifty according to data from NSE (over the same period taken by us in the article). Higher expense structure arises only for new funds and those that stagnate without garnering fresh inflows. Funds that perform have demonstrated their ability to attract inflows thus keeping expenses at bay. – Vidya
Hi Vidya, your analysis was very insightful and informative.
Which is a better option – investment in index ETF or index fund?
Could you pls suggest few names to invest?
Also pls suggest options in Dynamic Bond Funds / Income Funds caegories?
There seems to be general opinion that PSU banks are undervalued. Would it be a good idea to invest in a PSU Bank ETF?
If you do not have a demat platform you can go for index funds. If you are going to actively buy and sell then ETFs would be a better option. The risk with ETFs is that the stock market price could be deviating quite a bit from the underlying nav as a result of market demand supply dynamics. If you wish to simply add an index to your portfolio of mfs then go for index fund. We have HDFC Sensex Index Plus as part of our FundsIndia Select funds list.
Kindly refer to our calls on funds such as Birla Sun Life Dynamic Bond fund/IDFC SSI Medium Term Plan A for your investment choices.
We do not hold a view in theme funds/theme ETFs now. Concerns over rising NPAs led to PSU banks being undervalued. That said, large ones such as SBI hasve already recovered from lower prices and delivered well in the last 6 months.
Rather than investing in large cap or mid-cap I prefer to invest in thematic funds. This investment has its ups and downs. Down is, in the rare case of a sector slowdown, your mutual fund investment will suffer. On the other hand, a sector focused fund will provide better returns despite one or two firms faltering. For example, HUL may suffer losses, which will be shared by other companies in the sector, boosting their share prices and the NAV of the fund.
Hi Arghya, I would request you to have a look at our article on sector funds: https://blog.fundsindia.com/blog/mutual-funds/should-you-have-sector-funds-in-your-portfolio/2301
Unfortunately, a stock like HUL or ITC would receive maximum weight in a FMCG sector fund. For insance SBI FMCG has a huge 42% holding in ITC alone! that is massive and will affect returns if the stk falls. Hence if a key stock falls, the NAV will be hit and not really hedged by other stocks. This is because sector funds tend to take high exposure to individual stocks. Thanks, Vidya