The mutual fund sector has been turning its heels and sprouting up with newer and innovative ideas again after a rather long dry spell. While some of these funds caught investor’s fancy, many of them also sank without trace. However, the sector as a whole has had a bounceback as investors once again look to balance out their portfolios and try to pick the most suited funds on the offer.
Rajan Krishnan, CEO, Baroda Pioneer AMC tells FE, “For the retail investor nothing has changed. It continues to give the key benefits as an access to the equity markets. With the constant shifts in the equity markets I still feel this is the best way to invest in the markets whilst taking the least amount of stress, from an investor’s point of view.”
Equity after a rather nightmarish year and a half has done well in the last quarter, and during the first quarter of the financial year, the BSE Sensex jumped 49.29% to close at 14493.84 points, while S&P CNX Nifty spurted by 42.04% to close at 4291.1 points. It was a particularly good quarter for investors in the mid and small cap space. As these indices rose significantly by 71.72% and 76.8% respectively. The markets also witnessed huge buying from FII’s and mutual funds during the quarter. The uptake in FII interest was also a major contributor to the rally. FII’s and Mutual fund invested a net Rs 30,455.7 crore and 3,169.2 crore respectively.
Finding the funds
Not surprisingly, in the last quarter, a majority of the top performing funds were those in the mid cap and small cap space where the high volatility and positive market outlook and sentiment saw these funds rally up, generating some good returns. While those investors who tend to enjoy volatility, high risk and a gamble or two, the funds within this sector offer the perfect opportunities in such times. However, for the faint-hearted, one would suggest having a more conservative approach and probably look at the large cap funds and diversified funds. Kenneth Andrade, head investments, IDFC felt, “Currently, there are a lot more people interested in the large cap sector funds, given the low volatility and steady growth that a majority of these companies provide. These funds invest in companies that are not shaken easily and that is probably a good place for many investors to restart their equity journey from.”
In the mid-term and long-term view so far, it is the infrastructure funds that show promise, as well as all the banking funds, both private and public that have done exceedingly well and given consistent returns. The service sector has still been more consistent in a one year to three year time frame, whilst power and infrastructure are still more a recent spark of interest, with good long-term prospects.
A mutualfundsindia.com quarterly equity review says, “On the sectoral front, it was a particularly excellent month for the realty sector as considerable buying was noticed. The BSE Realty rose by 105.48% in this quarter, followed by BSE Capital Goods (97.92%) and BSE Metal (86.9%), BSE Sensex (49.29%), S&P CNX Nifty (42.04%). Apart from this, the BSE Mid cap rose 71.72% and BSE Small cap by 76.80%. Auto stocks also saw a jump in their share value after major auto companies reported a decent growth in sales figures. The BSE Auto spurted by 48.89%. Despite strong growth in other sectors by more than 25%, the dependable BSE FMCG rose by only 11.12%. The BSE Oil and Gas went up by 33.14%. However, Reliance Industries (RIL) stock fell significantly after the Bombay High court ruled in favour of Reliance Natural Resources Ltd (RNRL).”
Sectoral funds have shown a preference to veer towards infrastructure and there maybe many more funds surrounding it that we could see in the coming few months.
“I think the question about timing the market is not so much about now but is more a case of always. The key for an investor here is the risk tolerance, which he has to either figure out by himself or via the help of a financial advisor. Once that is determined, it is essential to get the asset allocation right. Within the equity component, the specific funds depend on the risk tolerance and the expectation that the investor will have. Sometimes people choose the wrong products to keep in their portfolios without bearing their risk levels in mind and often end up disappointed later on” adds Krishnan.
Fixed income views
“Amid a deluge of liquidity in the banking system, the first quarter of the financial year 2009-10 started out on a buoyant note. In order to provide impetus to credit growth, RBI for the third time in this year instituted rate cuts, which further added to the market buoyancy. At the monetary policy review on April 21, 2009, RBI pruned its key benchmark rates, repo and reverse repo rates by 25 basis points each to 4.75% and 3.25% respectively with immediate effect. However, an unexpected rise in the Government’s borrowing in May and June along with indications of a further rise in government’s borrowing wiped out the gains earned in April. The yield on the 10-year benchmark GOI paper remained unchanged at 7.01% during the quarter. The yield curve remained positively sloped through the quarter,” says an extract from the quarterly debt market report by mutualfundsindia.com, which aptly summarises the situation here.
The fixed income space, which had a fantastic 2008, has had a very mixed outcome this year, with experts unsure about what to expect next in these conditions. The long-term view is particularly hard to predict and most advisors are of the opinion to stick to short-term funds, liquid funds and interval funds.
Krishnan also felt that, “In the fixed income space I feel that the long-term opportunities available are currently very uncertain and therefore I would advice investors to be cautious. They would have to figure out if the 50-100 basis points movement is worth the risk involved. The interest rate movement is unclear and long-term products currently run the risk of things going very wrong for them if they take the wrong call. I feel it is better to stick to short-term funds like short-term liquid funds or short-term income funds.”
While the reactions within this highly popular market space seems unclear about the future, the fact remains that investors are still very happy to stick to the fixed income space. During the quarter, RBI auctioned bonds worth Rs 1,62,000 crore, which amounts to 45% of the entire borrowing for the year 2009-10 and 67.5% of the first half of the year 2009-10. Against these hefty bond supplies, RBI bought back bonds worth a meagre Rs 23,522 crore over the quarter. This inadequate concurrent liquidity infusion was also one of the reasons, which led investors to offload their long positions to meet bond supplies, leading to a rise in bond yields. The government is further expected to raise Rs 96,000 crore in the next quarter and any rise in the government borrowings may have an adverse impact on debt market investor holdings.
And the rest
“With ETF’s, one must understand that the fund is just a tool and the underlining asset class is what’s most important. Some people in the markets do believe that commodities are the way to go and so a certain segment does believe that gold prices will go up. However, people are still not used to buying gold in the paper form and Indian families still feel that selling gold is a major taboo. Sentimental issues surrounding gold are still there and while an investment opportunity may exist, it is not as a surrogate to gold. I think the concern and strategy as far as building their portfolios at this point should be to get their asset allocation right, and to maintain a balanced portfolio at all times. I personally would say, I woud like to have maybe at least 45% in equity and divide the rest accordingly, and constantly rebalance my portfolio as per that. This I feel should be the primary aim of most investors, as not keeping the asset allocation intact is the biggest mistake we all make and the tendency remains that when the markets go up, equity allocations go up as well,” felt Krishnan.
Gold ETF’s that had a stellar time over the downward phase have had mixed fortunes since then. The funds have performed relatively well given the underlying value of gold having risen over the last two years. But as far as the future of this segment goes, one is still not certain and most financial planners still feel, that one need not invest more than 10-20% of their portfolio here.