Volatile mkt eats into star ratings of MF high fliers

The volatile equity market has taken its toll on the star ratings of quite a few prominent equity schemes this year, indicating that these schemes haven?t been able to keep up their performance in an increasingly uncertain environment. Three-year star ratings of 51, or nearly 20%, of the 262 equity schemes have been downgraded in the past one year ended August 2013, data collated from Morningstar India show. Of this, 14 schemes have been downgraded by more than 2 stars.

Morningstar India rates schemes from one to five stars depending on the risk-adjusted returns for a particular period.

?The downgrades have been primarily because of the underperformance. Schemes which have been overweight on cyclicals such as infra and interest rate sensitives have underperformed,? said Dhruva Chatterji, senior research consultant, Morningstar India. ?On the other hand, schemes that have been overweight on defensives such as FMCG, pharma and even technology have managed to weather the storm this year.?

Five HDFC funds ? HDFC TaxSaver Gr, HDFC Capital Builder Gr, HDFC Equity Gr, HDFC Focused Large-Cap Gr and HDFC Growth Gr ? feature among the schemes that have been downgraded by two stars. Three DSP BlackRock schemes ? DSP BlackRock Equity Gr, DSP BlackRock Micro Cap Gr and DSP BlackRock Small & Midcap Gr ? have also lost two stars. All except one of the fourteen schemes that have been downgraded by two stars have underperformed the benchmark indices in the past one year. All of them, without exception, have seen their AUM decline significantly over the past year. Together, the AUM of these 14 schemes has declined about R3,500 crore during the period.

Despite the underperformance, experts believe investors need to look at the long-term track record of these funds along with their recent performance before forming an opinion.

?A recent underperformance does not always mean that the underperformance will continue. For instance, most of the HDFC funds in this list have outfperformed over the long term,? said Chatterji. Schemes such as HDFC Capital Builder Gr, HDFC Equity Gr and HDFC TaxSaver have given annualised returns of over 20% over a 10-year period.

Interestingly, several index funds have seen their star ratings improve over the past year. ?That?s because Nifty and Sensex have not fallen as much over the past year, and many diversified equity funds have underperformed the indexes, as the markets have been quite polarised and the broader markets have not fared well,? said Chatterji.