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SURVEY In Debt We Trust The badla brouhaha and weak economic sentiment pushed equity funds into the negative territory last quarter. Deliverance to beleaguered investors came in the form of staid debt funds. A BT-mutualfundsindia.com study
Yet, it may not be the end of the road for either the small investor or the fund manager. Here's why: Just a little under 17 per cent of the industry's total assets is invested in equity (Growth and Equity-Linked Savings Scheme). The rest is safely tucked away in debt funds, whose corpus has been swelling over the past few months.
Therefore, the big news of the April to June quarter was that-like in the previous quarter-debt funds continued their trek north. And it wasn't as if they were dragging their feet; in fact, some debt-oriented funds stunned investors with a 20 per cent per annum. What helped were the rate cuts that began as early as the previous quarter and, not surprisingly, the market yield fell again (that's good for the funds) between April and June. Among debt funds, those that only invested in government securities, or gilts, were the real beneficiaries, largely because they increased their portfolio duration to high levels. For example, Alliance G-Sec Fund increased its maturity to over seven years in May from 15 months in March this year. When the market yield fell, gilt funds with a higher investment duration were able to make the most of the increase in prices of long-dated papers. Regular income funds took time to realign their portfolios and, hence, did not benefit as much. Thanks to the much-dreaded end of badla, equities were hard-pressed to find buyers. The bulls chose to offload their holdings and square off their positions, all of which kept the stockmarkets moving in fits and starts. The near-term outlook looks a bit iffy, too, partly because brokers at the BSE and the NSE are agitating to get the badla back. The net result for the quarter, however, was that returns on equity funds were negative, simply because the BSE Sensex fell by 7.86 per cent. The shift in consumer preference towards debt is borne out by fund mobilisation and redemption figures (See Equity Is Out, Debt Is In). Debt Funds Save The Day Despite the stockmarket volatility, some equity-based schemes managed to make money. The top five funds in the open-end equity category posted positive returns, with the UTI Growth Sector Fund (yeah, they do have some good schemes) topping the list with a 6.27 per cent return. The fund's secret of success? It chose to focus on petroleum stocks.
The next best fund in this category was Alliance Basic Industries (Growth), which benefited from gains made in some old economy stocks. It has investments across multiple sectors, and scrips such as Bharat Heavy Electricals Ltd. (BHEL), Reliance Industries, Grasim, and Larsen & Toubro. With little exposure to the new economy stocks, the downside was kept to a minimum. The worst equity performer was Taurus Discovery Stock that lost as much as 16 per cent in the quarter. In fact, Taurus' high exposure to the information technology (IT) sector has cost it dearly. Two other funds from its family (Taurus Starshare and Taurus Libra Leap) have ended up as the second- and third-worst performers among the top five. Let down by equity funds, investors found some solace in the debt variety. The top performer here was LIC Dhanaraksha 89, which ended the quarter with a 6.81 per cent return over the previous quarter. PNB Debt Fund came second (5.65 per cent), primarily because it has a portfolio of good quality debt and investments in gilts, with maturity ranging between three and seven years as on June 30, 2001. Again unlike equity funds, none of the debt funds reported negative earnings. The average performance of all debt schemes without any exposure to equity was a not-so-bad 3.5 per cent. Among the Liquid and Money Market Funds, Chola Liquid was the top performer for the quarter. The fund has invested 80 per cent of its funds in money market instruments, and the rest in call money. UTI Money Market, which came a close second, also has a sizeable exposure to GoI papers and money market instruments. Is there a lesson to be learnt somewhere here? Sure. Investors should stick to debt funds, at least for some time to come. The Twist In The Tale Delighted as investors were with the performance of debt funds, there was a bonus thrown in the act. Gilt Funds which traditionally have lagged behind income funds, since the yield on GoI papers is lower because of zero risk-wowed investors with annualised returns of more than 20 per cent. What did the trick? Like we mentioned earlier, the cuts in interest rates and the increase in the average investment duration of the portfolios.
On an average, gilt funds returned 5.03 per cent, with the lowest being 2.3 per cent of KM K Gilt Serial 2001. The chart buster with a 7.97 per cent gain was Kotak Mahindra Gilt Fund (Serial) 2013. And the reason, you guessed it, is that it has a long duration. In fact, capitalising on long duration has been the pet trick of the fund managers in this category, with the result that even the worst performer in this segment generated better returns than most funds of other categories. Another surprise was the performance of open-end balanced funds. JM Balanced Fund led the pack with a 33 per cent reward to its investors, followed by Canpremium (RO) (15 per cent). JM Balanced, which has exposure to both old economy stocks and debt instruments, has probably benefited from its increasing tilt towards debt. In fact, its top five holdings are debt instruments. Even its equity holdings are spread across old economy stocks such as Tata Steel and Reliance Petroleum, which are neither as volatile as it stocks nor fundamentally weak. Such a diversification shows prudence on part of the fund manager (see Open-End Balanced Funds).
If you want an idea of what bad equity picks can do a balance fund, just take a look at KP Vista and LIC Dhanvidya. They are the category's top losers because the erosion in the value of their equity holdings has more than negated the substantial gains made in debt. 1 2 |
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If
it was a big bang that the mutual funds industry had wanted to end the
first quarter with, then it got one with a vengeance. The Unit Trust of
India's US 64 dropped like a tonne of bricks on unsuspecting investors,
jolting market confidence and bringing the entire mutual funds industry
under a cloud.