FUND TRENDS OF THE QUARTER

Iffy Equities: With stockmarkets worldwide in a turmoil, equity funds took a beating. Blame it on PSU stocks. Darling Debt: Again, funds biased towards debt saved the day for investors. Bless fixed income. Glittering Gilt: Long-term paper continued to rule the roost with impressive returns. Gilt sceptics, begone. Two To Tango: M&As set the tone for greater consolidation, if not better returns, in the industry. Right Mix: Investors who balanced risk with returns were the winners this quarter too.

Eventful. That's what the July-September quarter was, not just for the mutual fund industry but for the economy-Indian and global- as a whole. Unfortunately, most of those events were nothing fund managers would consider worth writing home about. The mismanagement of the Unit Trust of India (UTI) continued to make waves, and the woes of the beleaguered trust mercifully culminated in the proposal by the government to split it into two. The private sector funds, in contrast, decided August was a good time to come together, with Franklin Templeton Investments gobbling up Pioneer ITI, thereby emerging the second largest mutual fund in the country. Clearly, a period of much-needed consolidation has begun, with Sun F&C too getting into the act by taking over Jardine Fleming's schemes.

The positive effects of that consolidation are not likely to be reflected in a hurry in the performance of Indian mutual funds. For a shorter term fillip, the disinvestment bandwagon has to begin rolling once again. And if the Prime Minister's assertion last fortnight that the disinvestment programme will continue full steam ahead is taken seriously, most funds could make up for the last quarter's beating in the current three-month period.

To be sure, almost every other equity-based fund has substantial exposures to public sector units, HPCL and BPCL in the main. The delay in disinvestment had a ripple effect on the markets, what with Standard & Poor's lowering the ratings on India's currency-denominated and long-term rupee debt to "junk". Some pundits may argue against the logic of this downgrade, but coming in the wake of Moody's forecast of gloom early in the year, there's little doubt that apprehension about the lack of progress in fiscal reforms is mounting.

Small wonder then that the markets are headed southward, with the Sensex dipping close to 8 per cent and Nifty close to 9 per cent last quarter. Globally too, the skies are overcast with the Nasdaq down almost 20 per cent and the Dow close to 18 per cent last quarter. Closer home, the Hang Seng too was 14 per cent off its previous quarter. Against that backdrop you need to be an avid believer to expect miracles, which of course weren't to be seen, with the performance of equity schemes slipping by 9 per cent on an average in the July-September period.

The Risk-Return Toppers

Our study attempts to rank the various schemes on the basis of risk-adjusted returns, even as we highlight the factors contributing to the success of the toppers. Whilst on the one hand we looked at sheer returns, we also took into account the risk profile of the scheme, since performance is ultimately dictated by both delivery of returns and management of risk.

Simply put, what this means is that the higher the risk a mutual fund takes, the higher should be the returns it posts.

If you use that as the yardstick, and also bring into play the consistency factor, then Zurich India Taxsaver seems to have done a reasonably decent job of it (See The Equity Fund Rankings). The fund not just ranks second on the average returns posted but has also managed to be at the top of the risk-adjusted rankings. The only blot on this fund is that the volatility that comes along with it, manifested clearly in its "Very High" risk categorisation. Almost a fifth of the Taxsaver's holdings are in the psu petro stocks.

Close on the heels of Zurich Taxsaver are two schemes from the Unit Trust of India (UTI). After all the brickbats, this must surely come as some consolation for the country's number one mutual fund. The performance of the schemes is noteworthy, but too is the risk taken by the schemes, which is towards the upper end of the spectrum.

The balanced funds category has not seen too many surprises-which is no big surprise really, with funds skewed more towards debt naturally performing better than those with a penchant for equity. The top two, Templeton India Pension Plan (formerly Pioneer ITI Pension Plan) and Canpremium, had exposures of over 50 per cent and close to 60 per cent respectively in debt and the money markets (See The Balanced Fund Rankings). The returns may not be flashy, but then the risk too is fairly low with these schemes.

Moving on to the debt funds, Birla Income Plus has emerged top dog in the last quarter, managing risk most effectively, although its returns aren't the best (See The Debt Fund Rankings). Although it ranks No. 4 on the basis of average returns, what propels Birla Income to the top is prudent risk management, thanks largely to the fund's substantial exposure to government securities and good quality corporate debt.

In fact what differentiates these debt (or income) funds is their risk-managing abilities, as the returns are pretty much uniform across the spectrum. "We expect returns to be good going forward, as interest rates are soft, and we anticipate a continuation of the downward movement at least for the rest of the year," points out Sandesh Kirkire, Debt Fund Manager, Kotak Mahindra Mutual Fund.

In the same vein, the gilt funds too have continued with their excellent showing in the previous couple of quarters. The notable performances in the past have been from the funds with high residual maturities that were able to perform because of a fairly consistent fall in the market yield. In this quarter, those funds that had less risk attached to them emerged winners. DSP Merrill Lynch G Sec Fund Plan B is a short-term gilt fund whose inherent low risk has proven to be a bit of an advantage (See The Gilt Fund Rankings).

No fancy returns, but stability assured-that's a liquid fund for you. Since they cater to short-term investment goals, more than returns what really matters in liquid funds is stability of performance. This is exactly where the IDBI-Principal Cash Management Fund Liquid Option (See The Liquid Fund Rankings) has scored over its category peers. Risk is very low, which is why it has scored over all the other players despite being unable to dish out obscene returns. As it is, the differential in return is not too high in this category, IDBI-Principal has managed to stay ahead by virtue of sheer consistency.

Absolute Performance

A fund's performance on the risk-return front is a good indicator of how it will perform over the long haul. But if your investment horizon is short term, quarter over quarter performances could throw up some attractive candidates.

The top showing in equity came from GIC D MAT (See Top Five Equity Funds). Don't, however, expect the returns of last quarter to take your breath away-of the 100-plus open-ended schemes whose absolute performance has been studied, none posted positive returns in the July-September period. The good news is that more than half of them bettered the average returns.

Equity funds may have been floating in a sea of red, but their debt counterparts are comfortably in black (See Top Five Debt Funds), with the top slots being occupied by some surprise entries. Escorts Income Bond, for instance, is miles ahead of the rest of the pack, posting massive returns of 44 per cent last quarter. "The exceptional performance is courtesy our ability to realise a few NPAs last quarter, which we had earlier written off," explains K.K. Mittal, Fund Manager, Escorts Mutual Fund, who expects the good showing to continue as "yields are down and prices are appreciating."

The fund at No. 2 position could notch up returns of just 4.5 per cent. Escorts Income may be top dog, but don't get carried away by those returns, for they were accompanied by a liberal dose of volatility.

Those who had predicted that gilt funds (See Top Five Gilt Funds) will begin underperforming may have to eat their words. Long-term paper continues to rule the roost and generate returns that are certainly not to be sneezed at. KM K Gilt (Serial) 2019 Fund generated over 6 per cent last quarter. The residual maturity of the papers held in the portfolio is close to 17 years and, with the debt market still buoyant, investors had little reason to complain. With absolute returns of 4.87 per cent, FT India Gilt Investment Plan too put up a good show, comfortably beating the category average of over 3 percent, although it still is a distant second to KM K Gilt (Serial) 2019.

Chola Liquid Institutional Fund has been among the most volatile liquid funds of the category (See Top Five Liquid Funds) but also the most successful in generating returns at the higher end. The fund has clearly left its category peers far behind. It is followed by another surprise entry, bob Liquid Fund, which has also made it to the ranks due to the volatility shown in the net asset value (NAV) performances.

Among the balanced funds, the best performance in the quarter under consideration has come from a surprise entry in LIC Dhanasahayog (See Top Five Balanced Funds). The fund has managed a good show of over 3 per cent even when the category average is well into the red. The only other fund in positive territory is the specialty fund for children, an offering from Prudential ICICI.

After running through the performance of the various funds in our study, investors will realise the need for the right asset mix. An equity-loaded portfolio can result in substantial erosion when times are uncertain and markets bearish. Debt may not promise the fantastic returns that equity does, but it does bring down the risk element in your portfolio. Sashi Krishnan, Debt Fund Manager, Cholamandalam Cazenove Mutual Fund, whose portfolio boasts an AAA credit profile, expects to notch up 10-11 per cent returns in the current quarter too. As long as uncertainty persists on the disinvestment front, the global markets remain lacklustre, and the domestic markets look in vain for that elusive trigger, performing the equity-debt balancing act remains the best option for an investor.

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