Mutual buzz: While equity funds fared well, debt funds remained dismal performers in the second quarter of 2004-05

If 2004-05's first quarter was all gloom, the second was mostly all cheer. The equity markets bounced right back, helping diversified equity schemes post a handsome average return of 18.81 per cent. This was in line with the broad market indices: the Sensex and Nifty gained 16.44 and 15.93 per cent, respectively. Needless to say, investor confidence in India has returned with a bang. Tellingly, all sector indices did well during the quarter, with the exception of banking.

The cnx Midcap 200 appreciated over 30 per cent, and funds exposed to mid-cap stocks did the best. Sundaram Select Midcap, for example. Taurus mf also emerged among the top performers, giving some respite to the beleaguered investors of the fund. ABN Amro Mutual Fund, meanwhile, made its debut, mobilising huge amounts for its schemes.

Debt funds did badly, but at least closed in positive territory, thanks to floating rate funds, in contrast to the negative returns of the previous quarter. Debt funds saw huge outflows, with Assets Under Management (AUM) falling by Rs 16,192 crore during the quarter.

Fund Performance

In the Equity schemes category, topped in the second quarter by Taurus Starshare, funds with exposure to pharma and it stocks did well. The average performance by pharma funds was 21.15 per cent. Tech funds also did well, with the average return close to 20 per cent.

Gilt schemes did poorly, with negative returns by and large. Of those ending positive, Reliance G Sec Fund did the best. Among Income schemes, Prudential ICICI topped. The category's average portfolio maturity remained low at around 2.7 years. Liquid schemes saw very little performance variation, clustered around 4.5 per cent return. The topper, LIC mf Liquid Scheme, has a portfolio maturity of around four months, and manages about Rs 1,500 crore. Balanced schemes' returns averaged a decent 12.7 per cent. Cantriple+, the topper, saw massive redemptions, though, its corpus dropping from around Rs 72 crore in July to Rs 24 crore in September. Over that period, it reduced its equity exposure from 55 to 38 per cent. The other category that has done well on low exposure equity is that of MIP schemes, led by HDFC MIP-LTP.

Risk Adjusted Returns

Adjusted for risk, Tata Growth has done well among Diversified Equity funds. It took high risks in peer comparison, but has made good on returns. Among balanced funds, the moderate-risk HDFC Prudence Fund has done the best. As for Income funds, the risk-adjusted topper is the moderate-risk Escorts Income Plan, thanks to the low volatility in its NAVs. The very low risk-taking Tata Liquid Fund tops the rankings in the liquid fund category, by posting high returns while also successful maintaining low volatility.

Among Gilt schemes, the top honours for the quarter go to Birla Gilt Plus Liquid Plan, classified as very low risk. Despite volatility in the Government Security market, the scheme was able to keep returns stable.

Outlook

The second quarter story, broadly, is about equity funds doing well and debt funds getting hit by all the interest rate uncertainty. The economy, with its 7.4 per cent pace for the first quarter (compared to 5.3 per cent in the corresponding period last year), continues to perform well. So even oil-related worries ought not to dampen spirits. Throw in strong corporate results, headline-making investments and enhanced FII confidence, and the next quarter could prove even more exciting.

Fresh Fund Fiddling
Tempted by Mutual Fund initial public offers? Read this.

By Shilpa Nayak

The high noon of mutual fund launches was in mid-1999, when sectoral funds became all the rage. Before that, the big pulse pounder was the big Morgan Stanley extravaganza of 1993. It's the new era, and new MFs hit the market with unfailing regularity now.

The trouble, however, is that all new MFs are not everything they're cracked up to be. Sure, there's the odd new entrant to the arena, such as ABN Amro, which has made a recent debut as an mf player. But many of them are thinly repackaged versions of some old house product pretending to be new. How is that? Investors are highly sensitive to a quantity called net asset value (NAV). When a scheme's NAV goes too high, investors are often reluctant to join in. This is when fund houses employ the simple device of slapping a new name onto a similar scheme and hawking it as a new fund. A fund touted as an 'opportunities fund', for example, may be just a mildly re-fiddled version of a growth fund. So, what should you do?

First, do not dismiss existing high-NAV funds as opportunities that have already passed you by. An old fund that takes its NAV from Rs 50 to Rs 60 in a year could be better than a new one that goes from Rs 10 to Rs 12 (equal percentage gain) simply because the old one has a track record to go by, and is thus less risky. Apart from that, the investment strategy of an existing fund is already 'market tested', in a sense.

"There is a general perception that a Rs-10 IPO in a mutual fund is a better investment option than a high NAV for an established scheme," says Ganesh Shanbhag, MD, SMS financial services, an mf distributor. "In a majority of the cases, this is a wrong perception."

Household investors are particularly susceptible. "New issues are hawked with 'Don't miss this investment opportunity' kind of a thing," complains Dhirendra Kumar, MD, Value Research, who doesn't see why anyone should fear lost opportunities in a market that's always open.

New funds, meanwhile, must not only start at the bottom of the learning curve, they also end up charging investors their start-up costs (often amortised over time). Newly launched funds are allowed to charge up to 6 per cent of the IPO money towards the IPO and initial marketing expenses. Some of these are charged bit by bit over the years, which hurts long-term investors (typically, retail investors) more than short-term ones (such as well-informed corporate entities).

"Never invest in a mutual fund IPO unless there is a compelling novelty to do so," warns Kumar. But that doesn't mean that you should stay tuned out of new fund launches. When differentiated offerings do come along, it pays to sit up and listen. "Floating funds investing in floating debt securities or global opportunities fund that invests in international securities are classic cases in point which offer a unique way to spread risks," says Kumar. Agrees Hemant Rustagi, CEO, Wise Invest Advisors. "We don't have all types of mutual fund products in our market yet," he says. "There are some specialty products which do merit investor attention."

After all, the world of investment is still evolving globally-as evident from all the action in hedge funds, which use special global expertise to make money. And then there are funds of funds too, that spread risks across a basket of funds to offer investors a new risk-return proposition.