If investors were looking for an October surprise, the equity markets were not the right place. They continued to do as expected: rising with much vigour. Except that mutual funds (MFs) were not able to keep up. They failed to beat the returns posted by the benchmark Nifty and Sensex, which posted 2.37 and 1.59 per cent, respectively. Diversified equity schemes did rather poorly. October had tech stocks in the limelight, with the action shifting from the big mid cap rally the previous month. The BSE Tech posted a rise of 5.95 per cent, and BSE it, almost 8 per cent. Among technology funds, Franklin Infotech and Kotak Tech were the good performers, giving 6.27 and 6.02 per cent returns, respectively. The month also saw some dividends coming in from equity schemes, with Franklin India Prima Plus leading the list with a neat 40 per cent dividend in the hands of investors.

Debt funds continued with their dismal performance, with the ibex posting a negative 2.06 per cent return. The category average was an even worse negative 4.3 per cent. Inflation concerns and tight liquidity drove up g-sec yields to a new two-year high. Meanwhile, the mf industry's Assets Under Management (AUM) suffered another dent, falling to Rs 1,48,283 crore from Rs 1,53,171 crore the previous month.

Equity Performance

Among diversified equity funds, SBI Magnum Sector Umbrella-Contra, the best performer, posted a return of 6.11 per cent in October. Its corpus, at about Rs 77 crore, was up from Rs 44.5 crore the previous month. It had exposure to Great Eastern Shipping, Jaiprakash Industries and Tata Motors, among others. The highest exposure was in the cement sector, though down from the earlier month.

Among Equity Linked Saving Schemes, also known as Tax Planning Schemes (collective corpus: Rs 716.6 crore), SBI Mutual Fund was the leader once again with its high exposure to the engineering and industrial machinery sector. The top honours among balanced schemes in October went to SBI Mutual Fund, with 70 per cent exposure to equity and 25 per cent to debt that month. Sectorwise, it bet heavily on tech stocks, followed by textiles.

The top performer among Monthly Income Plan (MIP) funds, DSP ML Savings Plan, had a large 15.6 per cent exposure to equities (and 58 per cent to debt). Pharma stocks formed a crucial part of its investments. Its annualised return: 10.82 per cent (way above the group average of 2.44 per cent). Chola Monthly Income Plan-Growth ranked second, followed by Kotak Income Plus-Growth.

The Debt Game

In this volatile market, Floating Rate Funds were the best bet, since they invest predominantly in floating rate securities. Though the price of floating rate bonds also falls when rates go up, the fall is less pronounced compared to that in fixed-income bonds. Birla Floating Rate Long-term plan was the topper in this category, posting an average annualised return of 4.4 per cent. Its fund size stood at Rs 263.2 crore, and had almost 70 per cent of its corpus in floating rate securities.

Among liquid funds, Principal Cash Management fund led the way. Among Gilt schemes, the top performers all did reasonably well, considering the fact that the average return posted by this segment was a negative 8.46 per cent. The uncertain interest rate scenario took its toll, of course.

Among Income debt schemes, Birla Dynamic Bond Fund topped with an annualised return of 5.13 per cent in October. Kotak Dynamics Income Plan-Growth also sneaked in a good performance.

Outlook

The outlook still seems bullish, with equity schemes expected to soar ahead, and debt investors again looking towards floating rate funds and marginal equity plans for positive returns. With so many questions of 2004 settled, the markets can perhaps return to a less jittery phase of prolonged buoyancy.

Investing In Real Estate
Should you go for commercial or residential property?

By Narendra Nathan

Real estate prices are getting firm. It started with a few nicely-landscaped enclaves of India's new urban hotspots, but has spread, spelling investment opportunities for non-resident Indians (NRIs) and high net-worth individuals (HNIs). "The number of hnis diversifying into the real-estate market is steadily increasing," confirms Naresh Nadkarni, CEO, HDFC Realties. Prices are projected to rise strongly too. So, if you have big bucks to invest, real estate is an obvious target. The question is: should you go for residential or commercial property?

Ticket Size

If it's really big bucks you have, try commercial property. How big? "Anything above Rs 5 crore is fine," says Chanakya Chakravarti, Joint Managing Director, Cushman & Wakefield (India). Thanks to loans from financial institutions (against future rent), investors with just around Rs 1 crore could also enter this market. "Even if you have the money (say, Rs 10 crore), it is better to leverage yourself and buy more properties instead of just one," advises Nadkarni. Thus, diversify.

Risk Capacity

If risk-taking is part of your investment thinking, go for commercial property. The capital appreciation game here is something of a gamble; either it pays off hugely if you bet early on a future high-activity commercial zone, or the gains are paltry. Location matters vastly. For rental purposes, though, commercial property involves lower risk-because big companies (with net worth over Rs 1 crore) are not eligible for protection under the Rent Control Act, as small tenants are. Of course, houses can also be rented out to big corporates.

Your Objective

Are you going for capital gain or regular steady returns? "Rental yields in residential properties are lower compared to commercial properties," says Kekoo Colah, Executive Director, Knight Frank (India). By how much? "On an average, the rental yields of commercial properties works out between 11 and 13 per cent," says Nadkarni. That is much more than the residential rental yield (year's rent as a percentage of purchase value) of 5 to 6 per cent. So, if renting out the premises is your idea, then commercial property is better. Otherwise, go for residential property.