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THE BT STUDY The
Indian Mutual Fund Industry has matured enough to provide an investment
option to every type of investor--be it a body corporate or an individual,
be it high risk taker, or a risk averse. New variants are being created by
Asset Management Companies to satisfy rising expectations of investing
community. Funds have become aggressive marketers as well as emulating
FMCG companies. Total investments in mutual funds have increased from
approximately Rs 65,000 crore in January, 1999, to approximately Rs
105,000 crore in May, 2000, a stupendous growth of approximately 61.5 per
cent. Increasing brand equity, better service, and transparency has led to
a shift of preferences of investors to the private sector mutual funds,
thus reducing the dominance of Unit Trust of India (UTI).
The rising number of schemes and investors make it important to study performance patterns. However, before looking at performance trends, let us explore what happened in the past one-and-a-half years in the industry. Beginning 1999, fortunes of the Indian mutual fund industry also turned around, thanks to upsurge in the equity markets as well as tax sops provided to the mutual fund industry by Union Finance Minister, Yashwant Sinha. The euphoric activity in stockmarkets had come after a long lull. As aggressively managed private sector equity funds generated good short-term returns, effectively exploiting the opportunity, investors' interest in equity funds also revived--high returns coupled with tax-free dividend. What else would an investor want? With the onset of the New Millennium, markets ran amuck following NASDAQ movements and skyrocketing valuations of infotech and Net stocks. Other high growth sectors like Media & Telecom followed suit, and the markets touched new highs. There was a mad rush among mutual funds to outperform each other. Open end equity funds started generating returns better than even market. The returns came as windfall to investors who invested in mutual funds during early part of the rally. Inspite of recent decline, some funds have shown excellent returns over the last one year clearly beating the market (KP Infotech 219 per cent; Alliance Tax Relief-193 per cent; KP Tax Shield-181 per cent; Zurich Tax Saver-146 per cent; and Birla Equity-142 per cent). The out performance was mainly due to focus of these funds towards ICE (Information, Communication, and Entertainment-ICE) stocks, and other funds in a bid to catch up started investing heavily in these sectors. ING Savings Trust had as on March 31, 2000, over 85 per cent of its corpus invested in ICE stocks, while Alliance Equity had 77 per cent. Out of 46 open end equity funds--excluding sector specific funds--10 had more than 60 per cent investments in ICE, 16 had more than 40 per cent, but less than 60 per cent in ICE, and only 20 funds had exposure of less than 40 per cent in ICE stocks. New launches of funds also focused on exploiting market fancy for such stocks and also generated excellent return in short term itself creating sort of a frenzy. Almost every fund house launched a sector specific fund, and the market responded back as well. Alliance New Millenium closed for subscription on January 15, 2000, and its NAV on March 7, 2000, touched as high as Rs 18.45 in just 51 days giving a return of 84.50 per cent. This reminded of those days when Morgan Stanley and UTI Master Gain used to command a premium in the grey market during their IPOs. Fund managers of even balanced funds--balanced funds by nature are an appropriate mix of equity and debt, and are supposed to be comparatively safe due to a high proportion of debt investment and, therefore, are meant for low risk takers--were not able to resist the temptation of exploiting the opportunity and the balance between equity and debt changed to a major tilt towards equities. Again a major portion of the equity investments were in ICE stocks even by these funds. These funds have reduced their equity exposure in the last three months as is clear from the following table
High
dominance in ICE stocks while giving very handsome returns, exposed mutual
funds to increasing levels of risk. Though fund managers were expecting
some correction in the ICE sector but nobody was prepared for the actual
carnage that took place. The exposure of most of the funds in ICE sector
was very high--which continues even today--displaying their confidence in
the sector. Though the fund managers talk of re-rating of old economy
stocks, the portfolios are yet to show a major shift to that sector.
One
of the major reasons of ICE sector getting a beating was the very high
institutional holding in the sector. All mutual funds, FI's, and FII's had
invested most of their investible funds in ICE stocks and had even
divested their old economy stock holdings to get a share of high growth
infotech stocks. It has been historically proven that when there is
negligible institutional holding in any sector or company, and such sector
or company is subject of re-rating, thereby attracting all the
institutions, then valuations rise very rapidly as we have seen over the
last two years. At the same time, when institutional holdings are very
large, risk of sharp decline increases tremendously as any negative factor
can lead most of these institutions to sell the stock causing sharp
decline. This in a way corrects the demand-supply situation. All this has
been particularly true for the ICE sector. The
recent sell-off happened after dramatic build-up of speculative positions
across the ICE sector resulting in even unknown infotech/media stocks
quoting at triple digits. Some fund managers also joined this speculative
fraternity with a temptation to outperform the markets and their peers.
Such build-ups inevitably result into crash, as they are neither supported
by fundamentals nor by real money. ICE
dominated funds also paid the price of taking the higher risk resulting in
higher erosion in NAVs compared to the indices.
Performance
Trend Analysis Out
of the total of 184 funds studied--only funds with life of more than one
year were considered--85 funds were not able to perform up to the
expectations given the level of risk assumed by fund manager, while 99
mutual fund schemes earned more than the returns expected of them for the
risk taken. Out of 44 open and closed ended tax saving funds studied, 26
funds were able to outperform their expected levels. Similarly, out of 65
normal open- and closed-ended equity funds--excluding tax planning equity
funds--38 were able to outperform the market expectation. However, 60 per
cent of balanced funds were unable to match the market expectation. Alliance
Tax Relief ’96 comes out to be on the top among all equity funds,
whether close end or open end. The scheme has returned 93 per cent on
annualised basis over last three years and its one-year performance is
staggering 193.62 per cent. Our study shows that superior stock selection
skills of fund manager of the scheme resulted in the scheme earning 121
per cent more than what was expected of it for the total risk incidental
to the scheme. Next on the list is again a tax saving scheme, i.e.,
Kothari Pioneer Tax Shield. These schemes have the benefit of three years
lock in of invested funds, which is required as per provisions of Income
Tax Act, 1961, which probably has aided the fund manager in generating a
superior performance. Six out of top 10 equity funds are tax saving
schemes.
Among
the equity funds other than tax saving schemes, the best performance was
given by Kothari Pioneer Infotech fund. The scheme launched in August,
1998, was a trend setter. Its stupendous performance riding the rally in
infotech stocks made others to follow it and a series of infotech funds
were launched by different AMCs. Next comes Birla Advantage Fund, the star performer from Birla Mutual Fund. The scheme focussed heavily on ICE stocks beating others in the race. This scheme has generated annualised return of 64.62 per cent over the last three years. In terms of risk rating, ING Growth Portfolio has taken highest risk among the top 10 equity funds. Alliance ’95 also figures in the list of top 10 equity funds. Even though it is a balanced fund, as per stated objective of the scheme, its high exposure to equities (73.6 per cent as on June 30, 2000) has resulted in its classification in equity funds for the purpose of this study. Among
the sectoral funds, infotech funds have been definite performers. Pharma
and FMCG scrips have not done well in recent times impacting performance
of funds focused on these sectors.
Among
Balanced Funds, Zurich India Prudence Fund comes out to be at the top
earning 35.68 per cent over last one year. Others in the list are JM
Balanced Fund, UTI US 95, Tata Balanced Fund, and Canstar CG.
Most
of these funds have been maintaining high credit quality papers in their
portfolio. Templeton has cent percent AA and above rated securities.
Similarly Escorts Income has 78 per cent, Kothari Pioneer Income Builder
Account has 98.4 per cent, Birla Income Plan has 100 per cent AA, and
above rated papers. The average maturity period/duration of these funds
are around 3.5 years which insulates them against any further increase in
interest rates. However, they may be impacted negatively in case interest
rates drop further. It is high time that investors realise importance of choosing the right fund as per their personal risk profile and returns requirements. Improper matching would cause only discomfort in terms of lower return or higher risk. Fund managers also need to be aware of the risk that they are taking while selecting stocks and also whether it matches with the overall stated objective of the fund. Only then they would turn out to be mutually beneficial! Methodology |
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