FUND FLAVOUR
September 2010

Evergreen Equity Funds…

Diversified equity mutual fund schemes offer good diversification, sound money management skills, experienced money managers, good investor-friendly practices, advantage of thorough research teams, etc. The important parameters to be considered are: the experience of a strong fund management team, the track record of the fund manager in different market cycles and the methodology and processes followed by the fund house, among others. What matters in long term investing is identifying good companies and not what is “in” or “out” of fashion. Diversified funds are safer and better suited to accomplish this long-term objective compared to sector focused ones. On an average, diversified equity schemes have generated far superior returns than index funds and market indices. They are much better positioned to tackle market risks. This is because the constituents of an index or an index fund are determined by the exchanges to include scrips/companies which have good trading volumes, are highly liquid and have reasonable market share. The constituents of a diversified equity scheme, on the contrary, are determined by the fund manager, with an aim to encash upon the opportunities thrown open by the market from time to time. The fund manager here is at liberty to reduce the weightage of non-performing or volatile sectors / stocks in the portfolio and increase the weightage of the hot and roaring sectors. As such, you will be better off considering diversified equity mutual funds for your equity portfolio within your overall asset allocation, risk profile, and risk appetite. Equity funds that are fully invested with judicious levels in defensive sectors are expected to outperform over the long run, thereby adding more value to your portfolio.

Wading through the waves…

The equity mutual fund universe not just tracked the market triumph in 2009, but actually beat it. September and October 2009 were dull months but mutual funds started looking up in November 2009. As of December 31, 2009, diversified equity funds were up by as much as 84.48%, which is better than the gain logged by Sensex at 81.03%. This may be attributed to the fact that the mid- and small-cap allocations in diversified equity funds helped them race past the Sensex.

January 2010 saw diversified equity funds fall by 4.19%. Seen in conjunction with the category's robust returns for the entire 2009, when it gained by 84.48%, this was surely a disappointing result. The fall spanned the industry - out of a total of 256 funds in this category, only four managed to stay in the green. But they too were positively borderline cases.

In February 2010 diversified equity funds fell by 0.21%. Out of the total funds in this category, 134 managed to stay in the green while all the rest posted negative returns.

Equity diversified funds ended their losing streak of the first two months of 2010 by posting a gain of 6.03% in March 2010. Riding the upsurge in the equity markets in March 2010 (the Sensex and the Nifty gained 6.68% and 6.64% respectively), all mutual fund categories ended the month in the positive (going by their category average results). All the funds in the diversified equity category remained in the green. However, mutual fund investment into equities remained negative in March 2010 registering net outflows of Rs 4082 crore. The outflows had accelerated from Rs 697.20 crore in February 2010.

April 2010 threw up many surprises, which reflected in the performance of both equity as well as some categories of debt funds. Equity funds' exceptional performance was obviously due to the stock market rally that was led by small and mid-cap stocks. The National Stock Exchange's Nifty gained 15% while the Bombay Stock Exchange's Sensex gained slightly higher at 17.46%. This was Sensex's best monthly performance in the last 10 years. Diversified equity funds logged a 14.12% gain in April 2010, capturing 80% of Sensex appreciation. However, out of the total number of diversified equity funds, just 27 managed to beat the BSE Sensex, while 77 funds were able to better S&P CNX Nifty, which is broader than the Sensex. The stock market euphoria was also reflected in the fact that nine diversified equity funds were able to gain in excess of 20%, most of them being mid- and small-cap funds.

Equity fund categories felt the heat of the global cues as their performance slipped in May 2010. Heavy sell-off across the globe was witnessed in reaction to the Euro zone debt worries and liquidity tightening in China. The equity markets also showed less enthusiasm since, March 2010 IIP (Index of Industrial Production) numbers (declared in the month of May 2010), also reported some slow down, which eventually did not appeal to the FIIs. The Index of Industrial Production (IIP) for March 2010 slowed to 13.5% (from 15.1% in February 2010) over the last year's figure in March 2009, on account of fading of overall base effect. However, strong manufacturing growth and sectoral output were positives. Foreign institutional investors, who invested Rs 8,415.9 crore in April 2010, pulled out around Rs 9,975.4 crore from equities in May 2010. Moving in tandem, the equity diversified category of mutual funds plunged 3.59% in May 2010. This marked the end of their winning streak during the preceding two months. Out of 256 diversified funds, only two funds ended the month in the green. All the rest ended the month in the red.

As the equity markets rallied up, in the month of June 2010, equity oriented mutual funds across all segments, gave handsome returns in the range of 5.0% - 15.0%. All equity-oriented funds ended in the positive terrain, as the Indian equity markets rebounded in the month of June 2010. The first quarter of the financial year 2010-11 witnessed volatility at its best as it rendered most of the major market indices with flat returns. The Sensex and the Nifty returned just about 1% and 1.2%, respectively for the three months ended June 30, 2010. On an average, diversified equity schemes returned about 3.76% for the quarter. These are just the average returns as there are certain diversified equity schemes that have returned as high as 10-11% for the quarter.

The diversified equity fund category registered a growth of 4.6% during July 2010. All the 259 diversified funds ended the month in the green.

Stock-specific movement skewed towards the banking sector helped diversified equity funds post a 2.09% increase in August 2010 as compared to a mere 0.7% increase in the case of BSE 100 index.

…etched forever in retail investors’ portfolio?

Equity funds have the lowest rate of survivorship over a five-year period when compared to hybrid or fixed income fund categories, according to Standard & Poor's-Crisil survey report. “S&P Crisil Spiva” performance scorecard presents the performances of actively managed mutual funds in India as compared to benchmark indices (S&P CNX Nifty and S&P CNX 500). The scorecard also shows both equal and asset weighted averages unlike the usual practice of calculating average returns using only equal weighting. Benchmark indices have outperformed a majority of funds in most categories across one-year, three-year and five-year time periods. The S&P CNX Nifty index has outperformed at least 55% of active large cap equity funds across all observed time periods and 70% of large cap funds under performed the S&P CNX Nifty Index over a 5-year period. Large cap and diversified equity funds only have a 74% and 85% of survival over 5-year periods respectively. On the other hand, ELSS funds enjoyed a 100% survivorship rate across all time horizons due to mandatory 3-year commitment for investors to invest in ELSS funds for availing tax benefits. All said and done, among all fund categories, equity funds have the highest concentration of retail investors – the jewel in the crown.