March 2009: Caught on Wrong Foot, Cash-Heavy Equity Funds Lag

Out of 137 funds, only 16 funds managed to outperform Sensex in March as most of these funds had allocations to cash.
By Chintamani Dagade |  14-04-09 | 

The diversified equity fund categories registered positive returns in March as the rally in benchmark indices, driven by strong global cues, boosted these funds’ performance. The Bombay Stock Exchange's Sensex registered 9.2% return, while the National Stock Exchange’s Nifty index gained 9.3% in March.

The announcement of government borrowing program hit fixed-income funds, which posted negative returns last month. Additionally, the advance tax outflows and closure of financial year battered the fixed-income funds, which experienced heavy redemptions in March, resulting in the industry’s assets declining by 18% to Rs 4.2 trillion.

Equity funds performance

Within the equity categories, the Large Cap Morningstar category delivered the highest returns as rally in frontline stocks boosted performance of these funds. Within this category, Templeton India Equity Income registered the highest return of 14.2%. Escorts Growth Plan was the only fund that posted negative return last month. Out of 137 funds, only 16 funds managed to outperform Sensex in March as most of these funds had allocations to cash.

Within the Smalll/Mid Cap Morningstar category, Principal Emerging Bluechip recorded the highest return of 13.5%, while its peers posted an average return of 6.9%. In comparison, the CNX Mid Cap index, the benchmark for Small/Mid Cap category returned 6.9%.

The ELSS category, which delivered 6.9% return, was the only equity category that received inflows last month. The category received 5.5 billion rupees of net inflows. The BSE 200 Index, the benchmark for the category, returned 9.1%. Within this category, JM Tax Gain delivered the highest return of 11.7%.

The moderate allocation category, which caps equity investments to the extent of 70% of the fund's assets and the rest in debt and cash instruments, delivered 4.7% return. Within this category, Reliance Regular Savings – Balanced was the best performer with 9.1% return.

Within the Conservative Allocation category, UTI Childrens Career Bond delivered the highest return of 3.9%, compared with its peers, which generated 1.4% average return. HDFC MIP Long Term registered the second best return of 3.2%. This category caps funds’ investments in equity to the extent of 30% of portfolio’s assets.

Fixed-Income funds performance

The liquid funds category, which invests in money market instruments, witnessed massive redemptions in March. The category saw Rs 369.9 billion flowing out of the industry as institutional investors redeemed their investments, owing to closure of financial year. Institutional investors favour these funds to park their short-term idle funds to take advantage of better return than bank current deposits.

Within this category, Sahara Liquid Variable Pricing Fund delivered the highest one-month return of 0.72%. In comparison, the liquid funds’ category posted 0.53% return. Out of 117 funds considered for analysis, 67 funds outperformed the category average.

The income funds, which invest in corporate and government issues, witnessed the largest redemptions in March, as an increase in yields post announcement of the government borrowing program negatively impacted these funds’ performance. A decline in bond prices pushes yields higher, while a rise in bond prices, leads to fall in yields. In March, income funds’ assets declined by Rs 623.8 billion.

Within the short-term bond category, DWS Short Maturity outperformed its peers by posting 1.1% return. In comparison, the category peers generated 0.5% average return.

The intermediate bond category registered negative average return of 0.9%. Out of 44 funds considered, only nine funds delivered positive returns with Reliance Medium Term Retail Fund generating the highest return of 0.6%.

Within the long-term bond category, ICICI Prudential Long Term Plan registered the highest return of 0.6%, compared with category average of 0.5% negative return.

The government securities dedicated funds, which were considered to be safe havens, suffered in March. The short government category delivered negative average return of 0.3%, while the intermediate government category posted 1.4% negative return, as the latter holds higher maturity issues. The long government category was the worst performer during the month as this category includes funds, which hold securities that are of longer maturities and hence are highly sensitive to interest rate risk. The category posted 2.4% negative return.

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