The month of October 2009 would have left several investors with a sense of dismay. The month began on a positive note with equity markets moving northwards on expectations of strong earnings growth and positive economic data. However as the month progressed, the rally seemed to lose steam. Factors like fears of rising inflation and a premature withdrawal of the stimulus package, among others weighed down the markets. The final straw came in the form of the Reserve Bank of India’s Monetary Policy review. The central bank revised upwards the inflation projection for March 2010 to 6.5% from the 5.0% (projected earlier in July 2009). Also the decision to hike the statutory liquidity ratio from 24% to 25% added to fears of an imminent uptick in interest rates. Equity markets reacted negatively to the latter and fell sharply.
Over the month the BSE Sensex shed 7.2%. Stocks from the mid cap segment fared better than their large cap peers. The BSE Mid Cap posted a loss of 4.9% over the month, while the BSE 100 shrunk by 6.7% over the same time frame. Notwithstanding the poor showing posted over the month, if a relatively longer time frame were to be considered, markets have commensurately rewarded investors for risk borne. For instance, over the one-year period, the BSE Sensex is up 62.4%, while the BSE 100 has risen by 68.2%. Conversely, investments in the mid and small cap segments, which typically offer a more high risk-high return investment proposition vis-à-vis large caps, have fared better. The BSE Mid Cap and BSE Small Cap have appreciated by 87.9% and 87.5% respectively, over the one-year time frame.
The performance of sectoral indices proved to be a mixed bag. The BSE FMCG index (up 9.1%) bucked the downward trend and delivered an impressive showing. The BSE TECK index which is representative of stocks from the Technology-Media-Telecom sectors lost 12.4% over the month. Telecom stocks bore the brunt of the ongoing price wars. Also, stocks from the Information Technology sector (which typically earn a substantial portion of their revenues from the US) were adversely impacted by the rupee’s rise vis-à-vis the dollar.
For the eighth month in a row, Foreign Institutional Investors (FIIs) were net buyers in equity markets; they bought equities to the tune of Rs 9,077 crores. On the other hand, domestic mutual funds were net sellers of around Rs 5,194 crores.
In order to merit funds’ long-term performance, they have been ranked based on their one-year Morningstar risk-adjusted return for this review.
Equity Category Performance
Large Cap
The Large Cap category clocked an average return of 66.0% for the year ended October 2009. Out of 72 funds considered, 37 outperformed the category average. Principal Large Cap emerged the top-performer on the Morningstar risk-adjusted return front. The fund’s NAV grew by 90.6% over the one-year period.
Small/Mid Cap
Funds from the Small/Mid Cap category posted an average return of 75.6% over the one-year period ended October 2009. Out of 47 funds, 26 bettered the category average. ICICI Prudential Discovery surfaced as the best performer on the Morningstar risk-adjusted return parameter. In terms of NAV performance, the fund posted a growth of 119.3% over the 12-month period.
ELSS
Investments in funds from the ELSS category are eligible for tax benefits under Section 80C of the Income Tax Act. The 14 chosen funds posted an average showing of 66.5% on the return front over one-year ended October 2009. Six funds outscored the category average. ICICI Prudential Tax Plan scored over all its peers in terms of the risk-adjusted return. The fund’s NAV appreciated by 83.0% over the one-year time frame.
Moderate Allocation
Funds that invest upto 75% of their assets in equities, and the balance in debt and money market instruments constitute the Moderate Allocation category. During the 12-month period ended October 2009, the 18 eligible funds registered a 52.7% average return. 10 funds outperformed the category’s average showing. In terms of the risk-adjusted return, HDFC Prudence surfaced as the best performer. On the NAV appreciation front, the fund posted a growth of 77.3% over the one-year period.
Conservative Allocation
The Conservative Allocation category is comprised of funds which invest upto 30% of assets in stocks; the balance is invested in debt and money market instruments. The category delivered an average return of 21.9% during one-year ended October 2009. Out of 26 funds under consideration, 13 scored better than the category average. HDFC MIP-Long Term topped the category on the risk-adjusted return front; the fund’s NAV rose by 37.2% over the 12-month period.
Note: For the purpose of this analysis, funds have been ranked based on their one-year Morningstar risk-adjusted return; only growth options have been considered. Further, only funds with AUM of more than 20% of the average category AUM as on September 2009 have been considered.