After having rallied for two consecutive months, the equity markets declined in the first month of the year. The markets started the month on a positive note, driven by better-than-expected industrial production (IIP) growth and improved exports. However, it turned bearish by the mid-month and ended lower due to disappointments from key corporate earnings and weak global cues. The country’s IIP surged faster-than-expected and grew by 11.7%, primarily due to strong demand for manufactured goods. The fear of monetary tightening by the central bank weighed heavily on the market sentiments, however, by the end of the month this fear receded when Reserve Bank of India (RBI) hiked the Cash Reserve Ratio (CRR) by 75 bps to 5.75% and kept all other rates unchanged. In addition, the RBI has also indicated that the home economy is expected to grow by 7.5% for this year ending.
The BSE Sensex declined by 6.3%, while the NSE Nifty fell by 6.1% for the month. The small cap shares continued to outperform their large- and mid-cap counterparts. The BSE Small Cap index was down by mere 1.9%, while the BSE Mid Cap index lost 4.5%.
Among the sectoral indices, all the indices ended in red except consumer durables which rose for the second consecutive month and was up 0.2%. Investors turned cautious on the rate sensitive stocks ahead of the RBI’s monetary review. Realty, metal, capital goods and auto were among the top losers which fell by 9.7%, 8.6%, 7.4% and 7% respectively. BSE Bankex declined by 4.5%. Metal lost its shine as metal prices globally remained subdued.
Foreign institutional investors after being net buyers for ten months in a row, turned net sellers for the month of January because of strengthening of the US dollar. They sold equities to the tune of Rs. 500 crores. Similarly, domestic institutions were also net sellers in equity to the extent of Rs. 1311 crores as per the data released by SEBI.
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 79.4% for the one-year period ended January. Out of 69 funds considered, 38 outperformed the category average. HDFC Equity growth surfaced as the top-performer on the Morningstar risk-adjusted return front. The fund posted a growth of 113.2% over the 12-month period.
Small/Mid Cap
Funds from the Small/Mid Cap category posted an average return of 106.7% over the one-year period ended January. Out of 47 funds, 24 bettered the category average. ICICI Prudential Discovery emerged as the best performer on the Morningstar risk-adjusted return parameter in this category. In terms of NAV performance, the fund’s NAV grew by 147% over the one-year period.
ELSS
Investors in tax-saving mutual funds (also referred to as equity linked savings schemes – ELSS) can avail of tax benefits under Section 80C of the Income Tax Act. The 14 chosen funds posted an average showing of 86.6% on the return front over one-year ended January. Five funds fared better than the category average. ICICI Prudential Tax Plan scored over its peers on the risk-adjusted return front. The fund’s NAV appreciated by 120.8% over the one-year time frame.
Moderate Allocation
Funds investing 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 January, the 18 eligible funds registered a 62.8% average return. 11 funds outperformed the category’s average showing. In terms of the risk-adjusted return, ICICI Prudential Child Care Gift Plan surfaced the best performer. Its NAV rose by 97.5% over the one-year period.
Conservative Allocation
The Conservative Allocation category is constituted 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 17.7% during one-year ended January. 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 posted a growth of 33% 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 December 2009 have been considered.