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Time To Invest or Review?
September 30, 2011

In this article, we examine the performance of funds belonging to different asset classes, their trends and explore opportunities for retail investors.


Author : Dhanashri Rane



So far, the markets have been anticipating positive news, but the way situation has unfolded it seems, ‘No news is good news’.

After S&P downgraded the debt rating for US in August 2011, the fear of a double-dip and a slowdown in economic activity has resurfaced. The bearish sentiment continued in September 2011 as the Eurozone debt crisis worsened and even the announcement of “Operation Twist” by the US Federal Reserve showed no signs of improvement for the US economy. 

With the market participants becoming more cautious, the equity markets around the world have reacted negatively. In India too, the BSE Sensex has returned an absolute -11.75% since August 2011 (see Chart 1) and -21%, Year-To-Date as at 22 September 2011.

Prior to this, the equity and debt markets in India were reeling under the pressure of inflation and high interest rate scenario in the domestic economy.

Moreover, corporate are facing the heat to maintain their profit margins. In terms of corporate earnings estimates by analysts, BSE 100 companies have witnessed the highest downgrades in the last six years (source: Business Standard, 19 September 2011).

While oil and commodity prices have significantly ruled the inflation figures and the sentiments in the Indian markets; the recent global events have caused domestic equities to plummet further.

As fear factor remains dominant and global and local factors look disparaging, what should retail investors do with their mutual fund portfolio?

Chart 1: BSE SENSEX - Index Fall (1 August 2011 to 29 September 2011)

source: BSE

Short Term Income Funds 

                            
To bring the high inflation down to acceptable levels, Reserve Bank of India (RBI) has raised the key policy rates, since 2010. The trend for price rise in the country however, has not subdued despite RBI increasing the rates 12 times. Though market participants are expecting that interest rate hikes may halt soon, low duration debt funds have been generating attractive returns.  When the central bank indeed puts a stop to the up-cycle in the coming quarters, the rates could ease and an opportunity to gain from the falling interest rates would spring up. Thus, investors can consider short-term funds for a horizon of 6-12 months.

Table 1: Past performance of Short term income funds:


Fund Name

Performance (%)

AUM

Expense Ratio 
Credit Quality

Absolute

CAGR

3 Months

6 Months

9 Months

1 Year

3 Years

5 Years

(crores)

%

AAA/P+ (%)

Reliance Short Term Fund (G)

2.44

4.31

5.59

6.79

8.70

8.67

1207

0.79

42.21

Templeton India ST Income(G)

2.57

5.01

6.22

7.49

9.45

9.01

4201

1.30

66.04

JM Short Term - R (G)

2.31

4.80

6.61

8.07

9.94

9.21

261

0.76

N.A.

UTI Short Term Income (G)

3.18

5.78

7.18

8.73

8.27

8.03

143

0.59

46.28

HDFC Short Term Plan (G)

2.63

4.75

5.80

7.10

9.22

8.75

671

1.00

66.35

Source: Accord, 30 August 2011

Equity Funds

The negative one year returns from equity funds would deter most investors to look at equity allocation. Very often, investors get lost around the extreme pessimism and euphoria surrounding a particular asset class. As a result, investors often “buy high” or “sell low”.

If we notice the Chart 2, the historical trend in current P/E and index points of BSE Sensex. The lows of 2008-2009 may not have been touched yet, but the market has corrected from September 2010 levels. The question that most investors would ask – Has market bottomed out or is there more downside in near future?

Hence, most market experts are suggesting a staggered approach towards equities. Even if markets crash, the cost per unit/ NAV of your mutual fund would reduce each time you buy. Therefore, the NAV of your mutual fund averages out in a falling market. On the other hand, one is satisfied to have invested at lows if markets rise from here on.

In a volatile market, there may not be significant upside potential nor can an investor be completely protected from the downside risk. But, equity is a high risk-high return asset class. So long-term investors who wish capital appreciation and do not mind the intermediate market gyration, should start or continue with their SIPs and STPs.

 

Chart 2: Historical Trend

source: iFAST Compilations

Table 2 shows that market cycles filled with anxiety and capitulation has eventually led to handsome gains in the long term.


Period

Sensex Level

1 Year Forward P/E

News

Total Return after 3 years

Total Return after 5 years

Sep-01

2812

11

Terrorist attack on Twin Towers

84%

316%

Jun-04

4795

10

General Elections - Unexpected defeat of BJP

203%

212%

Jun-06

9296

13

Collapse of US Housing Market

61%

99%

Nov-08

9093

11

Sub-prime crisis - Lehman collapse

100%

-

Aug-11

16857

13

US downgrade, European Crisis

?

?

(Courtesy: Mr. Prashant Jain, Executive Director & Chief Investment Officer, HDFC Mutual Fund, August 2011)

Below, we review the returns from our Recommended Equity Diversified Funds. As seen from Table 3, the performance record for equity funds in the 3 year and 5 year time period hasn’t been as affected as the 1 year return.

Table 3: Past performance of Recommended Equity Funds

 

CAGR

Ratio [01-Sep-2008 To 31-Aug-2011]

Fund Name

1 Year

3 Years

5 Years

Beta (Correlation)

Sharpe

Category: Balanced Funds

 

 

 

 

 

DSPBR Balanced (G)

-4.51

12.58

17.26

0.86

0.0318

HDFC Prudence(G)

-1.52

22.85

21.79

1.42

0.0532

Category: Diversified

 

 

 

 

 

Franklin India Bluechip (G)

-3.33

14.45

15.90

1.07

0.0267

HDFC Top 200 (G)

-7.89

15.35

19.51

1.69

0.0272

Fidelity Equity (G)

-5.27

14.97

18.60

1.10

0.0284

ICICI Pru Focused Blue Chip Equity - R (G)

-1.69

18.57

 -

1.00

0.0330

HDFC Equity(G)

-9.10

18.72

18.98

1.80

0.0333

UTI Opportunity (G)

0.34

21.30

19.85

0.72

0.0382

DSPBR Small and Mid Cap - R (G)

-8.14

21.87

 -

1.40

0.0419

ICICI Pru Discovery (G)

-8.14

23.86

14.97

1.52

0.0445

HDFC Mid-Cap Opportunity (G)

2.05

23.55

 -

1.29

0.0480

Source: Accord, 30 August 2011
Beta is a measure of volatility. Beta > 1 means that the fund is more volatile than the market; Beta < 1 means that the fund is less volatile than the market.Sharpe Ratio represents fund’s returns adjusted to the risk. Lower the Sharpe ratio, better the fund has performed versus the risk taken and vice versa.

Need To Review?

When every Tom, Dick and Harry starts commenting about the next low or high, one should stop and think. Stay away from the herd approach! One should be patient, extend the time horizon, if required and take steps at an individual level.

Instead of letting the market conditions drive your response, investors should review their portfolio in case of the following:

  • Investments match your ability to take risk. If yes, then you may stick to your portfolio and remain invested for long-term. Else, gradually rebalance your portfolio to reduce or add more risk.
  • For e.g. Anu, a middle aged professional with a conservative risk profile has 70% of her money in sector funds. So, every time the market falls, Anu panics because of her low tolerance to market fluctuations and worries about the drop in her portfolio value.
  • Investment objectives are being met by current holdings. If not, you should revise your portfolio allocation and investment horizon in order to meet your end objectives.
  • For e.g. Rahul, aged 30, who wishes to retire comfortably, has focused on investing in Bank deposits. While there is guaranteed income generation, Rahul can expand his portfolio to equity mutual funds for the additional kicker in his corpus for retirement.

Now, the catch here is ‘What if an investor with low risk appetite has major financial goals?’ Then, the person should invest more and worry less!

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Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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