MFs give considerable quarter

S. Vaidya Nathan

IN A quarter characterised by a high degree of volatility in the equity and debt markets, mutual funds went through three difficult months.

While the indifferent performance of equity funds was only to be expected, given the overall market conditions, it is clear that mutual funds did not make correct calls on the likely trends in the debt market. As a result, most were caught out in a quarter when the pressure on the rupee brought pressure also on interest rates.

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Funds that dished out dividends, and those with exposures to top-line IT and highly-traded stocks, such as Global Tele-Systems and Himachal Futuristic, did better than the broad market. Only a small proportion of diversified funds performed better than the sectoral ones.

Funds with portfolios tailored for bull market conditions, and which adopted active trading strategies centred on stocks that are the fancy of the day (for instance, a few DSP Merrill Lynch schemes and Libra Leap) showed a sizeable erosion in values.

After the first half of 2000, which saw the market touch all-time highs and then decline sharply, taking most equity funds down with it, the third quarter was equally difficult. The market had two recovery phases and dropped sharply since.

While all mutual funds cannot be expected to do better than the market, it is surprising that not a single open-ended equity-oriented fund turned in positive returns. The story with close-ended funds is not very different either. With most Old Economy stocks down sharply, even close-ended funds, which did better in the first six months of 2000, could not sustain the trend.

The closest was Tata Pure Equity Fund, which just about managed to hang on to its end-June values. That was largely because of the dividend payout of 20 per cent, and a portfolio with a pronounced tilt towards frontline IT stocks that outdid the broad market.

For a snapshot of how mutual funds handled one of the most volatile quarters across all the markets, Business Line analysed the performance of close to 350 open-end and equity-oriented close-end schemes in the July-September quarter.

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Equity funds take a dip

In this quarter, the broad market, as represented by various indices, declined close to 14.75 per cent. The BL Technology Index was down 21 per cent (the effect of the MTNL and VSNL price drops); the BL Computer Software Index down around 15 per cent; and the BL Consumer Confidence Index lower by 21 per cent.

In such a market, 63 of the 84 open-end funds with an equity tilt performed better than the broad market. But only 20 schemes did so by a comfortable margin of at least five percentage points.

The schemes that figure at the top of the pack are Tata Pure Equity Plan, Escorts Tax Plan and Kothari Prima (again, the dividend effect). There is a particular pattern of a fund's schemes being clustered either at the top or the bottom of the rankings list. But one exception is Alliance Capital Mutual Fund. Driven by its exposures to frontline IT stocks and such risky ones as Global Tele-Systems and Himachal Futuristic, which recovered to some extent after the fall in the second quarter, five Alliance schemes figure in the top 30 rankings of equity and sectoral funds combined.

The UTI funds have shown a wide divergence, which is a break from the past trends, when they used to be clustered in line with market trends. Funds such as Kothari Pioneer and Zurich India Mutual Fund, which have schemes in different slots, find themselves splattered across the rankings list.

For instance, the most conservative of the Zurich Funds, Zurich India Capital Builder, lost 9 per cent, while Zurich India Equity Fund and Zurich India Top 200 lost in line with the broad market. What the numbers show is that no particular fund has an overall strategy for different market conditions.

In the final analysis, it appears that retail investors themselves have to do the picking among various schemes on offer, even within a mutual fund, to get a favourable deal at the end of the day.

Head the fund way

Stock price volatility has been high over the past few months. The rate at which stock prices fluctuate has almost doubled over the past year, compared to the preceding periods. In this backdrop, and in the light of the performance of mutual funds in 2000, retail investors may be better off with mutual funds than on their own.

For sure, no mutual fund made money in the quarter, and only a handful are in positive territory for 2000, as a whole. But given that technology/telecom stocks drive the market, and the volatile price trends in these stocks, buying one or two of them (unless one buys an Infosys or a Wipro with a long-term perspective) may be risky.

More so as there is no level playing field in terms of information flows. There is also the hectic trading activity undertaken by the FIIs and mutual funds that could affect the performance of any individually constructed portfolio, unless one can take losses in the near term and wait for long-term gains.

Steer clear of balanced funds

What is clear from the performance of the various balanced funds, with the exception of Alliance '95 Fund, is that investors may be better off steering clear of balanced funds. In the latest quarter, though most balanced funds did better than the equity market, only one, Canpremium, posted positive returns. Even balanced funds with high debt exposures, such as K-Balance and Sundaram Balanced Fund, posted negative returns of around 2 per cent and 6 per cent respectively.

In a balanced fund, too many decision levels seem to be left to the fund managers -- allocation between debt and equity, allocation across sectors in equity; and the construction of a debt portfolio. The more the scope for decisions, the more the mistakes by fund managers seem to be the order of the day. In the Indian context, these funds are clearly of the `neither-here-nor-there' category.

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In this situation, investors could do their own asset allocation according to their preferences of risk, return and liquidity. They could choose the equity and income funds of their choice. Investors could make mistakes in timing, but fund managers seem just as susceptible, going by the performance of balanced funds in the last 18 months.

Even if one goes back in time, barring Alliance '95 Fund, no other fund consistently delivered good returns. A combination of good sectoral funds, select diversified and income funds may make for a better balance from the point of view of investors.