• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Shanthi Venkataraman

IN THE past couple of months, a spate of mutual fund IPOs (initial public offerings) mopped up more than Rs 1,000 crore from the market. The overwhelming investor response to these IPOs is, in a way, indicative of the faith in the fund managers' ability to outperform the market substantially (as they did in 2003), no matter how stormy the conditions in the bourses.

As it happens, the confidence was not misplaced. An analysis of mutual fund performance in the July-September quarter reveals that funds have, indeed, performed well, even in a relatively difficult market.

The benchmark indices — the Nifty and the Sensex — gained about 14 per cent and 15 per cent respectively over the quarter, while equity funds, on an average, recorded returns of 16-17 per cent — nothing extraordinary compared to the performance in 2003, but good enough considering the rather sedate pace of the market during this period. Of the 177 equity funds analysed by Business Line, 133 beat the Nifty, while 114 outpaced the Sensex.

Top performing funds

The funds that made it to the top ten in July-September did significantly outpace the Nifty and the Sensex . Had you invested in any of these funds, you would have enjoyed returns of 25-35 per cent over the quarter — a level substantially better than that of the benchmark indices.

Not all the funds that made it to the top of the list, however, can boast of a good, long-term track record. For instance, Taurus Mutual Fund's four equity funds made it to the top ten. But their five-year record is not very consistent; the funds figure in the bottom quartile in the ranking based on five-year returns.

Concentrated exposures in sectors such as entertainment, engineering and diversified stocks, and the strong mid-cap focus of its Starshare, Discovery and Libra Taxshield funds helped them vault into the top-performer list.

Outside the top ten, funds such as Tata Growth, HDFC Tax Plan 2000, Tata Select Equity and Reliance Growth Fund also did well. Relatively new funds, such as UTI Basic Industries and Kotak Global India, managed to turn up in the top quartile of ranked funds.

Sector funds lose steam

In the April-June quarter, a good number of sector funds topped the list, particularly those focussed on the technology and pharmaceutical sectors. But, this time, sector funds were missing from the top ten, giving way to diversified equity funds.

With the rally witnessed across more than one sector, diversified equity funds were better placed to cash in on such themes as engineering, chemicals, electrical equipment and pharmaceuticals. These sectors figured prominently in the portfolios of the top-performing funds.

Select sector and theme funds, however, did record a good performance, with UTI Basic, SBI Contra, Prudential ICICI Tech Plan and UTI Pharma Fund generating more than 20 per cent returns. But, even within a sector, funds turned in varying performances.

For instance, while UTI Pharma managed 21 per cent, SBI Pharma turned in about 9 per cent, reinforcing the importance of stock selection. Banking sector funds, of course, lagged the list, with bank stocks being largely out of favour in recent months.

Mid-cap focus pays off

A bias towards mid-caps certainly appears to have aided funds' performance. In the July-September quarter, the CNX Mid-Cap 200 gained a whopping 29 per cent. Mid-cap funds such as Sundaram Select Mid-Cap and Taurus Discovery made it to the top ten.

Mid-cap funds were also ahead of their large-cap counterparts. For instance, Sundaram Select Mid-cap generated a 30 per cent return, while Sundaram Growth turned in 17 per cent. Again, the NAV of Franklin Prima appreciated about 21 per cent. Franklin Bluechip registered just 12 per cent during the quarter underperforming the Sensex — perhaps for the first time.

Large-cap funds such as HDFC Equity, HSBC Equity and Franklin Bluechip have swelling asset bases at more than Rs 1,000 crore, leaving them little flexibility to invest in mid-cap and small-cap stocks. With hardly any action in the large-caps this quarter, these funds turned in more modest performances than mid-cap-focussed funds.

Tax-saving funds race ahead

In contrast, tax-saving funds, with their smaller asset bases, were able to capitalise on the mid-cap rally. Tax-saving funds turned in a strong performance during the quarter, with an average return of 19 per cent.

Five of the top ten funds were tax-saving funds. Funds such as HDFC Tax Plan 2000 and Prudential ICICI Tax Plan were ahead of the pack with their strong mid-cap bias.

Broader indices, tough to beat

Despite the focus on mid- and small-cap stocks, only 45 per cent of the funds beat the 17 per cent return of the S&P CNX 500. This considerably lags the performance in the April-June quarter, when more than 75 per cent of the funds beat the index.

While mid-cap funds beat the CNX 500 with ease, they found outperforming the CNX Mid-cap 200 — a more stringent benchmark — an uphill task. Mid-cap funds such as Franklin Prima and Birla Mid-Cap trailed the CNX Mid-cap considerably.

Within the basket of mid-cap funds, there were divergent performances. Funds that kept pace with the index, such as Sundaram Select Mid-cap, had large holdings in engineering and chemicals sectors. Mid-cap stocks belonging to these sectors sprinted during the quarter.

Franklin Prima and Birla Mid-cap, however, lacked a strong presence in these sectors, which could explain their lagging performance. This, again, emphasises the importance of investing in the right sectors and stocks to stay ahead of the rest.

Large-cap focus drags performance

Funds heavily invested in large-caps, such as UTI MasterPlus, GIC D'MAT and SBI Magnum Growth Fund, found themselves at the bottom of the list. Almost all index funds were relegated to the last quartile of the fund rankings.

Funds such as LIC MF Index Fund had a substantial tracking error, turning in just about eight per cent. Other index funds did generate returns that fell only slightly short of the Nifty and the Sensex. Investing in actively managed funds is still a better option than investing in index funds.

Diversified equity funds that were fairly heavily invested in banking stocks were also dragged to the bottom of the pile. These include funds such as Principal Equity Fund, Franklin India Bluechip, Alliance Frontline Equity and banking sector stocks such as Reliance Banking Fund and UTI Banking Fund.

Other funds that trailed the indices include Birla Dividend Yield Plus and the recently launched DSP ML T.I.G.E.R Fund, which turned in 12 per cent in its debut quarter.

Leading funds such as HDFC Equity and HSBC Equity formed the middle rung in the ranking list, with returns of about 19 per cent. These funds have, however, been credited with consistency in performance, particularly HDFC Equity, which has a longer track record.

Strategies such as taking concentrated exposures to stocks or sectors may have helped performances in this quarter, but may not hold good in the long term. A bias towards mid-caps during a mid-cap rally did not necessarily propel a fund to the top of the list.

The performance of these funds would have to be viewed against their track record and evaluated over a longer period, before fresh investments are contemplated.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line