If you look at the performance of mutual funds (MFs) over the last one year or so, you will be inclined to skip this article as most of them have seen their values erode by around half. But, if you take a longer-term view, it may not look as bad because in the preceding period, they had given returns that were, possibly, more than satisfactory.
Here is the article presenting the Outlook Money-Morningstar ranking of Mutual Funds, categorywise, based on performance over the last three years. With this information in hand, you will be able to figure out whether you should make fresh investments, continue with the funds that you are holding or cut your losses and exit.
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Equity
When equities started to tumble at the beginning of 2008, the small- and mid-caps suffered the most, predictably. The category lost 58 per cent compared to 53 per cent by large-caps.
Equity—Large-Cap.
The large-cap equity category is an interesting mix. Apart from the regulars, we have an infrastructure fund, a dividend yield fund and a tiny little fund that has quietly perched itself on top of the heap.
The topper, DSP BlackRock Top 100 (DBT100), is a fund we’ve been hooked to for quite some time now and, so far, without disappointment. We twice recommended this fund in the past year (in August 2008 and March 2009). Fund manager Apoorva Shah’s stock-picking skills and the fund’s ability to do well in both upturns and downturns differentiates it from the rest. So, if it returned 64 per cent against 57 per cent by the category in a raging bull market in 2007, it fell by just 45.5 per cent against 53 per cent by the category, in 2008. "Whenever we reach our price targets, we don’t hesitate to book profits," says Shah.
The tiny Sahara Growth Fund (Rs 3.28 crore assets) packed in quite a punch. Sticking mostly to Nifty stocks and holding high cash levels throughout the latter part of 2008, the fund protected the downside well and made timely exits from overheated sectors such as real estate, software and metals by the end of 2007. Under fund manager A.N. Sridhar’s stewardship (from February 2007), the fund sold all mid-caps and stuck to large-caps.
Birla Frontline Equity’s (BFE) consistency shows in its calls on the telecom sector, especially Bharti Airtel, as also selective PSU banks while trimming exposures to capital goods in time. These examples reflect fund manager Mahesh Patil’s skills. BFE takes marginal exposures to mid-cap scrips and doesn’t hesitate to aggressively book profits.
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Equity—Mid- and Small-Cap.
DSP BlackRock Equity (DBRE) tops. It has done well throughout its 10-year history. The little secret behind its success is that it isn’t a pure mid-cap fund; it buys across markets, with its current holding skewed towards large-caps.
Another of our chosen emerging funds, IDFC Premier Equity (IPE), did well. One of the most nimble in its category, it was among the earliest to limit inflows; if a mid-cap fund is too large, it finds it difficult to exit illiquid scrips in time. The fund holds about 30 scrips, far fewer than some of its peers. Across 2008, IPEF stuck to industry leaders in the mid-cap segment. "Typically, we prefer mature companies instead of start-ups," says fund manager Kenneth Andrade.
Swearing by India’s consumerism, Birla Sun Life Gen Next Fund (BGNF) came up trumps. BGNF can swing between large-caps and mid-caps, although for the past three years it’s tended towards mid-caps, on an average. A small corpus helped the fund to weather the downside better. Fund manager Sanjay Chawla’s fascination for the rural market and a high allocation to FMCG and pharmaceuticals in a falling market ensured its superior performance in 2008.
Equity-linked Savings Schemes (ELSS).
The topper, Sundaram BNP Paribas Taxsaver (SBPT), doesn’t shy from going the whole hog for mid- and small-caps in rising markets, and for large-caps in volatile markets. Since end-2007, it has also held fewer scrips. "There’s a need to have meaningful diversification rather than holding a large number of stocks in small quantities," says fund manager Satish Ramanathan.
Despite repeated changes of fund managers and, at one point, very large infows, SBI Magnum Tax Gain ’93 (SMTG) has managed to hold its ground. It moved from being a mid-cap-oriented to a large-cap fund. It slipped a bit in 2008 as it was late to exit capital goods and had a low exposure to defensive sectors.
A laggard during rising markets in 2007, Franklin India Taxshield (FIT) did much better in falling markets on account of its diversified large-cap base. Birla Sun Life Cap Tax Relief ’96 was a disappointment in 2008 because it had a large holding in the capital goods sector. It also took a big hit because of its exposures to plunging stocks: United Breweries Holdings and ICICI Bank.
Hybrid
Even if 2008 was good for debt-oriented hybrid funds, a few equity-oriented hybrid funds are also among the toppers since we take a three-year time frame.
Equity—Conservative Allocation.
This year’s topper, UTI Mahila Unit (UMU), has done well over a three-year period, although its past year’s performance was weak. The fund has actively managed equity and debt components to maximise returns and minimise losses. The fund lost out last year because its equity allocation was 10-14 per cent though, in the past, it has invested up to 25 per cent in equities.
With a one-year return of 28.5 per cent in 2008, Birla Sun Life MIP Savings 5 (BMIP5), could be mistaken for an equity fund. But it doesn’t invest more than 5 per cent in equities at any time. Massive redemptions on MF street in October 2008 brought down its corpus to Rs 21.1 crore by the end of that month from Rs 1,656 crore in the previous month. At this point, fund manager Satyabrata Mohanty parked 75 per cent of its corpus in just two G-secs and held the rest in cash to capitalise on falling interest rates during the last quarter of 2008. "We were also quick to exit them in January, when the tide reversed," he says.
Equity—Moderate Allocation.
The topper, ICICI Prudential Child Care-Study (IPCCS), invests 15-25 per cent in equities and the rest in debt. The scheme is targeted at parents who want to plan for the higher education of their children who are about 15 years old. As the goal is medium-term, fund managers Rahul Goswami and Munjal Shah manage the equity portion aggressively and invest only in mid- and small-caps. The fund did slip in 2008, but it balances its equity risk by sticking to high-rated debt. "Return of investment is more important to us than return on investment; I don’t want to take undue credit risks," says Goswami.
Debt
Overall, debt funds had a good year with falling interest rates and were back in the reckoning big time. After a gap of four years, they aggressively mopped up average maturities.
Bond—Medium-Term.
It was Canara Robeco all the way on the debt side. Head of their debt funds, Ritesh Jain, who joined in April 2008, was a star with both Canara Robeco Income (CRI) and Canara Robeco Gilt PGS, topping the Bond-Medium Term and Gilt-Medium Term categories, respectively. Jain manages CRI very actively, eking out returns on a daily basis, but limits trading to 40 per cent of the portfolio. He says: "I strongly believe that product cycles will get shorter as higher volatility creeps into all classes. Trading calls will have to be taken to bring down volatility." Lapping up corporate bonds post-September 2008 boded well for CRI.
The next in class, Fortis Flexi Debt (FFD), takes active management to a different level. It swings across average maturities by investing in different asset classes in varying proportions. While this is risky, so far, fund manager Alok Singh has managed to do this well, helped by the small fund size. Says Singh: "If we trade actively and our calls go wrong, we immediately spring into action." With government borrowing likely to be on the higher side, Singh now holds low-maturity corporate bonds to benefit from the spread between the bonds and the G-secs.
Bond—Long-Term.
Another dynamic bond fund, IDFC Dynamic Bond (IDB), did well. The fund doesn’t shy from aggressively stocking up higher maturity papers. Arjun Parthasarthy, earlier a fixed income trader with Citigroup and IDBI Bank, has been managing IDB since June 2008. Even with a corpus larger than FFD’s, IDB has done well over longer periods. "We aim to catch the medium- to long-term phase; hence, were comfortable with a larger corpus," says Parthasarthy.
Bond—Short-Term.
Category topper JM Short Term (JST) was aggressive and invested in scrips with slightly higher average maturities than is expected from a typical short-term fund. But with its corpus swaying between Rs 20 crore and Rs 50 crore in the latter half of 2008, JST took aggressive calls to stay ahead. Veteran debt fund manager Shalini Tibrewala, who got her calls right, swiftly switches maturities depending on market outlook.
Tactically targeting a mix of bonds and G-secs in the shorter to medium range also helped Reliance Short Term (RST) achieve a good rating. Additionally, RST also dabbles in slightly lower-risk scrips time and again, but fund manager Prashant Pimple claims the MF does its due diligence. "Going forward, we expect further rate cuts to happen due to falling inflation and the short- to medium-term rates could drop," he says.
Liquid.
Taking risks has consistently been LIC MF Liquid’s (LML) forte, be it in buying scrips below AA-rating—Outlook Money’s safety threshold—or holding scrips with high average maturity. But fund manager Ashish Kumar says that from September 2008, the portfolio has gone for a clean-up exercise. On account of the new regimen that limits the average maturities to 90 days for liquid funds, Kumar has stacked up LML’s average maturity. "Once the rule kicks in, I won’t be able to invest in higher duration papers; it’s best to lock returns now," he says.
Source: Outlook Money
