Continue to ride equity, but raise exposure to debt funds

Over the three-year period up to May 31, 2007, SBI Mutual Fund was the best-performing fund house in the equity segment and Birla Sun Life Mutual Fund the best-performing fund house in the debt segment.

Over the three-year period up to May 31, 2007, SBI Mutual Fund was the best-performing fund house in the equity segment and Birla Sun Life Mutual Fund the best-performing fund house in the debt segment. As many as 39 of 51 diversified equity funds and 10 of 14 equity-linked savings schemes (ELSS) with a three-year record have beaten the benchmark BSE Sensex, and rather impressively too. Income funds and gilt funds continued to be weighed down by rising interest rates, registering a paltry 3-year CAGR (compounded annual growth rate) of 3.9 per cent and 3.1 per cent respectively.

These are some of the findings of the Express Money-ICRA Online Best Funds 2007 rankings — a performance survey of all mutual fund schemes, across all fund houses, capturing all categories. The survey evaluated fund performance using statistical tools that take into account both returns and risk, and ranked them across 10 homogenous categories (three equity, six debt, and one balanced).

In the equity segment, the rising market lifted all funds, though in varying degrees. Over a three-year time horizon, 75 per cent of diversified equity funds beat the market. However, over a one-year horizon, with the market becoming more discerning and fund managers taking divergent calls, the percentage dipped to 52 per cent.

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If the number of four- and five-star funds — a rating tool used by us to capture performance — is an indicator, SBI was the clear leader with five schemes, followed by HDFC with four; Birla, DSP Merrill Lynch and Sundaram had three schemes apiece.

Market players say the long-term outlook for equities remains positive, but advise investors to tone down expectations and to stay patient. Says T P Raman, managing director, Sundaram BNP Paribas Asset Management: “Unlike the past three years, even attractive stock themes may take longer to deliver value. On 2008-09 and beyond earnings, select stocks across the capitalisation curve and sectors that are attractive.”

On the debt side, Birla had the maximum number of four-star and five-star schemes (eight), followed by ICICI Prudential (five) and Kotak and Tata (four apiece). Investors preferred short-term products that are less impacted by interest rates movements, namely liquid funds and fixed maturity plans (FMPs). Although income funds and gilt funds had a better year, their poor showing in the preceding two years reined in their three-year numbers.

However, experts say these two debt fund categories could be back in business. Says Nandkumar R Surti, chief investment officer-fixed income, JP Morgan Asset Management India: “As the slew of monetary and fiscal measures have the desired effect of checking inflation, interest rates will start to moderate; perhaps even drift lower. Investors should look to make allocations to longer-duration debt funds.”

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During the period under review, the Indian mutual fund industry crossed the $100 billion mark. On May 31, the total assets under management stood at Rs 4,16,320 crore, compared to Rs 2,31,862 crore in March 2006 — an increase of 80 per cent. While all fund houses have added AUMs, the pecking order has changed. The notable climber is Reliance Mutual Fund. Not even in the top five in May 2005, it has since grown at a compounded annual rate of 141 per cent on the back of new launches, good performance and aggressive marketing, pushing down both ICICI Prudential and UTI by a spot.

Is your scheme a leader or a laggard? Find out in the Express Money-ICRA Online mutual fund rankings in today’s edition of Express Money.