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BS Markets Bureau | February 17, 2004

Calendar 2003 has been a year of exceptional gains for most Indian investors, says the ICRA Online Mutual Fund Ranking.

With robust inflows from foreign institutional investors, the equity markets witnessed a major rally during the last calendar year -- the Bombay Stock Exchange Sensitive Index was up by 2,462 points in 2003, the highest gain in any calendar year since its inception in 1979.

More remarkable perhaps was the depth and breadth of the 2003 rally, encompassing both large and mid-cap stocks across sectors.

The most significant appreciation was witnessed, among others, by stocks from sectors like public sector undertakings , banking, technology, automotives, pharmaceuticals, fast moving consumer goods and the old economy.

Both the major equity market indices, the BSE Sensex and the National Stock Exchange Nifty, saw appreciation in excess of 70 per cent during 2003.

Among the major sectoral indices, the BSE PSU gained 144 per cent while others like BSE Bankex, BSE Healthcare, BSE FMCG and BSE IT indices appreciated by 108 per cent, 96 per cent, 35 per cent and 23 per cent, respectively.

The index for mid-cap companies -- the CNX Mid-cap 200 -- gained 136 per cent.

Arguably, one of the most effective strategies for the retail investor to cope with the ups and downs of the stock market is to follow the basics of investment: (a) invest for the long term -- do not press the sell button during bearish phases; (b) invest through mutual funds; and (c) invest through Systematic Investment Plans.

By following an SIP, the need to time the market is precluded; it is just that one buys more when the markets are ruling low and vice versa.

Perhaps it is pertinent to note that anyone who stayed invested through the bearish market that followed the end of the 2000 boom would now be a happy investor.

As for the debt markets, they also delivered reasonable returns during the year, despite the high volatility. Thus, the gilt market benchmark I-Bex gained over 12 per cent in 2003 over the previous year.

However, debt fund investors, who have had a good going during the last three years, would now have to realign their expectations with the prevailing low interest rates.

Further, given the confluence of positive factors -- like increased liquidity, and expectation of a 4-4.5 per cent annual inflation rate -- and negative ones -- like firming up of global interest rates -- the ride ahead through the debt markets is likely to be a bumpy one.

Equity Funds

Equity funds once again brought gains to investors in calendar 2003. The average returns from diversified equity schemes for the one-year and three-year periods ended December 31, 2003 were around 110 per cent and 23 per cent, respectively.

Diversified equity funds with focus on mid-cap stocks were in the forefront, leading the pack of diversified equity schemes; banking and technology were clearly the most popular sectors among fund managers.

As for Sectoral Equity funds, technology funds were back in focus reporting an average one-year return of 51 per cent as against a negative 0.06 per cent for the three-year period ended December 31, 2003.

Balanced Schemes

Balanced funds, on an average, posted over 60 per cent absolute returns during calendar 2003. Most fund managers booked profits and reduced the exposure to equities, as the stock prices soared in the latter part of the year.

While at the beginning of the year, the average allocation to equity was around 66 per cent, by the year-end, the average allocation dropped to 59 per cent.

The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 62 per cent and 21 per cent, respectively.

Marginal Equity Schemes

Marginal equity schemes, which are debt schemes with a marginal equity exposure, came into focus once again. With returns from debt funds declining and the equity markets showing improved performance, marginal equity schemes accounted for the bulk of the new launches in the mutual funds industry in 2003, attracting investors looking for better returns without taking too much risk.

The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 15 per cent and 13 per cent, respectively.

Debt Funds

Although overshadowed by the performance of Equity Funds, Debt Funds also reported satisfactory performance, with most long-term debt funds delivering returns in the range of 8 to 10 per cent.

During the last one year, most fund houses maintained an average portfolio maturity of five to seven years for their debt schemes.

Dynamic Bond funds were also launched to give more flexibility to fund managers in terms of portfolio restructuring.

The average returns in this category for the one-year and three-year periods ended December 31, 2003 were 7.75 per cent and 13.7 per cent, respectively.

Short-term debt funds , which are becoming increasingly popular among corporates and other investors with short investment horizons, also gained significance over the last one year because of the increased volatility in the debt markets.

The average return in this category for the one-year period ended December 31, 2003 was 6.25 per cent.

Gilt Schemes

Within the fixed income category, long-term gilt funds have been reporting the highest returns for the last three years.

The one-year and three-year returns posted by long-term gilt funds for the period ended December 31, 2003 averaged very high figures of 10.7 per cent and 18.9 per cent, respectively, on the back of a soft interest rate regime.

However, going forward, investors would perhaps have to reconcile themselves to very conservative returns from Gilt funds and also factor in the higher volatility associated with them vis--vis their debt counterparts.

Liquid Schemes

The returns from liquid funds moved within the narrow range of 5 to 5.5 per cent during calendar 2003. Over the same period, the call rates were around 4.25 to 4.5 per cent while the repo rate moved down from 5.50 to 4.50 per cent.

The average return in this category for the one-year ended December 31, 2003 was 5.36 per cent.

The methodology

ICRA Online Mutual Fund Rankings seek to inform investors and MF intermediaries of the category-wise relative performance of MF schemes.

The rankings, covering the two time horizons of one and three years, have been arrived at following an in-depth analysis of critical parameters, including: risk-adjusted performance; portfolio concentration characteristics; liquidity; corpus size; average maturity; and portfolio turnover.

Eligibility Criteria for Ranking

  • The Net Asset Value (NAV) of the MF scheme should have been disclosed daily during the period covered by the ranking.
  • In the case of one-year ranking, complete disclosure of monthly portfolio should have been made for the past one year. For the three-year ranking, complete disclosure of quarterly portfolios should have been made for the past three years.
  • The scheme's corpus size should have been at least 5 per cent of the average fund size of the category. (The average fund size of the category was calculated after classifying all schemes into various categories on the basis of asset allocation.)
  • Any category should have had a minimum of five schemes so as to be included for the ranking exercise.

Note: Only open-ended schemes were considered for the ranking exercise. The NAVs taken for the ranking were those of the schemes with the growth option.

For schemes which did not offer the growth option, dividend-adjusted NAVs were considered.

Classification of schemes

The classification of MF schemes was done on the basis of the asset allocation and the investment pattern of the schemes concerned. This is different from the traditional offer document-based scheme classification.

The classification on the basis of asset allocation and investment pattern holds more relevance as these two factors determine the risk level of MF schemes.

MF schemes with equity exposure were classified as Marginal Equity, Balanced, and Equity, on the basis of the extent of the equity exposure.

Then they were sub-classified as Diversified-Defensive, Diversified-Aggressive, and Sector schemes on the basis of their sectoral concentration.

Debt-based MF schemes were categorised on the basis of their average allocation to Gilt securities.

Then were sub-classified as Debt -- Short Term and Debt -- Long Term schemes, depending on their average portfolio maturity over the ranking period.

The Ranking Categories

The ranking categories defined in accordance with the classification discussed above were as follows:

  • Diversified Equity Schemes -- Defensive
  • Diversified Equity Schemes -- Aggressive
  • Sector Schemes (Only Technology Funds considered)
  • Index Funds (Nifty)
  • Equity Linked Savings Schemes (ELSS)
  • Balanced Schemes
  • Marginal Equity Schemes/ Monthly Income Plans
  • Income Schemes -- Long Term and Short Term
  • Gilt Schemes -- Long Term and Short Term
  • Liquid Schemes

The Ranking Parameters

Return Analysis: Return analysis was done on the basis of the excess return generated per unit risk. The excess risk premium was taken as the average daily active return of the scheme (for the ranking period) over the average peer-group return.

The downside deviation of the schemes' return from the expected return of the peer group was taken as the surrogate of risk.

Here the average peer group return was taken as the proxy for the expected return. A higher excess return per unit risk was taken to indicate better performance.

In the case of Index Schemes, the Return Analysis was done on the basis of Tracking Error, wherein a lower tracking error was taken to indicate better performance.

Portfolio Concentration Analysis: MF schemes that do not have an adequately diversified portfolio carry a higher risk than well-diversified schemes.

While for equity schemes, company concentration was considered, sector concentration was evaluated for debt schemes.

Company concentration was determined taking NSE Nifty as the benchmark to decide the extent of exposure in any of the scrips in the portfolio.

For debt schemes, the sectors that were considered are: Gilt; Non-Banking Financial Companies; Manufacturing Companies; Banks/Financial Institutions/Development Institutions; and Non-Financial/Non-Manufacturing Companies. Concentration in any of these sectors was penalised.

Liquidity: Liquidity analysis was done only for equity schemes. In this case the liquidity coefficient for a scheme was calculated as the weighted average of the liquidity coefficients of all scrips in the portfolio.

The liquidity coefficient of a scrip is calculated as the total number of shares in the portfolio of the scheme divided by the total daily turnover of the scrip.

Corpus Size: Since a larger size of the scheme's corpus lends stability to a Mutual Fund scheme during periods of high redemption pressure, credit was accorded to large-size schemes.

Average Maturity: Average maturity was considered in the case of Debt, Gilt and Liquid categories. Schemes with higher average maturity are susceptible to higher interest rate risks as compared with schemes with lower average maturity.

Portfolio Turnover: Schemes with low portfolio turnover were given a higher credit vis--vis those with a higher portfolio turnover.

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