|Rediff India Abroad Home | All the sections|
India's BEST mutual funds, ranked!
May 09, 2006
Last year we todl you that the acid test of a mutual fund scheme was during a bear market; that was when the Bull market seemed to be losing steam. This year, the bull seems to have got its second wind, and the markets have never seemed so good.
The bellwether BSE (Bombay Stock Exchange) Sensex has breached the 12,000-point mark and promises to do even better. The Nifty has also been steaming ahead, touching a new high of 3,578 recently. Mutual fund managers say that this bull run is not entirely due to what former US Federal Reserve chief Alan Greenspan once called "irrational exuberance"; they are of the opinion that this market is based on solid fundamentals, which is why they also expect even better times ahead in the near future.
While this surmise may be a matter that's open to debate, what is in no doubt is that the gods of investing are smiling upon this market.
And that's something that has got fund managers cheering all the way to the bank.
And when fund managers are happy, investors are bound to be happy too. In fact, over the past few years, investors have realised that going the MF route is a sure-fire way of minting money. That's something particularly true of equity funds, as seen in the rising popularity of equity-oriented schemes.
There has been a fair share of investment in debt funds as well. But then, as the Outlook Money Mutual Funds rankings this year show, diversified equity funds seem to have stolen the show in this round. Last year, we said that a well-chosen diversified equity fund would fetch you returns of 15-18 per cent. This year, we are delighted to say we were wrong. Even the lowest performing fund, LIC MF Equity Fund, returned 25 per cent.
Debt funds, however, suffered on account of interest rate volatility during the past year; and their fund managers were forced to realign their portfolios by investing in shorter tenure papers to reduce the impact of this volatility in rates.
The good news is that hybrid funds, which invest in both equity and debt, have done well. In fact, we have seen how a well-managed hybrid fund like HDFC Prudence Fund has outperformed 25 of the 53 equity-diversified funds we ranked.
But before we get into the 2006 rankings and the reasons thereof, let us take a look at some of the major MF events of the year gone by.
The year that was
Advantage ELSS: We've said it often enough: equity-linked savings schemes are the way ahead. The government too has taken note of this prescription and has now said that investments of up to Rs 100,000 in ELSS schemes will qualify for Section 88 rebate; the earlier sectoral caps on Section 88 instruments have been removed. Investors need no longer be restricted by the fact that only up to Rs 10,000 in ELSS will qualify for Section 88 benefits.
And the new freedom shows: in the three ELSS schemes launched last year, there were several investments of Rs 100,000, where earlier investors would stop at investing Rs 10,000. The three ELSS launched last year mopped up Rs 886 crore in all.
New launches: Mutual fund houses pulled out all stops last year and launched a record number of new schemes. And because of the run in the stock markets, most of them were predictably in equities; 43 new schemes were launched last year that mopped up a total of Rs 25,000 crore (Rs 250 billion) - the highest collection so far by equity funds.
The not-so-good news is that most of these funds were far from being unique or novel, and were launched purely to take advantage of the bull run. But there were a few truly innovative funds that promised a new investment avenue.
Rechristened: The year also saw the renaming of new launches; Sebi (the Securities and Exchange Board of India) made it mandatory for fund houses to call their launches NFOs (new fund offers) instead of IPOs, so that prospective investors could tell equity IPOs from MF launches. It seems a small thing, but makes a world of difference to unsuspecting investors who want to subscribe to new mutual fund launches simply for listing gains.
Sebi has also banned initial issue expenses and amortisation, in a bid to control how funds are priced and sold. Needless to say, much more remains to be done, and we hope the regulator will keep up its reforms.
Closed-end: As markets continued their run upwards and investors started churning their money more frequently to book profits - withdrawing from existing schemes and putting it in new ones - mutual funds saw a need as well as an opportunity to launch schemes that not only capitalised on equity but also brought in sticky money.
Closed-end funds were seen as the solution and Franklin Templeton, HDFC and Tata Mutual Fund launched their versions of closed-end funds last year. Prudential ICICI launched its version earlier this year.
As most of these funds invest in small and medium-sized companies, they give ample opportunity to investors to make money in five years, which is the usual tenure of such schemes. While these funds do not entirely rule out an early exit, the high exit loads prescribed generally prove to be a sufficient deterrent.
Hardly glittering: The big news last year was when the Budget allowed the introduction of gold funds. Commodities trading has been seeing a fair amount of action of late, and retail investors have been wanting to get their piece of the action.
So, when gold funds were allowed, investors rejoiced. Gold prices have been hitting record highs regularly, but investing in physical gold comes with its own set of problems - ascertaining purity, storage, security, etc. Buying gold mutual fund units does away with the need of physically chasing gold as it will now be possible to hold the metal in demat form.
However, gold funds are yet to see the light of day. One reason for the delay was the fact that Sebi issued guidelines for these funds only in January this year. Mutual funds are now busy trying to design gold schemes based on these guidelines and they are likely to make an appearance in the markets soon.
So, yes, there has been a lot happening in the mutual funds space. And how has all this affected your investment and how has it hit the mutual funds? Let's get on with the Outlook Money listings, and you can take a look at how your scheme has fared.
Equity funds: Blazing away
We've already said it, but let us hammer the fact home: diversified equity funds have surpassed all expectations and have reported returns far higher than what we had anticipated last year. And overall, though there was plenty of positive action in the large-cap space, the mid-caps dominated the equity landscape.
While the Nifty returned 34 per cent, the CNX Mid-cap yielded a return of 32.29 per cent. For the better part of the year however, mid-cap stocks rallied to dizzying heights on the bourses. Eventually though, mid-cap returns flattened out due to profit-taking and large-cap stocks took over as front-runners towards the end of the year.
Equity-diversified funds: There wasn't much of a surprise in this space with the usual suspects delivering great returns. Franklin India Prima Fund tops our list this year too; it has been among the top five with consistent regularity. Prima Fund was also our Pick of the Fortnight. While last year may not have been as much the year of the mid-caps as the previous year was, mid-cap stocks were still dominant. Franklin India Prima invests predominantly in these stocks and in small cap scrips.
On account of a high corpus and liquidity concerns in the mid-cap segment, the fund closed for further subscription for six months in February this year. This bodes well for existing investors, as there's no telling where the markets are headed. Should there be a crash, a restricted corpus size eases the pressure on the fund.
Siva Subramaniam, fund manager, Franklin India Prima, says, "We set a target price for each stock, taking into consideration the fundamentals of the individual company as well as the sector. This price is revised continuously as we receive and analyse the information flow. We also book profits aggressively."
SBI Magnum Contra Fund has come up one place from last year's No 3 spot, thanks mainly to its aggressive fund management and a complete portfolio overhaul.
As the name declares, the fund seeks to invest in contrarian opportunities and is, therefore, a long-term investment. In fact on a pure, point-to-point returns basis, this scheme tops Franklin Prima in the past one and three years. However, since we consider the fund's rolling returns - an average of one-year returns over the past three years (See box: The Methodology) - the scheme comes a close second. The only cloud is that much of its past performance has been thanks to its aggressive fund manager Sandeep Sabherwal, who has now left the fund. Chances are that the fund may get a little conservative, but its performance is likely to be consistent.
The usual suspects - Reliance Growth and Reliance Vision - lose out on account of a higher cash allocation, though they have returned 70 per cent and 55 per cent respectively in the past one year. While it may be a conscious strategy for the funds, we penalise equity funds for investing more than 10 per cent in cash.
One of our other regular toppers, Franklin India Bluechip, drops to a three-star rating this year. It has lost out because it is a large-cap fund and much of the current market rally has been in mid-caps. The scheme remains a decent long-term option.
HDFC Equity Fund, which is also large-cap oriented, fares comparatively better. And then there's Taurus Discovery Stock, which, despite outperforming the category average, ranks 51 out of 53 on account of high volatility and high scrip concentration.
ELSS: There has been a lot of SBI MF in our rankings this year. For the first time in the ELSS category, SBI Magnum Tax Gain Scheme 93 tops our charts. The fund actively manages stocks of different market caps, and over the last two years, it has been actively investing in mid-caps.
In spite of the phenomenal rise in its corpus (from around Rs 60 crore in January 2005 to Rs 705 crore now), the fund's performance hasn't faltered; it has returned 100 per cent in the past one year, the highest in the category. "Although we were heavily into mid-cap stocks, we have recently increased our allocation to large-caps as well, as volatility is lesser here," says Sanjay Sinha, fund manager, SBI Magnum.
Close on its heels is HDFC Long Term Advantage Fund, which loses out to SBI's scheme on a pure returns front, though it shows comparatively less volatility. The fund makes its debut in our rankings. This is the second ELSS fund from HDFC Mutual - the other being HDFC Tax Saver, which it acquired from Zurich India Mutual Fund.
While HDFC LT gets five stars, HDFC Tax Saver finishes with four stars - it continues its good show as the fund has got a five-star rating since the past three years. The third place goes to Prudential ICICI Tax Plan, which has gone up four spots since last year.
Sector funds: This was the year of FMCG funds, which stole the show from other sector funds like oil and petro funds. Prudential ICICI FMCG Fund comes out tops by returning 96 per cent in the past one year. The fund has been the least volatile of all FMCG funds, as it is significantly invested in large-cap stocks.
Tech funds have not managed to recover their glory days yet, but they have put up a decent showing. Like last year, Tata Life Sciences and Technology Fund topped the list. The scheme retains the flexibility to invest in not just technology stocks but also in pharmaceuticals, which reduces volatility. This is a huge advantage and has stood the Tata tech fund in good stead, as it has otherwise underperformed its category average.
Rising oil prices and continuing subsidies doled out by oil companies due to the government's faulty prices kept the oil and petroleum sector in a limbo. Oil and petro funds put up a sad show, and JM Basic Fund returned 17.08 per cent in the past year.
Though returns from UTI Growth Sector Fund-Petro were higher, it lost out on account of high scrip concentration. The corpus of both funds fell in 2005 - JM Basic Fund's corpus went down from Rs 39.29 crore in January 2005 to 11.76 crore in March, while UTI Growth Sector Fund-Petro's corpus went down from Rs 239.83 crore in January to Rs 219.73 crore in March.
Debt funds: Still down
Debt funds have continued to suffer on account of interest rate volatility this year. As against Rs 12,145 crore that bond funds mobilised in January 2005, they managed only Rs 5,457 crore (Rs 54.57 billion)†in March, according to AMFI data. Fund managers have continued to realign portfolios by investing in shorter tenure papers to reduce the impact of interest rate volatility on their funds.
The year also saw the introduction of a new breed of liquid funds, which invested only in cash and call markets. These schemes have an average maturity of around a day or so and invest in scrips that mature overnight.
Why this new animal? Banks withdrew huge sums from liquid funds on account of the lack of liquidity in the debt market and also because they deployed money in call money markets earning as high as 7 per cent annualised. Mutual funds were quick to launch liquid-call plans that invested only in call money instruments. But since none of these funds have completed a year, we have not considered them for our rankings.
Bond Funds: In the midst of volatility is opportunity, which bond funds have been quick to take advantage of. UTI Bond Fund, the topper here, returned 8.97 per cent, one of the highest returns of the category. And this after reporting 1 per cent returns last year. After the beating it took in 2004, the fund reduced its exposure to government securities, which brought down volatility.
"We also reduced our average maturity last year," says Amandeep Chopra, fund manager, UTI MF. The fund also got a boost when the credit ratings of its holdings - like PNB, Central Bank and Oriental Bank - went up. (Whenever a paper's credit rating improves, its market price goes up.) The fund also has one of the lowest expense ratios. During periods of increased volatility, this helps boost a fund's returns.
Principal Income Fund goes to No 2 from top spot, but the biggest gain (after UTI, of course) was by Reliance Income Fund, which climbs 11 spots to finish at No 3.
Some funds seem to have gone just a tad too far in reducing their average maturity to ward off interest rate volatility. One of the biggest offenders is BOB Income Fund. Its average maturity fell to just one day in the last three months of 2005, as it invested its entire corpus in securities that mature overnight.
Yes, that may be the fund's strategy, but we feel that a fund must stay true to its objectives and invest accordingly: BOB goes to No 15. Can Income Scheme fares slightly better on that front, but still with an average maturity of just 161 days, it too was penalised and goes to 11.
This year, we have added a new category: short-term funds. The first fund to top this new list is Prudential ICICI Short-Term Plan. Here too, Can Short-Term Plan is ranked only 9th in spite of topping the one-year category returns with 7.67 per cent, mainly because the fund's average maturity was just one day. The fund has seen huge outflows consistently throughout 2004, as its corpus fell from Rs 73.64 crore in March 2004 to Rs 71 lakh (Rs 7.1 billion)†in December 2005.
Gilt Funds: Short-term government securities funds outperformed their long-term counterparts and DSP ML G Sec Fund-Plan B-STD topped the category. With a corpus size of Rs 14.20 crore (Rs 142 million), this is among the smallest gilt funds in the industry. Reducing the average maturity further helped the fund as it kept its interest rate volatility on the lower side. The fund has exited government securities and got into treasury bills - shorter tenured government securities. "We were able to actively manage our portfolio and thereby manage the interest rates," says fund manager Dhawal Dalal. This g-sec fund also had the lowest expense ratio in its category.
Funds that have invested huge portions of their corpus in single securities were penalised. For instance, BOB Gilt Fund and ING Vysya Gilt Fund had invested 89.27 and 86.65 per cent respectively in just one security. While BOB was ranked last, ING Vysya was ranked 33 out of 36 schemes.
Liquid Funds: It was a good year for liquid funds as their average return was 5.25 per cent, up from 4.5 per cent a year back. However, given that all liquid funds invest in shorter tenured papers, getting their interest rate calls right and managing the fund's tenure smartly is what differentiates one liquid fund from another.
Our topper, Chola Liquid Fund, managed to do all of that and jumped 18 places to finish at No 1. The fund turned more aggressive - its average maturity as of December was 155 days compared to 96 days a year back. Says Ashish Nigam, fund manager: "My scheme's inflows can be a little unpredictable at times. So I have to manage the fund with a slightly higher maturity to earn the kicker in returns in case I suddenly get a lot of inflows. Therefore, even if I get a large amount of cash in a month, my scheme's yield should not go down drastically." The fund has added around Rs 400 crore to its corpus over the past year.
LIC MF Liquid Fund debuts at No 2, with above-average returns, low volatility and a low expense ratio. Last year's topper, DSP ML Liquidity Fund, retains its five-star rating but falls to No 3. Bringing up the rear is ING Vysya Liquid Fund, mainly because of its high scrip concentration - 77.66 per cent in its top 5 scrips.
Two new categories have been added here this year. LIC MF's Floating Rate Fund-ST tops the new short-term floating rate fund category, while JM Floater Fund-LTP tops the long-term floating rate funds category.
Hybrid Funds: Growing up
Otherwise known as balanced funds, hybrid funds invest in both equities and debt. But their fortunes depend largely on how the equity market performs. That was hardly a problem last year, as the upswing in equities gave the required kicker to hybrid funds. As we've already said, HDFC Prudence Fund, a hybrid fund, outperformed 25 of 53 equity diversified funds from our lot.
Balanced Fund: No surprises here, as HDFC Prudence has made it a habit to come on top of our rankings. Rated five-star for the third year running, the scheme returned 49.1 and 52.8 per cent in the last one and three years. It beat the category average despite being amongst the least volatile. "Since we don't chase momentum stocks and buy stocks with good businesses with at least a two-year view, our fund's volatility goes down," says Prashant Jain, CIO, HDFC Mutual Fund.
Though the fund can invest across market cap in equities, it prefers to hold 40-70 per cent of its equity portion in large-cap stocks. The fund manages its debt portion passively and prefers to hold securities with shorter maturities and hold them till maturity.
At second place is Templeton India Pension Plan. Though its returns are lower than some other aggressive balanced funds, its volatility quotient is among the lowest in the category. SBI Magnum Balanced Fund jumps from 15 last year to No 3. The fund, along with HDFC Prudence Fund, boasts one of the best one-year returns in the past year on account of the fund's turnaround on the equity side.
LIC Children's Fund finished last, reporting returns of a meagre 2.9 per cent in spite of holding 24 per cent in equities. The fund, though, has held high levels of cash, as high as 77 per cent in June 2005.
Monthly Income Plans: This year, we decided to tweak our definition of MIP (monthly income plan) and have included even those funds that have a mandate to invest as much as 30 per cent in equities, even if those funds don't aim to declare a monthly income.
This is because MIPs are actually a misnomer; these funds try to distribute dividends monthly but cannot guarantee this, as Sebi rules don't allow funds to assure any income.
There have been several MIPs that have skipped dividends when there's a bad patch, making us wonder why they were ever called MIPs in the first place. Which is why we've expanded our definition.
The buoyant equity market was good for hybrid funds. SBI Magnum MIP topped the charts. The fund gave a modest return of 9.48 per cent in the past one year and 9.05 per cent in the past three years. It also had one of the lowest expense ratios in the category at 1.5 per cent.
On account of investing significantly in large-cap stocks, it demonstrated low volatility. Says K. Ramkumar, head-fixed income, SBI Mutual Fund: "As this scheme is meant for those investors who would like to introduce equities in their portfolios and expect slightly more returns than available from a debt fund, our MIP fund limits volatility by investing in large-cap stocks."
Birla MIP comes in second and Templeton India MIP comes third. Though UTI Mahila Unit Scheme topped the category with 30.19 per cent returns in the past one year, it was penalised for having 34.47 per cent equity exposure, as of December 2005.
Our toppers have delivered consistent performances over the past few years. But this is no guarantee of future performance. The disclaimer "Mutual funds are subject to market risk" remains as true as ever!
The Value of Innovation
Not every mutual fund scheme is a me-too product. Here are some aimed at hitherto-unsatisfied areas of mutual fund market.
Franklin Templeton Fixed Tenure Funds: These closed-end funds invest in fixed income instruments with up to 30 per cent of equity. The equity component is conservatively, though actively managed. It's a good way for the risk-averse to get a flavour of equity, while retaining the stability of debtĖthey focus on high credit quality instruments and hold them to maturity to minimise interest rate volatility.
Reliance Equity Fund: Says Sunil Singhania, fund manager, Reliance MF: "This fund was launched to take advantage of price falls and to provide protection from unforeseen events." If the fund is bearish on a stock, it will initiate a short position on it, contracting to sell the stock future and-ideally-making a profit by buying it back after the price falls. The extent to which the equity corpus is hedged or short would depend on the Nifty's trailing 12-month price/earnings ratioĖit would rise as the PE rises.
Prudential ICICI Blended Plan: This fund mixes debt with equity and equity derivative products that exploit the arbitrage between spot (cash) and futures prices. Say Bank X shares trade at Rs 100, while one-month Bank X futures are at Rs 101. The scheme can buy the first and sell the second, locking into the 1 per cent gain. Since it takes two opposite positions, which cancel when cash and futures prices converge, it gains however the share price moves. Yogesh Bhatt, fund manager, Pru ICICI AMC, says: "It is a better alternative to a debt product."
HDFC Multiple Yield Fund: The scheme invests 85-95 per cent of its net assets in fixed income securities of roughly one-year maturity and has a largely buy-and-hold strategy. Over the medium term, this part will earn returns nearly equal to the underlying bond yields, regardless of interest rate movements. The rest of its assets are invested in equities. Wait for a new series to launch and invest with a 15-month horizon.
Benchmark Inverse Index Fund: Equity funds can't expect to make money when markets fall. This fund, now awaiting Sebi approval, promises otherwise. It has a 100 per cent short position on the Nifty, with any spare cash in money markets. If the Nifty falls 1 per cent, it returns 1 per cent plus the interest earned on money market instruments. If the index rises 1 per cent, it loses 1 per cent, less the interest income. Says Rajan Mehta, ED, Benchmark MF: "It is for those who aren't comfortable taking direct exposure in the futures market (either to go short or to hedge)."
No dramatic changes here if you've been following our ratings over the years.
Categories: Based on their investment objective, we classified schemes into 11 sets: equity (diversified, tax-saving and sector), debt (bond, short-term plans, gilt, liquid, short-term floating rate and long-term floating rate), balanced funds and monthly income plans (MIP). Only schemes with minimum investment stipulation up to Rs 25,000 were considered, except for liquid funds where we increased the threshold to Rs 50,000.
Returns: The cut-off date was 30 December 2005. Equity and balanced funds were evaluated on a rolling return of one year over the past three years; for bond, gilt and MIPs, one-year rolling returns for the past two years; for short-term plans, one-year rolling return rolled over the past one year; for liquid, short-term floating, long-term floating and STP, six months rolling return rolled over the previous six months on a daily basis. Data was sourced from mutualfundsindia.com.
Risk: For each fund, we quantified five kinds of risk.
Downside risk: A statistical measure, 'targeted semi-variance, showing the number of weeks a fund earned less than the risk-free rate and the shortfall, was used.
Strategy risk: We penalised balanced funds with over 60 per cent in equity, debt funds with over 10 per cent in equity and equity funds with over 10 per cent in debt.
Concentration risk: Funds holding a security (other than g-secs, where there's no theoretical risk of default) in excess of 10 per cent of their corpus, gilt funds with more than 30 per cent of their assets in g-secs and funds with more than 40 per cent in their top five holdings were assigned a concentration risk.
We also penalised schemes that had maturities disproportionate to their objective. In bond funds, for maturity between 1 and 180 days, the penalty was 12 points; for 181-365 days, 6 points; for 365-540 days, 3 points; for 540-730 days, 2 points; and for more than 730 days, 1 point. For short-term plans with average maturity between 0 and 90 days, the penalty was 10 points; for 90-180 days, 5 points; for 180-270 days, 2 points; and for more than 270 days, 1 point. The actual expense ratio for debt funds and MIP, as of November 2005, has been added to the total risk quotient.
Credit risk: Funds with low-quality paper rated below AA have been penalised.
Non-disclosure risk: Funds that don't disclose portfolios or data critical to analysis were penalised by assigning them the highest concentration risk.
Rankings. . .: The six types of risk were clubbed together to arrive at the total risk figure. Next, we computed the risk-adjusted return by dividing the return by the risk. The funds were then ranked on the basis of that score.
. . . and ratings: Since the variance between two ranks can be statistically insignificant, we assigned star ratings. The top 10 per cent of schemes get 5 stars; the next 22.5 per cent get 4 stars; the middle 35 per cent get 3 stars; the next 22.5 per cent get 2 stars; and the bottom 10 per cent get one star. Given their small set size, sector funds have not been given star ratings.
With inputs from Tejas P. Bhope, Outlook Money†