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Inflation spooked markets

August 09, 2004 12:05 IST

It was a mixed week at the markets. The BSE Sensex closed at 5,197 points, up by 0.52%, while the S&P CNX Nifty posted a minor gain of 0.06% to end at 1,633 points. The marginal growths posted by the indices conceal the volatility experienced during the week.

Higher than expected inflation figures played spoilsport as the BSE Sensex witnessed a crash of more than 50 points on Friday.

Leading Income Funds
Income FundsNAV (Rs)1-Wk1-Mth6-Mth1-YrIncep.SDSR
DSP ML FLOATING RATE G 10.610.12%0.39%2.30%4.86%4.91%0.02%-6.67%
HDFC FLOATING LTP G 10.710.09%0.37%2.05%4.16%4.44%0.04%-5.27%
BIRLA FLOATING RATE LTP G 10.600.09%0.37%2.26%5.02%5.06%0.06%-2.34%
GRINDLAYS FLOATING RATE G 10.160.09%0.37%NANA1.56%0.04%-3.38%
PRU ICICI FLOATING RATE G 10.670.09%0.36%2.27%4.80%4.90%0.03%-5.41%
(Source: Credence Analytics. NAV data as on August 6, 2004. Growth over 1-Yr is compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis--vis those offered by a risk-free instrument)
(Standard deviation highlights the element of risk associated with the fund.)

Data released on Friday showed the inflation figures at 7.5%. Expectedly debt markets reacted adversely and we saw the benchmark 7.37% 2014 GOI yield rise 17 basis points above the previous weekly close, and end at 6.30% (August 6, 2004). Bond yields and prices share an inverse relationship, rising yields leading to falling bond prices.

Floating rate funds powered by their ability to counter rising interest rates (by realigning the coupon rates) prove to be smart choices in such an environment. Similarly dynamic debt funds, which invest across various segments of the debt market like gsecs, corporate bonds are also good options.

To put things in perspective, lets look at how conventional long-term debt funds and gilt funds have performed during the week. The tables below list the worst performers from the above categories over the week.

Gilt Funds: Worst performers
Gilt FundsNAV (Rs)1-Wk
ALLIANCE GSEC LT G 18.02-0.62%
BIRLA GILT RP G 20.38-0.80%
HDFC GILT FUND LT G 14.64-0.90%
BOB GILT G 10.06-0.97%
Income Funds (LT): Worst performers
Income FundsNAV (Rs)1-Wk
UTI - BOND ADVANTAGE G 16.83-0.29%
HDFC INCOME FUND G 15.43-0.31%

(Source: Credence Analytics. NAV data as on August 6, 2004. Growth over 1-Yr is compounded annualised)

Ironically the week also saw the launch of an assured return scheme; investors in assured return schemes perhaps bear the worst brunt due to inflation.

The Senior Citizens Savings Scheme that offers a return of 9% p.a. was launched this week. Despite the aforementioned shortcoming, for risk-averse investors who are looking at earning regular returns, this is a lucrative proposition.

Leading Diversified Equity Funds
Diversified Equity FundsNAV (Rs)1-Wk1-Mth1-Yr3-YrIncep.SDSR
TAURUS STARSHARE 11.774.90%14.72%43.36%32.94%0.90%7.50%0.33%
MAGNUM GLOBAL 12.574.40%16.28%91.09%36.27%6.83%7.59%0.41%
HDFC CAPITAL BLD. G 24.933.50%8.47%74.57%39.17%15.59%7.33%0.44%
RELIANCE GROWTH GR 78.823.45%10.89%75.04%60.74%26.36%7.55%0.54%
DISCOVERY STOCK 6.083.40%13.22%23.83%18.04%-4.86%NANA
(Source: Credence Analytics. NAV data as on August 6, 2004. Growth over 1-Yr is compounded annualised)

Taurus Starshare (4.90%) was the weekly topper in the equity funds segment followed by Magnum Global (4.40%). Yet again funds that invest predominantly in midcap stocks and those adopting the value style investment pattern, dominated the top positions. HDFC Capital Builder (3.50%) a value style fund that invests in the midcap segment occupied third position. This fund is also focussed in this week's FundSelect, our premium mutual fund advisory service.

Leading Balanced Funds
Balanced FundsNAV (Rs)1-Wk1-Mth1-Yr3-YrIncep.SDSR
KOTAK BALANCE 13.832.75%7.47%36.80%23.40%12.23%5.18%0.36%
CANGANGA 10.782.08%5.89%32.04%19.92%4.40%6.98%0.29%
TATA BALANCED APP 22.112.01%6.78%40.50%24.17%14.11%5.39%0.39%
UNIT SCHEME 95 G 29.801.95%4.41%31.45%21.88%18.27%4.59%0.32%
ESCORTS BAL G 21.321.94%8.13%43.83%27.29%25.55%6.06%0.33%
(Source: Credence Analytics. NAV data as on August 6, 2004. Growth over 1-Yr is compounded annualised)

Balanced funds also suffered on account of the falling debt markets. Kotak Balance (2.75%) topped the balanced funds category while Canganga (2.08%) came in at second position. Category leader HDFC Prudence (1.43%) had a reasonable week as well.

Last week we spoke about the relevance of receiving proper information and sound advice from your investment advisor.

This time round let's consider the individuals whose advice investors should strictly avoid. These investment experts for a variety of reasons can prove to be rather damaging to your investments.

For example, relatives who spent a lifetime investing in post office schemes like the NSC, PPF etc will generally prod you to consider the same avenues.

While their choices may have been made at when the government and banks were the most popular institutions to mobilise public savings; post-liberalisation of the financial sector we have options like mutual funds and other innovative products like ULIPs from private insurers.

Similarly friends and colleagues who make investments based on 'tips' should be given the miss.

Debt markets have been witnessing a sharp decline for some time now. The same would have impacted your investments in balanced funds and MIPs, apart from the regular long-term debt funds. At this point we would like to reinforce our view -- reallocate your assets to floating rate funds and avoid long-term debt funds for the time being

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