Of the 34 diversified equity-oriented funds we recommended last year, 29 outperformed their respective category averages. Remember, 2011 was a tough year on equity funds as the benchmark Sensex of the Bombay Stock Exchange lost 25%. Our best performing large-cap scheme fell by just 16%, while our best performing multi-cap fund fell by 15.2%. Mid- and small-cap funds fell harder, especially in the last two months. CNX Midcap index lost 31% in 2011. Though losses are hard to digest, it bodes well if your fund falls less than its benchmark. Should you sell your fund because of one bad year? No, the question you should ask is: why did the scheme lose money? Is it because of a fall in markets or was it poor fund management? Our advice is to exit due to poor management of the scheme and not due to falling markets. For funds with a five-year-plus track record, we typically would hold for at least one year to allow for the fund to regain its balance. Hold on if the fund has underperformed because the theme itself got punished by the market and a rebound is expected.If 2011 was dominated by rising interest rates and falling equity markets, 2012 will call for cherry picking. The big change this year is in the infrastructure and short-term bond funds categories.
Infrastructure funds: Though infrastructure funds have been battered in the past three years (they lost 15% compounded in the past two years compared with losses of 5.0%, 4.4% and 3.4% by mid-, multi- and large-cap funds, respectively), we believe that there are companies in this sector that are available at good valuations. Many fund managers have already started picking up some of these stocks. We have replaced the three infrastructure funds in Mint50 and brought in two new ones. Better performance and a mandate that best embraces the theme are two reasons why we have brought in AIG Infrastructure and Economic Reform Fund, and Canara Robeco Infrastructure Fund.
Short-term bond funds: Though interest rates appear to have peaked and bond market experts are predicting interest rates to fall, the timing, the drop and quantum of reduction — most say it won’t be above 150 basis points (100 basis points is 1 percantage point) — is tough. That is not the only caveat. Though interest rates are expected to fall, they could soon move up as well, even if slightly, and then remain volatile. The main threat is the central government’s borrowing programme. The government’s fiscal deficit is on a rise and to bridge this deficit, it may borrow more money. Already the government increased its borrowing in 2011-12 to Rs 5.1 trillion, up 21% from its budget of Rs 4.1 trillion.
The finance minister has warned that the fiscal deficit for the current fiscal may be more than the budget estimate of 4.6% of gross domestic product (GDP). This makes predicting the direction of interest rates no easy job.
We faced the same problem in 2008. After the global crisis hit the Indian markets, interest rates fell and debt MF schemes registered big gains. Between August 2008 and February 2009 (seven months), government securities funds returned 11.7%. But when budget 2009 projected the fiscal deficit of 6.8% of the GDP compared with 2.5% in the budget estimates a year back, debt market yields shot up and prices of debt securities fell sharply. If these investors had held on to their units till December 2009 (17 months) or July 2010 (24 months), their returns would have dwindled to 8.7% and 7.3%, respectively.
Since there’s always a danger for an interest rate rally to cut short — or worse, reverse rapidly — it’s best to stick to short-term bond funds for now. Many long-term bond funds anyway have high exit loads. This year, wehave added AIG India Short Term Fund and Canara Robeco–Income Short Term. Both actively managed the average maturity of their underlying scrips last year to protect losses as interest rates rose. They come in on account of good fund management and performance. Both are rated one-star each. Reliance Short Term Fund moves out because its star rating dropped to two stars; Mint50 does not take schemes rated below three stars.
Principal Short-Term Fund goes out because of change in the fund manager, which is one of the reasons for Mint50 to drop a fund.