The volatility in the stock markets since the beginning of the year and more so during the quarter ended June has taken a toll on the performance of large-cap funds. With higher commodity prices and interest rates the Reserve Bank of India increased the benchmark repo rate 11 times since March 2010 hurting Indian companies,the growth in profit of large companies especially in the industrial,automobile and consumer goods sectors,has shrunk. A report by Icra,a leading rating agency,on the performance of mutual funds for the quarter ended June shows that mid- and small-cap funds have outperformed their large-cap peers in the equity funds category. The analysis shows that the average returns for mid- and small-cap funds were close to 1.5%,while the large-cap funds delivered a negative 1.98%. During the same period (April to June) the benchmark indices,the 50-share Nifty and the 30-share Sensex,gave -3.07% and -2.96% returns,respectively. The rating agency evaluated 244 equity schemes for the one-year performance and the results were startling: Only 48 schemes reported an improvement in performance,42 schemes slipped from their previous position and 146 schemes remained unchanged for the quarter. On a broader three-year horizon,of the total 200 equity scheme that the agency tracked,only 26 schemes showed improvement,25 schemes slipped from their previous position and 143 schemes remained unchanged. Analysts say the the main reasons for the negative returns in equity funds in the quarter ended June this year were because of the high crude prices,higher headline inflation which led to monetary tightening by the central bank and lower-than-expected GDP growth. Analysts say equity schemes could not recover from the shock of 2008 when the Sensex fell to the 8,000 points level. Some gains were made last year,but with the markets on a slide since the beginning of this year,equity funds will have a difficult phase in the near to medium term, says Pradeep Jain,a certified financial planner. But that doesnt mean that investors should not continue with systematic investment plans (SIPs) in equity funds. The cost averaging works out best in a falling market scenario because this way the investor can average out her cost of purchase. If the investor does not witness a downturn,she is only exposed to a market rally,and the average purchase cost of her SIP will rise over a period of time, says Anil Rego,CEO of Right Horizons. On debt funds,the ICRA performance gauge for the quarter ended June shows that in a one-year performance horizon,of the 215 schemes that qualify for ranking,47 funds advanced,51 declined and 109 remained unchanged from their earlier performance. On the longer three-year horizon,of the 179 eligible schemes only 50 advanced,36 declined and 90 schemes remained unchanged. In the debt funds category,ultra short-term funds topped the chart,followed by debt intermediate and liquid funds. In the one-year debt fund category,33 schemes were analysed,out of which JPMorgan India short-term income fund,DSP BlackRock short-term and Reliance floating rate fund grabbed the top positions. In the three-year category,24 schemes were analysed by the rating agency,of which Kotak Flexi Debt Fund grabbed the top position. In the gilt fund category,18 schemes were analysed on a one-year time frame,out of which Birla Sun Life Government Securities Fund and LIC Nomura G Sec Fund outperformed. In the three-year category,17 schemes were analysed,of which Religare Gilt Fund - Long Duration Plan and HSBC Gilt Fund took the top positions. Analyst say there are some signals that interest rates have peaked,and with the equity markets showing downward movement,gilt funds which predominantly invest in government bonds can be a better bet. Gilt funds invest in government securities or G-secs,which tend to rise when interest rates fall and vice-versa. The maturity of G-secs varies,as the government issues paper of various tenor and can be short,medium and long term. Funds houses also promote gilt funds by emphasising on their risk-free returns,but they cannot give any assured returns because of the interest rate risks. The credit risk is next to nil as the government has zero risk of defaulting,but the interest rate risk rises as the market price of debt securities varies with fluctuating interest rates. In fact,after the collapse of Lehman Brothers and the global financial crises,when the central bank reduced the policy rate by 275 basis points between December 8,2008,and April 21,2009,to infuse liquidity in the banking system,prices of long-term bonds and G-secs appreciated and the funds that were invested in such securities benefited.
