MUTUAL FUNDS - STILL NOT OUT OF THE WOODS IN 2009

2009 may have been a year of rags to riches for the equity market and its investors, what with mutual funds, on an average, returning over 74 per cent during the year, but the gains haven't been enough to wipe way the losses suffered during the 2008 crash. If you are one of those investors who entered the market close to its peak just before the January 2008 crash, chances are your investments may still not be in the money.

No surprise, then, that the two-year scorecard of equity funds (both open and close-ended) between December 2007 and now presents a rather gloomy picture. Only 21 of the over 260 funds, or 8 per cent of the equity fund universe, (with a two-year track record) generated positive returns. The rest still languish in negative territory.

Having said that, the performance scorecard should not, however, really shock investors, given that key indices such as the Sensex or even the broader market index such as the BSE-500 still sport a two-year negative score; the compounded annual return over the two-year period for Sensex and BSE-500 stands at -8.5 per cent and -10.9 per cent respectively.

Benchmarked against the BSE-500, the average -9.5 per cent returns staged by equity funds does appear less bleak. Three out of every five funds, or 60 per cent of the universe have declined, fell than the BSE-500.

Outperformers

Funds that generated positive returns could truly be called the outliers. Not surprisingly, theme funds in the pharma and consumer goods space topped the list, their two-year returns ranging 10-25 per cent. As against this, the best fund in the diversified equity category, ICICI Pru Discovery, delivered only 5.2 per cent.

The defensives tag attached to pharma and consumer good themes, backed by good financial performance by the underlying companies, appear to have helped the sector funds drastically outrun their diversified peers.

But even among diversified funds, those with a ‘value theme' or the ones that did not go significantly into cash closer to market-lows were the ones that generated positive returns.

While ICIC Pru Discovery and Birla Sun Life Dividend Yield Plus would fit the ‘value' category, others such as Templeton India Growth, Quantum Long Term Equity and HDFC Top 200 delivered well as they were almost fully invested in equities by December 2008, ahead of the March 2009 lows.

This trait also differentiated the performers from the rest of the pack as most other funds were late to shift from their cash-heavy positions to equities.

Negative territory

A good number of funds that underperformed were either sector funds or ones with a small-cap and mid-cap bias. Funds from the JM Stable languished at the bottom of the two-year performance chart.

Interestingly, if you thought that equity-oriented balanced funds helped tide the downturn, you would have been proved wrong. Although six of the 25 balanced funds, including HDFC Prudence, and DSPBR Balanced moved to positive territory, thanks to the 2009 rally, the rest continue to suffer negative returns.

Balanced funds are constrained by the mandate of having to hold an average 65 per cent in equities to qualify as equity funds; hence their ability to shield the fund returns with debt is limited.