Mutual Funds – Long term bet?

Mutual funds have earned a reputation that hovers between risky and conservative. It caters to the segment that is skeptical to stocks but still want to take a shot at it. Also it provides a platform, wherein the funds are professionally managed by exposing it to multiple stocks. So it becomes certain that they are not as risky as stocks but they are not as safe as pure debt either.

Another aspect that is generally associated with mutual funds is that, it is a long term investment. What is the definition of long term here, 5-7 years? The perception is that it is a more passive mode of investment; hence consistent check is not a mandate.

After analyzing a certain set of funds, that did not seem necessarily true. I took a sample of funds to justify this notion.

These are the Top 3 Funds of Top 5 AMC’s namely the HDFC, ICICI, Reliance, UTI and Franklin Templeton.

The same set of funds across the span of last 3 years.

This is the CAGR returns that you would get, if you parked in these funds for 5 years. The ICICI Prudential Discovery Fund (G) and UTI MNC Fund (G) have been the best funds with an average of 12 % Annualized returns in 5 years. The average of these funds would have been 8.5 % CAGR Returns.

The same set of funds across the span of last 3 years.

Undoubtedly there has been some consistency in the repetition of top funds in the AMC’s across tenures. However here, the Reliance Equity Opportunities Fund (G) and the HDFC Midcap Opportunities Fund (G) has have given the highest returns i.e 17.08 % and 16.95% respectively. On an average these top funds have given an average of 11.8 % CAGR returns. Certainly that is more than the 5 year tenure as seen above.

Now let’s look at 1 year tenure.

These figures evidently state the returns are higher than the 3 or 5 year tenure. The best performing among the above, the Reliance Equity Opportunities delivered 22.22 % return in the last year and the ICICI Prudential Discovery Fund gave a 21.36 % return. The average in the tenure came to 16.8 %, way higher than even 3 year return.

Further, let’s take a peek at the worst performing funds and their returns in 5 years.

The observation tells us that even in a 5 year span, there was a good possibility of the capital getting eroded with funds like HSBC Unique Opportunities Fund (G) and L & T Contra Fund (G) giving negative returns after five years.

 Moral of the story is:

ü  It is purely a notion that longer the tenure of the fund, the higher the returns. There is a good possibility that the returns dwindle, even with the best of funds. The reason being, the longer the tenure, more the market cycles. Any bearish phase may be detrimental to the equity fund in general, unless you are into the right/ defensive fund.

ü  Pick of fund becomes even more important. As we have seen, the wrong pick of funds puts you into lurch as the years go by.

ü  Mutual funds are not passive mode of investment. It requires consistent monitoring and replacements as and when market cycles change.

After stating whatever I did above, I do accept that there are funds which you should stay invested in for a long tenure. But that quotient will be a very small figure, and tracking that is difficult. Thus reviewing becomes imperative.

                        *** All opinions above are personal and any further debate is welcome ***

Has the giant woken Yet ?

The bulls seem to be surging consistently and we have seen a couple of gap ups in the index in the last ten days. Nifty managed to cross the psychological barrier of 5600 .The flurry of positive news gushed in with the ECB willing to buy back bonds to the QE3 infusing liquidity .In India, there were pleasant surprises too. The UPA government finally accelerated their reform policies. The delayed, but the well awaited FDI’s in Single, Multi- Retail and Aviation sectors finally got the nod .The diesel prices were hiked by Rs5 and disinvestment in 5 PSU’s were finally implemented to eliminate high CAD issues. These factors seem to have given sufficient boosters to the market to do some tango.

However, the question that surfaces is, whether would you enter the market at such high levels. Clearly it may not make too much of sense to the do the same. The FMCG and Pharma stocks, being the defensive stocks generally do not run along with the bulls. So which are the sectors that you would be able to capitalize in these times?

As we look at the reforms that have recently propelled and the valuations, the Infrastructure sector seems like a decent bet .The commodities like steel and aluminum are at its lowest valuations with very limited import liability. The domestic capacity of these commodities has been expanded, in turn catering to the expanding infrastructure needs of the country. The hike in diesel prices and cutting on subsidies in LPG will enhance margins of the oil companies. Infrastructure related stocks like IRB infrastructure, Power Grid Corporation, SAIL are all looking to rise steadily for some time.

Coming back to investments, how would you deploy funds in the sector? In the Mutual fund arena, there are ample thematic –Infrastructure Funds. Among those, the AIG Infrastructure and SBI PSU Fund seem lucrative, mainly due to the low valuations. These funds have barely seen momentum since the slump in 2008. The stock compilation is true to its theme. Funds like HDFC and ICICI Infrastructure can also be looked into. The deterrent being, it does not seem true to its theme but has heavy weightage on the Banking Sector. This sector is likely to do well with the RBI cutting the CRR rate 25 bps and general positive credit sentiment. The down side of these funds seems minimal.

This graph depicts the CAGR returns of the month August, 2012. The Infrastructure and Banking clearly underperformed in the month. The situation seems to have retraced to some extent. Another good bet is the Media sector Mutual Funds. The Sundaram Entertainment Fund and the Reliance Media Fund may give you some positive returns in the times to come with factors like mandatory digitization and 74 % permit in FDI for broadcasting.

If you like the above or perhaps dislike it too! Please do give me a feedback.

Percepts of a Market Novice

Markets are funny. And I say markets are sadistic too. My mere stint in them for three months has taught me a lot. It has the ability to engulf you, woo you and then discard you like the UPA did to didi. (Haha that was seriously funny though). (In this case I don’t care about the knee jerk reaction but admire the confident stand by the party. Kudos. I say India has finally landed.) .

What I understand is that markets purely work on the mechanism of supply and demand. So the price at what you buy or sell plays a crucial role. But who gets trapped in this mechanism? Yes you and I, who think markets, are soaring, and before you know, it’s all gone. Well let’s face it; we have to be extra cautious backed by consistent expert advice, before we plunge into it.

When I say this I recollect the TV advertisements which feature in stunts. They come with a disclaimer ** Do not try this at home / without an expert .It is dangerous **. I can perfectly correlate the market to the same. I agree when financial advisors claim that equity is the best asset class to get superlative returns as it beats inflation and is devoid of tax and so on. However there lie the clauses attached.

Let me just elaborate with hind-sight. The market crashed in 2008, followed by a massive bull run in 2009. The horizontal stint continued in 2010. 2011, it fell considerably. Until now 2012 seemed dull, if not for the sudden Bull Run. The factors pertinently being the ECB Liquidity move, QE3 and now the UPA reforms. However, when we look back, how many of us would have known the exact points of deflection. Markets are evidently too quick to factor in any news. So the moment you blink, market has reacted and run way ahead. Ok now you wake up, and say I wish to join this marathon run too. You start to accumulate and by the time you realize, you shall be accompanied by bears.

Another prominent dilemma I see that many us would have faced. Buy, when the IPO is launched on a high, and then wait till we reach our graves for the prices to reach those levels again.(Somehow reminds me of Facebook). My observation tells me, that it’s psychological to plunge into the market when it’s at the peak. Everyone is hesitant in the bear zone. But common sense states buy low, sell high. Well I’m guessing we shall all learn that after we get into the ring and get crushed. (Including me at this stage).

Let me further elaborate more on my personal observations;-

-    -When you do invest (especially with bottom- Up) Approach look into the fundamentals backed by the technical’s of the stock .If you don’t understand, ask your expert to give you a review of both .It certainly works best.

-    -Understand sectors. Not all work in your bullish run. The Pharma and FMCG sectors seem to be in a committed relationship with the bears. They are defensive in nature. So they will not make you, your moolah in buoyant markets. Or keep it for a long time frame. Most likely to work. The Infrastructure sector is good ally of the bulls.

-          -Mid-cap and small caps mostly outperform large caps in the Bull Run. On the flipside, they may not work in weak zone. And small caps will get wiped off.

Ok, so if you ask me what does the market say now? I say the bulls are not exhausted yet. There is good scope for the Sensex to hit the 20 K levels. What stocks look good to me? I say Onmobile Global, Shalimar paints, Dish TV, Syndicate Bank, Polaris, Corporation Bank, MT Educare, Dena bank ( Above 105 –Target 125 ) , Motherson Sumi , NRB Bearings .( All on a upside of about 20% ).

So markets are cruel but can be endearing. You can love them and hate them at the same time. But I’m certain it’s difficult to leave them.  So, I say we devour it by upgrading our knowledge and skill sets. Because it’s an exciting place to be!!!

*** Disclaimer: Invest in these stocks at your own risk and if you do book profits, send me some***