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Inflation matter of concern: FM; RBI could take some steps

New Delhi: Finance minister Pranab Mukherjee today said inflation is a matter of concern, indicating that the Reserve Bank of India (RBI) could take some steps to check rising prices at its mid-year monetary policy review tomorrow, reports PTI.

"Inflation is a matter of concern. The main reason for the high level of inflation is food prices. Inflation (is expected) to further go down to a more acceptable level," Mr Mukherjee said at the Indian Banks' Association (IBA) conference.

The overall inflation for September was at 8.62%, much higher than RBI's acceptable level of 5%-6%.

Food inflation, which is reigning in double digits for the past three months, is feeding the overall inflation numbers. Food inflation in mid-October stood at 13.75%.

Mr Mukherjee's comment come just ahead of the Reserve Bank's second quarter monetary policy review tomorrow, in which the central bank is expected to hike policy rates by 25 basis points to tame inflationary pressure.

When asked about the possible rate hike action by the central bank, Mr Mukherjee said, "Let us wait. RBI policy statement will be made shortly... I am in discussion with RBI governor."

Since January, RBI has started reversing its soft monetary policy it began in September 2008, when global financial crisis deepened after the collapse of US financial major Lehman Brothers.

While few economists forecast another rate hike on Tuesday, others said that a slowdown in factory output numbers of August and core-sector figures of July might force RBI to give a rethink to its rate hike decision.

Industrial output growth in August slowed to a 15-month low of 5.6% from 15.2% in July. The six-core infrastructure output slowed down to 2.5% in September from 3.9% a month ago.

In a bid to tame inflation, the central bank has hiked its key short-term lending (repo) and borrowing (reverse) rates five times so far this year and experts see another 25 basis points hike in the key policy rates by RBI on Tuesday.

This year, the RBI has raised repo and reverse repo rates by 125 and 175 basis points respectively.

It had last hiked rates in its mid-quarterly review on 16th September. The repo and reverse repo rate currently stand at 6% and 5% respectively.


Best Fund Houses

Last year, when we analysed the best fund houses, there were 29 of them operating in India; many more were awaiting SEBI’s nod to enter the Indian market. That number has now gone up to 33 with 284 equity growth schemes on offer to investors. We bring you a rating of all the fund houses. We have used the same methodology that we had evolved last year to help select the best ones based on a complex and unique combination of data for the past three years.

As you are aware, the commonest approach to rank funds is to choose from the recent top performers but, as we have shown several times, many funds do well for a brief period (called winning streaks) and then start slipping. You can tweak this method in a variety of ways but any selection based on the results of recent performance is bound to be fundamentally flawed.

Another approach is to find out how good a fund family is. Are there patterns in their performance? Do well-performing fund houses maintain their high batting averages over a period? The most obvious way to find that out is to aggregate the returns of all schemes of the fund house in a certain category over a period and rank them. This gives us the benefit of identifying consistently good performers across different styles and focus. One particular scheme may have been lucky to be on a winning streak, but it is doubtful if a fund house, as a whole, will be lucky when its performance is measured across all schemes.

So, when the next new scheme of a top-performing fund house comes along, you know that it has better pedigree. But considering performance in isolation is not enough. We have demonstrated this through many separate analyses. The past cannot be easily and simply extrapolated into the future. To make our findings more authentic, we added other parameters that are uniquely relevant in the Indian context. These make our ranking of the top fund houses completely different from the general approach adopted by others.   

The Top Honours

We have always maintained that being on top is one thing; remaining there is another. A fund house which is among the top performers at one time may not necessarily repeat its performance the second time. Consistency in remaining at the top is what actually counts. Look at the top performers of our list this time and it would be clear what we mean by consistency. Deutsche Mutual, which was languishing in the middle order last year, has jumped to the top position this year with a composite score of 85. This is primarily due to a robust performance of its schemes - it gave an annualised return of 51% over the past three years. Though the fund house still lags behind other major fund houses in terms of size, it hasn’t launched any scheme in rising market cycles. We value that approach. Its riskiness is also low which has pushed it up the order. Among others that managed a high rank were Morgan Stanley, HDFC Mutual, Tata Mutual and Franklin Templeton. What has given them a place among the top five performers? It is a combination of four factors, which includes higher returns, a lower downside risk, minimum number of launches in rising market cycles, and a reasonable size.

What happened to the toppers of last year? DSP Merrill Lynch scored a composite score of 51 this year and was at the 11th position. What has pushed it down the ladder is the higher number of funds launched in rising market cycles. Fund managers at Sundaram Mutual have been taking greater risk than others; that has pushed the fund house lower down the ladder. Also, coinciding with rising market cycles, it has launched a total of five new schemes, three of which were launched in 2007. Look at Reliance Mutual as well. This fund house too has slipped because of the higher number of new schemes it launched in rising market cycles and the higher risk taken by its fund managers.

The Laggards

Among fund houses that have lagged are: JM Financial, DBS Chola, LIC Mutual and Fidelity. JM Mutual failed on all the parameters. It launched seven new funds in the past three years; in terms of returns too it was way below the others on a three-year basis. DBS Chola too scored low because of the riskiness of its portfolio and has launched four new funds in a rising market cycle. LIC was among the losers last year; it has done equally badly this year with a composite score of 25, thanks to its poor performance. Fidelity scored low on all four parameters and ended with a composite score of 27.

The older, bank-sponsored mutual funds in their new avatars have done comparatively better this time. Look at Canbank (now Canara Robeco). It emerged quite high with a composite score of 56. It has maintained a fairly reasonable risk profile and has launched just two new funds in rising market cycles during the past three years. On the returns front too, it hasn’t done very badly but the only parameter which pulls it down is its size. Here are some more observations from our study.

Winners & Losers: It is worthwhile reiterating what we said last time. To start with, avoid fund families that are consistently poor performers and yet greedily launch new funds. This is a deadly combination. Which are the ones that qualify to be in this list? JM Financial, UTI and LIC. The best fund families usually have top-quality fund managers. Good fund managers are characterised by their depth of experience and have a cerebral approach. S Naganath of DSP Merrill Lynch, Prashant Jain of HDFC and Sanjay Sinha of SBI belong to this category. If these fund managers quit, take a hard look at the new manager. If you are not a risk-averse investor, take a look at Reliance. Its fund managers have a more trading-oriented style but deliver a good performance.

Mix and Match: Mutual funds are the biggest proponents of the theory of diversification. We suggest you diversify your portfolio over various fund houses and not just various schemes and themes. For instance, SBI launched a comparatively larger number of new funds in rising market cycles over the past three years, yet it has been able to deliver good returns. It was among the top five fund houses when it came to returns. On the other hand, Sahara may have a very good risk profile but it fails when it comes to delivering returns and is also among the smallest in terms of size.

Size Does Matter: Large- and mega-cap stocks are good bets to avoid irrational market mood swings. By the same logic, fund houses with larger assets under management (AUMs) seem to be doing well and have a balanced overall performance. Look at Reliance. It manages Rs58,000 crore in assets and has managed to return an annualised 24% over the past three years. The same stands true of ICICI Prudential. It has an asset size of Rs51,000 crore and has returned an annualised 29%.

It is not that the bigger the fund house, the better the performance. Reliance with the largest AUMs has given a reasonable return over the past three years while ICICI Prudential was also among the toppers in providing returns, despite its large AUMs. UTI stands out as an exception. It has a large size but is way below other fund houses in terms of returns. Kotak Mutual, with a much smaller size, is much better when it comes to providing returns. 

Timing The Market

Fund management is a business and fund companies make money on the money they are able to collect from the public through existing as well as new schemes that they launch. Investor ignorance and lack of adequate regulatory oversight are two principal reasons why fund houses prefer to launch new schemes in different flavours irrespective of investor needs. One of the four parameters of ranking fund houses is their greed for raising fresh money from the public as reflected in their hurry to launch NFOs, especially during rising market cycles. To get the public’s attention and interest, fund houses launch NFOs with funny ideas sold with marketing gimmicks and lavish incentives for distributors. Many of these ideas are untested and unproven. This is a peculiar Indian trend, to segregate which we have aggregated NFOs launched by fund houses timed with a strong market uptrend.

We have identified four major periods of uptrend in the past three years which have encouraged fund houses to launch new schemes. Among the 28 fund houses, only three went without launching any schemes in rising market cycles. Benchmark, BOB and Escorts were the only ones to have launched the least number of schemes during these periods. Funds that have been slow to raise money during rising market cycles were: Canara Robeco, Fidelity, Franklin Templeton, HDFC Mutual and LIC; they launched two schemes each. ABN AMRO, HSBC, Kotak and Tata Mutual launched three schemes each while DBS Chola, Standard Chartered, PRINCIPAL, Sahara, SBI and Sundaram were more aggressive in launching schemes during bull periods. Those that have raised large sums through new fund offerings were: ING (six), Reliance Mutual (six), Birla (seven), JM Financial (seven), UTI (seven), DSP Merrill Lynch (eight) and ICICI Prudential (nine). 

Our study covers a period of three years, which have been great for Indian investors, more particularly the fund industry which has reached a critical mass during this period. From 29, the number of fund houses operating in India has gone up to 33. However, we have considered only 28, which have been operational in the Indian market for more than three years, and left the five new entrants out of the scope of our study. We ranked the performance of these 28 funds over the past three years by four factors. First, the average performance of their equity growth funds (these include diversified, sector and index funds) over the past three years.

How did we do this? We considered all the 284 growth schemes in those three categories presently on offer by various fund houses to calculate the average returns provided by them during the past three years. For all those schemes which have been in existence for more than three years, we have considered their returns over the past three years and annualised them. For schemes which have been in existence for less than three years but more than one year, we have considered annualised returns since inception; for those which have been in existence for less than a year, we have considered their absolute returns since inception. We then took an average of returns provided by various schemes of each fund house to arrive at an aggregate average return for each.

Second, since we believe that returns are just one part of the story, we considered the downside risk associated with each of the schemes by calculating the Sortino ratio. An average of the Sortino for schemes offered by each fund house gave us the measure of the downside risk associated with each of the fund house. Third, one unique criterion that we had introduced last year was the number of new funds offered by fund houses when the going is good (periods of rising markets). We provide negative weightage - the more the NFOs, the lower is the rank. The fourth factor that we considered was the size of assets managed. The larger the size, the better it is. A composite ranking based on all these four factors gave us our final list of the best fund houses.


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