The Union Budget remained the key highlight for February with primary focus on reducing the fiscal deficit, controlling inflation and improving economic growth. The fiscal deficit was estimated at 5.5%, with further plans to reduce it to 4.8% and 4.15% in fiscal 2012 and 2013, respectively, which signalled a reduction in the government borrowings. While the gross domestic product (GDP) growth slackened to 6.0% in the December quarter compared with the previous quarter (when it expanded by 7.9%, primarily on the back of agriculture output which contracted by 2.8%) the future growth estimates still continue to be strong. The GDP growth for 2009-10 is pegged at 7.2%.
The bond yields rose on expectations of higher government borrowings for fiscal 2010-11. The government gross borrowings and net borrowings for the fiscal 2010-11 has been pegged at Rs4.57 crore and Rs3.45 crore, respectively. The yield on 10-year government bond increased to 7.86% in February, from 7.59% last month. However, yields remained muted in the second half of the month, indicating a lack of consensus over the timing of the rate hike. The Reserve Bank of India raised its cash reserve requirements by 75 basis points in January, higher than market expectations a hike of 50 basis points. One basis point is a one-hundredth of a percentage point.
For this review to appraise the funds’ long-term performance, they have been ranked based on their one-year Morningstar risk-adjusted return.
The Morningstar star rating methodology is based on a fund’s risk-adjusted return denoted as Morningstar risk-adjusted return (MRAR) within a given Morningstar category. Morningstar categorizes funds based on their average holdings statistics for the past three years. Morningstar uses expected utility theory as the basis for MRAR. The expected utility theory determines how much return an investor is willing to give up to reduce risk. Therefore, MRAR gives more importance to a fund’s downside deviation. To calculate MRAR, a fund’s monthly total return is calculated. The total return is then adjusted for risk-free rate to arrive at the Morningstar return. The Morningstar return is then adjusted for risk to calculate MRAR. Morningstar uses parameter gamma to describe investors’ sensitivity to risk. Morningstar fund analysts have concluded that gamma equals to two results in fund rankings that are consistent with the risk tolerances of typical retail investors. Morningstar risk is calculated as the difference between Morningstar return and MRAR. Morningstar rating is calculated every month for 3-, 5- and 10-year periods. The fund’s overall rating is calculated based on a weighted average of the available time period ratings. Within each rating period, the top 10% funds receive a five-star rating, the next 22.50% earn a four-star rating, the next 35% get three stars, the next 22.50% receive two stars, and the last 10% get one star. Morningstar rates each share class of a fund separately, because each share class has different loads, fees and total return time periods available. The distribution of funds among the star ratings depend on the number of portfolios evaluated within the category, rather than the number of share classes available.
Also see Morningstar ratings (Graphics)
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