Mutual fund (MF) investors had something to cheer the past year as equity and debt funds performed well, especially when compared with the abysmal performance in 2011. In 2012, equity markets looked up on the back of record inflows by foreign institutional investors (FIIs), who invested around $24 billion (around Rs.1.3 trillion). Improved global liquidity and cheaper rupee attracted FIIs to emerging markets such as India.
Rising equity markets typically are good for mid-cap funds. Accordingly, in 2012, mid-cap funds outperformed and rose by 38% on average compared with large-cap funds that returned 26%.
Different years, different toppers
The schemes that topped the charts in 2011 did not replicate their performance in 2012. “This is the tendency across categories. It is rare to find consistent performers over the past five to 10 years. It is common to find funds that, say, today come in the first quartile, but then later drop to the second or third quartile and then come back to the first quartile after one or few years,” says N. Sethuram Iyer, CEO, Daiwa Asset Management Co. Ltd.
Of the 133 equity schemes we considered (equity multi-cap, equity large-cap and equity mid-cap categories), only four schemes came in the top 10 in both 2011 and 2012.
Even dividend yield funds that invest in dividend yield stocks did not make the cut in 2012. Dividend yield stocks pay a high dividend in relation to their share price and typically aim to provide periodic returns. Even if the market doesn’t look up, these, typically, still give dividends. Of the seven dividend yield funds in the broad categories that we looked at, only Principal Dividend Yield Fund came in the top 10 in 2012 with a return of 41.67%. Curiously, as against most other dividend yield funds, it did not perform well in 2011. “In 2011, most dividend yield funds had invested in the consumer goods sector. In 2011, the consumer sector was the star performer in terms of returns. But in 2012, many other sectors did well, which could not fit the “high dividend yield” criteria and that is where dividend yield funds weren’t the outperformers,” says Iyer.
Gilt funds glitter
Government securities or gilt funds did well in 2012 on the back of a rally seen in government securities (G-secs). The benchmark 10-year G-sec yield, which hit the peak on 14 November 2011 at 8.972%, fell to 8.036% in June. At the end of 2012, the yield was 8.05%. A drop in yield led to a rise in the prices of G-secs and, therefore, the net asset value of gilt funds.
But are gilt funds ideal for the average investor? “Not really; gilt funds work best for really aware investors. These are opportunistic funds. For instance, even though interest rates didn’t decline much last year, there was a big rally in G-secs on the expectation of rate cuts. Unaware investors can get stuck in them for a long time if they enter at the wrong time,” says Waqar Naqvi, chief executive officer, Taurus Asset Management Co. Ltd.