The Hindu Business Line : Performance in a rally: Variations among funds

It has been a very volatile market for the past seven weeks. Certain funds recorded a tremendous recovery during the relief rally, but have fallen with a thud over the last 10 days. Although these are very short-term trends, they offer clues on what makes some funds rally in an uptrend.

In October (1-27), as many as five of JM Mutual Fund’s schemes were at the bottom of the returns list. They had fallen 38-50 per cent during this period. JM Contra was the worst performing fund, with a 50 per cent fall in its NAV.

Return Fluctuation: Funds such as ICICI Pru Emerging STAR and Magnum Midcap also lost quite heavily, falling 39 and 40 per cent respectively. But during the rally from October 27 to November 10, when the broader market gained by close to 25 per cent, the JM pack performed quite admirably.

In fact, JM Multi-Strategy, JM Basic and JM Contra rose by nearly 32 per cent. HSBC Emerging Markets funds delivered over 25 per cent returns. In the market fall from November 10-20, the earlier trend was revisited. These returns, however, must be seen in the context of the base effect- which leads to a bigger base for a fall and a lower one for a gain.

There are a few factors that explain this trend of out-performance by some funds. First, most of these funds invest a large part of their portfolios in mid-cap stocks.

These stocks fell more sharply than the large-cap stocks. The BSE Mid-Cap fell by as much as 38 per cent in the October fall. These stocks also recover later and, to a lower extent during market rallies, as investors may prefer companies with better revenue visibility that are more liquid in the current environment.

Second, most of these funds are invested in sectors such as capital goods, construction and metals. These stocks fell the most in October and gained very significantly in the rally thereafter. Selection of stocks may have played a key role. Third, with respect to most JM funds, these were fully invested, either in equity and derivatives. This exposes a greater part of their portfolio to market volatility than a fund with substantial cash and debt exposures.

The trends in these returns are short-term in nature and may not hold over the long run. Predicting the bottom is difficult in stocks, let alone in funds!

But those with a risk appetite may take exposure to such funds. Risk-averse investors may consider investments in the form of SIPs in funds that invest in large-cap and blue-chip stocks such as Sundaram BNP Paribas Select Focus, DSP BR Top 100 Equity and HDFC Top 200 Equity. These funds have a long track record of delivering returns and containing downsides.

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