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Indian markets: From sublime to sub-prime
Over the last couple of weeks, domestic markets have woken up to the
sub-prime problem, an issue that finds its roots in the US housing market,
but one that has quickly spread across other countries. The BSE Sensex
posted a loss of 1.78% to close at 14,868 points; the S&P CNX Nifty fell
by 1.57% to close at 4,333 points. The CNX Midcap closed at 5,938 points
(down by 1.87%).
Sub-prime loans are offered to individuals who do not have the
requisite credit history to qualify for regular loans (referred to as
prime loans). Since individuals who have taken sub-prime loans do not have
a stable credit history, the default rate of these loans is much higher.
If it were left only at this level, the sub-prime problem would not have
assumed such monstrous proportions. The problem escalated because the
sub-prime loans were bundled into securities that were eventually bought
by mutual funds and other institutional investors without accurately
assessing the risk in these investments. When the individuals opting for
the sub-prime loans defaulted, it triggered a chain reaction that
adversely impacted all entities linked to the sub-prime loans.
While the sub-prime problem is of a relatively unfamiliar nature as far
as the Indian investor is concerned, sector funds are not that unfamiliar.
For some inexplicable reason, sector funds continue to ‘mesmerise’
investors, despite their non-performance over longer time frames. In spite
of performing only in patches and taking on very high risks (which
translates into a volatile performance) compared to diversified equity
funds, sector funds still catch the investor’s fancy every time a
particular theme/sector is in the limelight. At present, infrastructure is
the mutual fund industry’s pet theme so there is a lot of investor
interest around it. Personalfn did a 3-part series on sector funds and
established that these funds simply fail to measure up with their
diversified peers over the long-term:
Leading open-ended equity funds
| Equity Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| JM Emerg. Leaders
|
12.93 |
2.91% |
4.16% |
26.01% |
25.52% |
7.74% |
0.10% |
| Franklin Infotech |
48.81 |
2.10% |
-3.39% |
-14.96% |
13.07% |
7.63% |
0.22% |
| JM HI FI |
12.05 |
1.39% |
1.41% |
12.06% |
36.43% |
10.87% |
0.11% |
| UTI GSF Software
|
25.78 |
1.38% |
-6.08% |
-11.74% |
27.00% |
8.34% |
0.27% |
| Reliance Media &
Ent. |
29.61 |
0.64% |
0.09% |
22.02% |
77.37% |
8.82% |
0.30% |
Source: Credence Analytics. NAV data as on August 10, 2007.)
(Standard Deviation highlights the element of risk associated with
the fund. Sharpe Ratio is a measure of the returns offered by the
fund vis-à-vis those offered by a risk-free instrument) |
Sector and thematic funds dominated proceedings in the equity funds
segment. JM Emerging Leaders (2.91%) emerged as the top performer,
followed by Franklin Infotech (2.10%) and JM HI FI (1.39%).
Leading open-ended long-term debt funds
| Debt Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| ICICI Pru. Long
Term |
16.10 |
0.18% |
0.64% |
4.10% |
7.62% |
0.19% |
-0.10% |
| Sahara Income |
13.47 |
0.17% |
0.63% |
3.69% |
8.48% |
0.35% |
-0.16% |
| Sahara Gilt |
12.72 |
0.16% |
0.13% |
2.29% |
5.91% |
0.34% |
-0.40% |
| Birla Floating LTP |
12.71 |
0.15% |
0.52% |
4.27% |
7.96% |
0.16% |
-0.06% |
| DWS Floating |
12.46 |
0.15% |
0.58% |
3.77% |
7.55% |
0.08% |
-0.01% |
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(Source: Credence Analytics. NAV data as on August 10, 2007.) |
ICICI Prudential Long Term Plan (0.18%) topped the long-term debt
funds segment. Two funds from Sahara Mutual Fund i.e. Sahara Income
(0.17%) and Sahara Gilt (0.16%) occupied second and third positions
respectively.
Leading open-ended balanced funds
| Balanced Funds |
NAV (Rs) |
1-Wk |
1-Mth |
6-Mth |
1-Yr |
SD |
SR |
| JM
Balanced |
27.34 |
2.01% |
3.33% |
17.38% |
40.12% |
6.38% |
0.37% |
| Birla
Sun Life 95 |
206.76 |
0.47% |
1.85% |
14.07% |
43.81% |
5.27% |
0.35% |
| UTI
Variable Invest. |
17.26 |
-0.56% |
0.45% |
4.30% |
12.25% |
2.50% |
0.23% |
|
Principal Balanced |
23.71 |
-0.71% |
-0.42% |
7.87% |
22.66% |
6.19% |
0.20% |
| ICICI
Pru. Balanced |
36.15 |
-1.01% |
-2.64% |
2.58% |
21.92% |
5.41% |
0.26% |
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(Source: Credence Analytics. NAV data as on August 10, 2007.) |
In the balanced funds segment, only two funds i.e. JM
Balanced (2.01%) and Birla Sun Life 95 (0.47%), managed to close the week
in positive terrain.
As markets serve a painful reminder to investors, it is
time for them to do a reality check on their risk appetite and
investments. For many investors, the last 3-4 years was all about making
easy money over a short period of time at minimal risk. Stock markets are
far removed from that; there is no easy money to be made in the stock
markets, your investment time frame for investing in equities needs to be
really high (at least 3-5 years in our view) and the risk of investing in
equities is anything but minimal.
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