The Wealth Creators

Mutual funds have changed the way Indians invest. Let's see how they performed in 2012-13
Dipak Mondal & Tanvi Varma | Print Edition: June 2013

India's private mutual funds were born out of chaos. The 1992 Harshad Mehta scam had shaken small investors. Those scarred by the stock markets were investing in either Unit Trust of India's US 64 scheme or assured-return schemes of mutual funds promoted by public sector banks. US 64, a balanced fund, was giving 18% annual dividend and bank-promoted mutual funds were promising to treble (return 15% a year) money in eight years. Daily disclosure of unit value, called net asset value (NAV), was unheard of; in fact, NAVs were rarely disclosed, neither were portfolios of the schemes.

The Securities and Exchange Board of India (Sebi) had just come into being and was trying to grapple with the kerfuffle caused by the securities scam. Amid all this, in 1993, it allowed private mutual funds to set up shop in the country.

That year, seven private fund managers were given permission to start business. The first was Kothari Pioneer Mutual Fund, which launched two schemes-Kothari Pioneer Prima, an open-ended mid- and small-cap fund, and Kothari Pioneer Bluechip, a close-ended large-cap fund-in November. Others who followed were 20th Century Mutual Fund, ICICI Mutual Fund, Taurus Mutual Fund and Morgan Stanley Mutual Fund.

Many of these were a result of tie-ups between Indian and foreign entities. Their new and dynamic fund management practices, and the evolving Sebi regulations over the last two decades, have made mutual funds as investor-friendly a product as any.

Before we look at funds that have been the most efficient wealth creators in the year that ended on March 31, let's look back at the major changes the industry has undergone in the last 20 years -


NAVs and fund portfolios were rarely disclosed before 1993. This changed when the new set of mutual funds started operating under Sebi. To begin with, private fund houses started disclosing NAVs on a weekly basis.

Sebi took note of this in its annual statement 1993-94. "The private sector mutual funds have begun to…disclose NAVs more frequently…The NAVs are now declared at even weekly intervals," it said. Today NAVs are declared daily while fund portfolios are made public on a monthly basis.

Also, over the years, offer documents have become standardised; disclosures through them have also become more comprehensive. Now, the offer document has to mention investment objectives and pattern, risks, fees, and even the tax implications of investing in the scheme.

These aside, the funds have to disclose half-yearly financial results, send account statements to investors regularly and even reveal the commission paid to distributors annually.


Schemes such as US 64 and assuredreturn funds from fund houses promoted by public sector banks remained popular in the 90s, until they become unsustainable and collapsed by the end of the decade. Tax-saving funds started gaining popularity. In March 1994, there were 26 such schemes, all by public sector mutual funds.

With the entry of private mutual funds, the list of products started becoming longer. After starting with simple equity schemes such as large-, mid-cap and tax-saving, the funds diversified into fixed-income schemes. Birla Sun Life Mutual Fund launched the first liquid fund in 1997, while in 1998 Kotak Mutual Fund became the first fund house to launch a gilt scheme that invests only in government bonds.

The year 1998-99 also saw the emergence of sector funds such as technology, FMCG and pharma. Monthly income plans (MIPs), fixed maturity plans (FMPs) and capital protection-oriented funds were other innovations in the fixed-income category.

In 2001, Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) launched the first equity exchangetraded fund (ETF) and introduced the concept of passive fund management. In 2007, Benchmark launched the first gold ETF, introducing the concept of paper gold in the country.

Anil Chopra, CEO, Bajaj Capital, a financial advisory company, says, "The period between 1995 and 1999 belonged to equities due to the tech boom. Between 2000 and 2003, the focus shifted to debt funds as equity markets were down after the dotcom bubble burst. The focus again shifted to equities in the bull run after 2003. That was when a lot of new fund offers, or NFOs, were launched."

Private players brought another important change-open-ended funds. Earlier, most schemes were closeended, open for a limited period, and had a lock-in period (usually seven years). Private funds introduced openended schemes, which investor can enter and exit any time.

In 1993-94, only one open-ended scheme was launched; this rose to 10 in 1994-95. Today, most schemes are open-ended, except a few debt funds such as FMPs, interval funds and capital protection-oriented funds.


Over the years, Sebi brought new or tweaked existing regulations to ensure that investors are protected from undue risks. Starting at the structural level, where the fund management team was kept at an arm's length from the asset management company, Sebi stipulated strict investment norms such as exposure limits to ensure that the portfolio is not too concentrated.

Now, an equity fund cannot invest more than 10% of its total NAV in one company, except in index/sector funds. A debt fund cannot invest more than 15% assets in rated bonds and 10% in unrated bonds of a single issuer. Besides, a fund cannot invest more than 25% net assets in stocks of group companies of its sponsor.

All schemes should have at least 25 investors, and all investors should be informed about any change in the scheme objective and given an option to exit without paying a fee.

After reports of frauds, Sebi also asked mutual funds not to accept thirdparty cheques, except in case of minors.

"A lot of small changes over the years regarding investment restrictions, valuations and product specifications have ensured that the risk involved in investing in mutual funds is minimal," says Vikas Sachdeva, CEO, Edelweiss Mutual Fund.


The NFO period (during which units are issued and allotted) was cut from 45 to 15 days. Once the units have been allotted, the fund house must send the investor a statement; the deadline for this is five days (earlier 30 days).

In case of non-allotment, the money has to be refunded within five working days of the issue closure; this period used to be six weeks earlier.


A big change took place in the way the funds were managed. Till 2007-08, a scheme's returns depended entirely upon its fund manager's performance. When he quit, the scheme's fortunes would reverse. Fund houses realised they could not let one person run the show. So, they started putting in place sound fund management practices, and asking their fund managers to work within those frameworks. Today, fund management is team work.

As R Srinivasan, head of equity, SBI Mutual Fund, puts it: "A fund manager's success lies in trying to avoid his personality biases."


Earlier, in NFOs, a fund house could deduct 6% invested amount straightaway. A big part of this was for paying distributors. There was a time when the starting NAV of a fund (whose unit's face value was Rs 10) used to be Rs 9.40. That's why distributors sold NFOs more aggressively than the existing funds, leading to mis-selling. This changed when Sebi banned entry load, a 2.5% fee charged by the distributor upfront, in 2009.

Now, the initial fee is Rs 150 a year for new investors and Rs 100 for others. Recurring charges have been capped at 3% a year. Also, people can now invest directly, and save half-apercentage point in fee.


Celebrities promote insurance schemes and banking & brokerage services. Mutual funds don't have such luxury. Sebi has a strict advertisement code. As a result, mutual fund advertisements do not have tall promises or celebrities.

A lot of mis-selling happened because of payment of commission to distributors upfront, especially in NFOs. This led to a flood of NFOs in the mid-2000s. With entry load banned and Sebi restricting new launches, the focus is now on the performance of existing funds.

Nimesh Shah, managing director and CEO, ICICI Prudential Mutual Fund, says, "Sebi has done a great job by disciplining the NFO culture. Now, everyone realises that the only model that will work is showing fund performance and thus getting inflows instead of attracting money through new launches."

Another fad in the late 1990s and early 2000 was launch of funds with fancy/vague names. For instance, a large- and mid-cap fund was called Power Fund, while an infrastructure fund was named Nation Building Fund. This is changing. Many funds have been renamed so that investors know exactly what they stand for.

"The endeavour is to make sure that when you hear the name you know what the fund does," says Shah of ICICI Prudential Mutual Fund.


Kothari Pioneer Mutual Fund, now Franklin Templeton, in a leaflet in early 1995, explained the benefits of systematic investment plans (SIPs), through which one could invest as little as Rs 500, though for at least 12 months. It even offered a onetime discount on SIPs of Rs 1,000 a month and more. Despite the efforts of Kothari and other funds houses, SIPs did not become popular.

A chief executive officer of a fund house who started his career as a sales executive with Birla Sun Life Mutual Fund recounts how everyone in the industry used to make fun of Franklin Templeton for marketing SIPs aggressively.

SIPs did not become 'serious' business for fund houses until the ban on entry load. Now, both distributors and fund houses have realised that the only way to make money from mutual funds is convincing people to invest systematically and for the long term.


Not long ago, one could invest in mutual funds without producing an identity proof or PAN. Now, Sebi has made it mandatory to give a copy of PAN and identity and address proofs, irrespective of the investment amount. This is to keep black money out to the industry.

Another big change has been the quality of agents and advisors. Now, anyone who wants to sell mutual funds has to have a proper certification. Sebi is also in the process of issuing guidelines on mutual fund distributors.


With just 3% domestic savings being invested into mutual funds, one can hardly say that they have become hugely popular. However, experts say that those who invest have evolved over the years.

Sundeep Sikka, chief executive officer, Reliance Mutual Fund, says those who have never invested in mutual funds may not have changed their perception about the industry, but those who started investing a few years ago have certainly become more mature.

"They now realise the importance of asset allocation. They have become more selective in choosing funds and their focus is on long-term performance, and therefore, they look for fund houses with committed stakeholders and good service," he says.

Shah of ICICI says investors have become smarter and invest in falling markets, unlike earlier when most used to invest in overvalued markets.


After a tumultuous 2011-12, mutual funds had a good 2012-13. Though the average return from large-cap funds (6.5%) was less than the 7.31% rise in the Nifty and 8.23% in the Sensex, 23 out of 75 funds in the category beat both the indices. A total of 41 beat the Nifty.

In other categories, large- and midcap funds returned 6.31%, multi-cap funds 5.07%, and small- and mid-caps 4.67%.

Debt funds benefitted from the Reserve Bank of India's decision to cut the short-term rate at which banks borrow from it by 100 basis points during 2012-13. When interest rates fall, bond prices rise, benefitting funds that are holding them. Income funds gave an average return of 10.37%, medium- and long-term gilt funds returned 10.76%, while short-term debt funds and liquid funds returned 9.73% and 9.11%, respectively.

Against this backdrop, the MONEY TODAY-Value Research Annual Best Mutual Fund Ranking takes a close look at the performance of funds under different categories.

The ratings take into account the three-year performance of funds at the end of the financial year. Like previous years, the schemes have been divided into three categories-equity funds (100% equities), hybrid funds (mix of debt & equity) and debt funds (fixedincome securities).

These have been further divided into sub-categories based on market capitalisation, tenure of securities held, etc.

Equity large-cap funds:

There are not many surprises here compared to 2011-12. While ICICI Prudential Focused Bluechip, ICICI Prudential Indo Asia Equity and SBI Magnum Equity have maintained 5-star rating, HDFC Index Sensex Plus and BNP Paribas Equity are the new entrants in the 5-star club.

It's a sharp jump for BNP Paribas Equity as it was 3-star in 2011-12. Its NAV rose 9.75% in the year ended March 31. Its three-year return is 6.91% a year.

Franklin India Bluechip Fund, India's first private sector mutual fund, has fallen from 5-star to 4-star. The notable miss is DSPBR Top 100 Equity. It has failed to make it to the top 10, although it has managed to retain 4-star rating.

Equity large- and mid-cap funds:

Six of the top 10 funds in this category are 5-star. While Quantum Long Term Equity, Mirae Asset India Opportunities and UTI Opportunities have maintained top ratings, UTI Equity, L&T Indo Asia and Reliance NRI Equity are the new entrants.

While Quantum has emerged as the best performer in the three-year period with annual return of 8.53%, Reliance NRI Equity is the best performer in the one-year period (up 10.81%).

Both ICICI Prudential Dynamic and HDFC Growth have failed to make it to the top 10. Both, though, managed to get a credible 4-star rating.

Equity multi-cap funds:

The top 10 list is dominated by smaller fund houses. While BNP Paribas Dividend Yield and ING Divided Yield are among the three 5-star funds in this category, Tata Ethical Plan A, Taurus Starshare and Principal Dividend Yields are other funds in the list. IDFC India GDP Growth is the other 5-star fund in the category.

In 2011-12, the category was dominated by HDFC Mutual Fund with four (HDFC Capital Builder, HDFC Equity, HDFC Core & Satellite and HDFC Premier Multi-cap) out of top 10 funds coming from its stable.

This year none of its funds has made it to the top 10. While HDFC Capital Builder and HDFC Equity have been put in the large- and mid-cap category this year, their ratings have dropped. HDFC Capital Builder has fallen from 5-star to 4-star, while HDFC Equity has been downgraded from 5-star to 3-star.

Equity Mid- and Small-cap:

SBI Magnum Emerging Businesses has emerged as the best fund in this category for the second year in a row. The fund continues to impress. It returned 21% in the year ended March 2013. The second best performer, Taurus Discovery, returned 17.5%. The average category return was 4.67. In the 3-year period, the fund has given 15.5% a year. The next best, Reliance Equity Opportunities, has returned 9.84%.

Apart from the two funds mentioned earlier, IDFC Premier Equity and HDFC Mid-cap Opportunities are the other 5-star funds in this category.

Equity tax-saving:

Axis Long Term Equity, rated for the first time after completing three years in December 2012, has got top rating (5-star). The only other two 5-star funds in this category are Quantum Tax Saving and Franklin Templeton Tax Shield. Another scheme from BNP Paribas Mutual Fund-BNP Paribas Tax Advantage-has made it to the top 10 list.

Hybrid Funds:

ICICI Prudential Equity Volatility Advantage and ICICI Prudential Balanced (the only two 5-star funds) have topped the list of equity-oriented hybrid funds by returning 11.5% in 2012-13. In the debt-oriented category, Birla Sun Life MIP 2 Savings 5 is on the top of the list. The other three 5-star funds in the debt-oriented category are HDFC Multiple Yield Plan 2005, IDFC Monthly Income Plan Regular and SBI Magnum MIP Floater.


There are 11 fund categories considered for this study primarily from the point of view of the interests of retail investors. Six of them are from the equity category: large-cap, large- and mid-cap, mid- and small-cap, multi-cap, infrastructure and ELSS. These have been ranked on the basis of risk-adjusted returns.

RISK: To calculate risk, monthly/weekly returns were compared with monthly riskfree returns for equity and hybrid funds; for debt funds, weekly risk-free returns were considered. For all practical purposes, State Bank of India's 46 to 90 days term deposit rate, which is 5.5%, was assumed as the risk-free return. For months/weeks that the fund had underperformed the risk-free return, the magnitude of underperformance was added. This was then divided by the category average to get a risk score, which was ranked with those of other similar funds, and a relative risk score assigned.

RETURNS: The monthly/weekly returns of each fund (adjusted for dividend, bonus or rights) were compared with the monthly/weekly risk-free return to get the fund's total returns in excess of the risk-free return.

The monthly average risk-adjusted return was then divided by the average category return for the return score. In case of a negative category average, the risk-free return was used as the benchmark. The returns were then ranked with other funds of the same type and a relative return score assigned. All return estimates assumed reinvestment of dividend adjusted for bonus or rights. Finally, a composite risk-return score was obtained by subtracting the risk score from the returns score.

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