If April was a special month, May can just as well be considered as super-special, for the mutual fund industry. As far as investors are concerned, well, they have got more than they could have asked for.
After choosing to take back their money in 2008, the Foreign Institutional Investors (FIIs) have ramped-up their investments in India and the effect has been extraordinary on equities, convinced fully, in May, by the stunning poll victory handed to the Congress party that the equity markets will most probably gain exceptionally. The stock markets have been on an unstoppable roll now for more than two months – a period that has seen sustained inflow of foreign funds. On the other hand, mutual fund managers have still opted not to invest their money in equity by reducing the large piles of cash they are sitting on – they are still holding cash to the extent of 16 per cent in May, the figure was almost the same for April, signifying that they were not investing in equities to any noticeable extent.
However, mutual funds have been beneficiaries due to their earlier holdings in equities. The effect of FII funds flow into stocks, which skyrocketed, has been phenomenal on equity diversified funds, which have logged the best gains in 17 years, with most funds actually going ahead and beating the benchmark index in the month of May. Of the 226 number of diversified equity funds, 126 funds were able to beat the Sensex, while 127 stayed ahead of the CNX Nifty.
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Aside from the rally in the large caps, the great performance by the mid- and small-cap indices helped register gains across all segments of equity investments. Equity funds posted an average of 30.65 per cent returns for the month, which is the best gain for 17 years – in March 1992 when equity funds gained a phenomenal 48.73 per cent.
As was expected, election results, which reinstated the UPA government at the Center, put the market in a state of bliss and new records were set as double circuits were broken by the biggest stock market indices, and some companies managed to do that more frequently. Both the Sensex and the Nifty gained the highest in a single trading session, 17.24 per cent and 17.33 per cent respectively on May 18, 2009. It enabled equities to continue their rally for the third consecutive month, allowing the BSE Sensex to gain 28.25 per cent and S&P CNX Nifty to gain 28.06 per cent for the month of May.
What got the markets started on this unforeseen and unforgettable rally was the coming back of the UPA government to power in a stronger form, which boosted confidence all around. The government, now being Left-free, is expected to be in a much better position to implement a reforms agenda including disinvestment of PSUs, insurance bill and take better and bigger steps to revive the economy – even the gross domestic product numbers have been of considerable sentiment-boosting value.
The rally was fueled by small- and mid-cap stocks, while the top gains among market indices were clocked by BSE Realty, a mammoth 79.30 per cent, BSE Metal gained 57.98 per cent and BSE Consumer Durables by 56.92 per cent. Gains in the realty stocks were as a result of the government announcing its infrastructure spending plans while the realtors have also been taking steps to come to terms with the changed situation by concentrating more on affordable housing as well as slashing rates.
FMCG stocks, which provided the a most crucial and much-needed support to the markets last year, gained the least this time around by a mere 0.08 per cent during this rally. BSE FMCG had fallen just 14.33 in 2008 as compared to 52.45per cent lost by BSE Sensex.
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As far as mutual funds are concerned, the May rally rub-off also translated into some magnificent gains. Among the equity funds, banking funds were top gainers with 38.66 per cent returns. BSE Bankex gained 45.26 per cent during the period. The diversified equity funds gained 30.65 per cent, while the tax planning funds clocked 30.11per cent.
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The signal by the government to increase spending on the infrastructure development has led to a rally in realty, capital goods, construction, steel, energy and metals stocks, among others. This was reflected in the performance of equity funds where the top gainers were Taurus Infrastructure (61.86 per cent), JM Basic (60.15 per cent) and Sundaram BNP Paribas CAPEX Opp-D (54.46 per cent).
As the mood improved in the markets, companies have also started their fund raising efforts, qualified institutional placement (QIPs) being the popular one. Similar money-seeking activity was also recorded in the mutual fund industry as fund houses have again got back to equity new fund offers (NFOs). A lot of such draft offer documents are awaiting the Securities and Exchange Board of India (SEBI) approval before launching their efforts looking to capitalise on equity gains.
There were losers too in the mutual funds space. Amid all the gains captured by equity funds, debt funds were at the losing end for the month. Their performance in April had been one of the best in their history. But in May, the 10 year GOI yields went up from 6.23 per cent to 6.70 per cent on increased government borrowings, which translate into losses for income and gilt funds. While the medium term gilt funds lost 1.25 per cent, the worst-performing of all categories in the month, the debt funds lost 0.66 per cent.
Liquid funds gained 0.37 per cent, while the monthly income funds gained a handsome 3.61per cent, driven by the market rally. The short-term gilt funds lost 0.10 per cent while short-term debt funds gained 0.15per cent.
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While all the good news kept flowing, the GDP numbers helped give support to the markets towards the month end. GDP for FY09 has grown at 5.8 per cent in the fourth quarter, second only to China’s (6.1 per cent). The growth for the whole year was 6.7per cent. Although this is much less than the 9 per cent growth in FY08, it was much better than many other economies which are struggling to keep their economic numbers positive. Prospects for the future are bright too as growth rate has picked up in most sectors of the economy, and the forecast for the current fiscal, FY10 is around 6 per cent.
The Gold ETF category also turned into a gainer after losing for the past 2 months. The category gained 2.16 per cent in May after a loss of 4.05 per cent in April.
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Historically, this has been the 5th best month ever for BSE Sensex and 3rd best for the S&P CNX Nifty. However, this has been the best month for both of them after March 1992. While the figures are eye-popping and very satisfying for investors, yet, at his point of time, Indian markets may be some of the most overvalued among emerging markets, and therefore, a possibility of a modest correction of 15-20 per cent cannot be ruled out from here.