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Underperformers in plenty

Over 90 per cent diversified equity funds underperformed their benchmark indices in September

The month of September marks the midway mark to the financial year. This year, September witnessed the resurgence of the stock markets in India when both the Sensex and the Nifty gained 11 per cent touching 20,000 and 6,000 levels respectively. Needless to say, it created the buzz around investors, who were curious to follow the markets after a long hiatus.

A quick analysis into the performance of equity diversified funds, many of which benchmark their performance on these two indices throws up a different picture. As many as 90 per cent diversified equity funds underperformed their respective benchmark indices in this month, strongly indicating the fact that most fund manager missed the rally in equity markets during the month.

Now, one month may not seem to be a significant period to many, but for investors who lost out on this rise, the angst is palpable. Fund managers are of the opinion that the underperformance was due to the rally being limited to selective stocks and a large cap driven market.

As many as 275 diversified funds (including tax saving funds) out of 303 underperformed their respective benchmark indices. The average appreciation witnessed by diversified funds during the month was 7.8 per cent compared to over 11 per cent rise in both the Sensex and the Nifty. Other major indices including BSE 100, CNX 100 and BSE 200 moved up by 10.38 per cent, 10.77 per cent and 9.88 per cent.

Anand Shah, equity head, Canara Robeco Mutual Fund, said, “The rally that we saw in September was mainly driven by large cap stocks, while the mid- and small-cap funds missed out on the rally. Most funds underperformed their indices because of exposure to mid and small caps, which underperformed the large cap stocks.” The CNX Mid Cap rose 5.58 per cent, the BSE Mid Cap rose 6.41 per cent and the BSE Small Cap appreciated by 7.39 per cent during September.

When asked if fund houses holding cash could be a reason for the underperformance, Rajan Krishnan, chief executive officer, Baroda Pioneer, said, “It could be that some funds may have given 100-150 basis points lower return because of holding higher level of cash.” One basis point is equal to 100th of a percentage point. But that is not how low the margin appears to be.

As some mutual funds were holding as high as 25-30 per cent of their portfolio in cash at the end of August 2010; it could have added to the underperformance owing to missed opportunity. Though, a single month is not the right parameter to judge the performance of a fund, it does indicate the deviation in the funds performance.