December 2011

Market Overview The descending move displayed in November 2011 was continued in December 2011 as well, as the Indian equity market went further down by -4.1% (or -668.5 points), as gloomy clouds led by the Euro zone debt crisis were still evident. In the U.S. while they did reveal positive news on their quarter-on-quarter (Q-O-Q) economic growth rate (by expanding 1.8% in the 3rd quarter of 2011 over the previous quarter) and on unemployment rate (as it fell to 8.6% in November 2011), it didnt enthuse the Indian equity markets much as their focus was more towards debtoverhang situation prevailing in the Euro zone. Similarly, although Moodys on December 21, 2011 upgraded Indias rating from speculative (Ba1) to an investment grade (Baa3) (due to Indias diverse source of growth, which enhanced its resilience to global shocks), the impulse (of +3.4%) seen on the date of announcement was partially washed out in the ensuing trading session of the Indian equity markets.

It is noteworthy that there were downbeat domestic economic factors for the markets to react in a detrimental manner. Primarily, the sharp fall in the Index of Industrial Production (IIP) for October 2011 (data released in December 2011) to -5.1%, (which signalled signs of economic slowdown), and second the WPI inflation still continuing to remain over the comfort zone of the Reserve Bank of India (RBI) - even though it mellowed to 9.11% in November 2011 (data released in December 2011). In the last monetary policy review meeting (held on December 16, 2011), even though the RBI tried to be accommodative in monetary policy stance by pressing the pause button on the policy rate hikes, it was not well taken by the Indian equity markets as the most expected Cash Reserve Ratio (CRR) cut did not take place, despite liquidity in the system being tight.

Moreover, with the Government again revising its borrowing target to 4.7 trillion by March
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2011(from 528.72 billion set in September 2011); it was considered rather worrisome by the Indian equity markets as it implied that fiscal deficit target of 4.6% for fiscal year 2011-12 may not be met.

Also since the Government in power faced political backlash over reform moves (such as increase in FDI limit in multi-brand retail), and also faced the hurdles over passing the Lokpal Bill the markets seemed nervous and termed such impediments to be policy paralysis. Interestingly taking cue from these mixed global economic uncertainties, the precious yellow metal gold too underwent a corrective phase as prices softened by 6.4%, thereby washing some gains as seen in the earlier months. Moreover, the demand for gold was weak during later part of the December 2011due to year-end holidays and ongoing Khar Mass (which is considered inauspicious month as per the Hindu calendar for gold buying and starting new ventures). However, stockist did gradually pile up inventory to meet demand during the marriage season beginning from mid- January 2012.

Speaking about the Brent crude oil, it too eased by 2.7% after Irans threat to stop flow of oil from the Gulf was written off, and due to slowdown in demand from worlds second largest consumer of oil China.

For the bonds markets, the Open Market Operation (OMO) purchase in the last week of December 2011 helped to push down yields of 8.79% 2021 G-sec bonds. However the yields of 1-month and 3-month CDs hardened by 35 and 10 basis points (bps) respectively, thus taking them to 9.50% and 9.60%.

Monthly Market Roundup As on Dec 31, As on Nov 30, Change %

BSE Sensex S&P CNX Nifty CNX Midcap Gold ( /10 gram) Re/US $ Crude Oil ($/BBL) 10-Yr G-Sec (%) 1-Yr FDs

2011 15,454.9 4,624.3 6,111.9 27,100.0 53.1 108.3 8.57

2011 16,123.5 4,832.1

Change (668.5) -4.1% (207.8) -4.3%

6,641.1 (529.2) -8.0% 28,965.0 (1,865.0) -6.4% 52.2 111.4 8.76 7.25% - 9.40% (0.9) -1.6% (3.1) -2.7% (0.19) 19 bps

(Monthly change as on December 31, 2011) (Source: ACE MF, PersonalFN Research)

Ascertaining the confluence of factors in the global as well as domestic economy, Foreign Institutional Investors (FIIs) however turned net buyers in the Indian equity markets. But a noteworthy point is that since the month of December 2011 being financial year ending time for them, their participation was far muted i.e. to the tune of only 98 crore. Moreover, Christmas celebration on large scale also dampened their buying activity. In November 2011 they were net sellers to the tune of 4,198 crore.

BSE Sensex vs FII inflows

(Source: ACE MF , PersonalFN Research) Mutual Fund Overview But compared to FIIs, in the month gone by, domestic mutual funds bought aggressively to the tune of 580 crore, thereby maintaining their November 2011 buying streak where they were net buyers to the tune of 810 crore. It seems that the following positive factors enthused them to continue buying into the Indian equity markets:

Attractive valuations (markets have already corrected 26.4% from their last peak of 21,004.96 made on November 5, 2010)

Better growth prospects for India (Q2 FY2011-12 GDP growth rate at 6.9%, which was near to market estimates) when compared to the other developed economies Food inflation dwindling much below the double-digit mark (0.42% for the week ended as December 12, 2011) Expectation that WPI inflation would therefore mellow to sub 8.0% mark. Robust consumption story

BSE Sensex vs MF inflows

(Source: ACE MF, PersonalFN Research)

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However, the descending move of the Indian equity markets took a toll on the performance of all categories of domestic equity funds; barring technology funds which managed to deliver positive returns due to fall in the Indian Rupee (which led to the underlying stocks in the portfolio with exposure to foreign exchange revenue perform better). Among the other sector funds, even pharma and FMCG funds which are generally considered defensive werent spared as they too eroded their investors wealth. But Infra funds, energy funds and banking funds plunged the most as the underlying stocks felt the nuance of problems faced their respective sectors. Contrary to the performance of domestic diversified equity funds, Fund of Funds (FoFs) led by some offshore ones displayed luring returns to investors. In the Hybrid fund category, balanced funds due to their dominant exposure to equity, delivered negative returns, but some of the Monthly Income Plans (MIPs) ended the month in green.

Monthly top gainers: Open-ended equity funds Diversified Equity Funds 1-Mth Edelweiss Absolute Return Sector Funds 1-Mth ELSS 1-Mth -

Franklin Infotech (G) 3.36%Religare AGILE Tax (G) (G) 0.09% 1.43% IDFC Strategic Sector (50- ICICI Pru Technology Canara Robeco Equity 1.22% 50) Eq-B (G) 1.19% (G) Tax Saver (G) 3.31% IDFC Strategic Sector (50- Birla SL New 1.10%IDFC Tax Saver (G) 50) Eq-A (G) 1.20% Millennium (G) 3.70% (1-Mth returns as on December 31, 2011) (Source: ACE MF, PersonalFN Research)

Monthly top gainers: Open-ended Fund of Funds Fund of Funds ING Global Real Estate-Reg (G) 1-Mth 2.70%
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Mirae Asset China Advantage-Reg (G) Principal Global Opportunities (G) (1-Mth returns as on December 31, 2011) (Source: ACE MF, PersonalFN Research)

2.31% 2.08%

Monthly top gainers: Open-ended Hybrid Funds Balanced Funds Canara Robeco Balance (G) Kotak Balance FT India Balanced (G) 1-Mth Monthly Income Plans -2.42% DWS Money Plus Advt-Reg (G) -2.63% DSPBR MIP (G) -3.09% Birla SL MIP II-Savings 5 (G) 1-Mth 1.07% 0.98% 0.96%

(1-Mth returns as on December 31, 2011) (Source: ACE MF, PersonalFN Research )

Monthly top gainers: Open-ended debt funds 1-Mth Income Funds Short Term IDFC SSIF-MT-F Escorts ST Debt (G) 0.85% (G) SBI Magnum Income FRPIDFC SSIF-MT 0.81% Saving Plus Bond (G) (G) IDFC SSIF-ST-D Canara Robeco FRF(G) 0.78% (G) Long Term Long Term Kotak BondSundaram Flexible-FIP(G) 1.80% Deposit (G) SBI Magnum Income FRP-LTPKotak Bond-Reg 0.90% Reg(G) (G) Fidelity Flexi Tata FRF-LTP(G) 0.80% Bond-Ret (G) Floating Rate Funds Short Term 1-Mth 1.06% Gilt funds Short Term HSBC Gilt-ST-Reg (G) 1-Mth 2.01%

1.04% Kotak Gilt-Savings (G)1.78% 1.04% Edelweiss Gilt (G) Long Term Kotak Gilt-InvestPF&Trust (G) Kotak Gilt-Invest-Reg (G) ICICI Pru Gilt-Invest (G) 1.73%

2.53% 2.53% 2.19%

2.89% 2.89% 2.20%

Liquid Funds Escorts Liquid Plan (G) IDFC Ultra ST (G) Pramerica Liquid Fund-Reg (G)

1-Mth Liquid Plus funds 0.83% Pramerica Treasury Adv (G) 0.81% JM Money Mgr-Super (G) 0.79% JM Money Mgr-Reg (G)

1-Mth 0.96% 0.80% 0.80%

(1-Mth returns as on December 31, 2011) (Source: ACE MF, PersonalFN Research )

Debt mutual funds delivered moderate gains in the month gone by as RBI preferred to be dovish in its monetary policy stance by pausing policy rate hike in a scenario where liquidity was tight in the system, as also giving due consideration for economic growth. However, a noteworthy point is, with interest rates close to peaking out, - both short-term as well as long-term gilt funds revealed luring performance in the month gone by.

Moreover, being aware of the fact that interest rates are close to peaking and attractive yields are offered by most debt papers, domestic debt mutual funds bought aggressively net to the tune of 52,285 crore, thereby accelerating much further compared to their November 2011 activity where they net bought to the tune of 9,819 crore.

Performance across various categories of mutual funds

(1-Mth average returns of funds in various categories as on December 31, 2011) (Source: ACE MF, PersonalFN Research)

The graph above displays how various categories of mutual funds performed in the previous month. As revealed above, all equity funds across categories; barring the technology sector eroded investors wealth. Even balanced funds (which predominantly hold an equity portfolio) delivered negative returns as their underlying portfolio felt the pressure of the descending move of the Indian equity markets. Taking cue of the mixed global economic uncertainties, Gold ETFs too posted negative returns as the prices of precious yellow metal underwent a corrective phase. However, debt mutual funds across categories performed well as RBI maintained a dovish stance by maintaining a pause on rate hikes, as liquidity remained tight for most part of the month. But a noteworthy point is, ascertaining the fact that interest rates are close to peaking out both shortterm as well as long-term delivered luring returns. Other News and New Fund Offers

The Securities and Exchange Board of India (SEBI) has proposed to exclude service tax from the fee that investors pay mutual funds every year, measured as expense ratio and instead has recommended that the 10.03% service tax could be levied on investors over and above the 2.4% expense ratio. In the case of debt funds, the committee has slashed expense ratio from 2.25% to a maximum of 2.15%, excluding service tax. Furthermore, the SEBI has capped the expense charged on exchange-traded funds and fund-of-funds at 1% after keeping out the service tax. We believe that the SEBI recommendation will not have a major impact on the returns of
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the investors. Though there will be a marginal increase in the expense ratio for the investors, mutual funds still remain a better way to benefit from the equity markets in the long run.

SEBI has issued detailed rules on its new idea of Know-Your-Customer Registration Agencies (KRAs). The new rules, effective January 1, 2012, apply to intermediaries such as stock brokers, depository participants, mutual funds, portfolio managers, venture capital funds and collective investment schemes. According to the new rules, an intermediary shall perform the initial KYC of its clients and upload the details on the system of the KRA. When the client approaches another intermediary, the latter can verify and download the clients details from the system of the KRA. Once the client has done a KYC with a SEBI-registered intermediary, he need not undergo the same process with another.

Quantum Mutual Fund recently tied up with Yes Bank Ltd., thereby offering their investors the ease and convenience to invest in respective schemes of Quantum Mutual Fund whereby one can simply drop in their subscription application in the drop boxes of Yes Bank Ltd, having the Quantum Mutual Fund logo. We believe the initiative taken by India's first "direct-to-investor" mutual fund house would provide it an avenue for reaching out to investors. This tie-up between the two entities in our view reflects the customer-centric focus and is also a very good attempt to bring in financial inclusion by providing investors the ease and convenience while investing. However we believe investors should do their homework and seek enough information before investing in any mutual fund scheme.

As an investor, you can now get instant access to your mutual fund investment through an ATM card. Recently, the country's second largest mutual fund house (in terms of average assets under management) - Reliance Mutual Fund introduced its "Reliance Any Time Money Card", thus offering its investors the facility to access their invested money, just as they would do with their savings bank account. The ATM card will be available to investors of Reliance Mutual Fund designated schemes through their online account with the fund house.
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The card offers all the convenience of a debit card for investments made in Reliance mutual fund schemes, and can used to withdraw cash from any VISA authorized ATM or make payments at Point of Sale (PoS) outlets. We believe that while innovation introduced by the fund house enables investors to withdraw money (from their investments made), excessive withdrawals or usage at PoS outlets may hamper the growth potential of their investments made and also encourage incorrect spending habits. The capital market regulator - SEBI may soon relax the advertisement norms for mutual funds, by allowing them to use more space in advertisements to promote their products by reducing the disclaimer size. The mutual fund industry at present has been crying hoarse that the current advertisement code is very stringent and leaves little room to make a marketing pitch to investors. Moreover, the regulator has mandated mutual funds to provide several disclosures on the product such as its performance, rating and risk factors among others. SEBI appointed Mr. K.V. Kamath, as the Chairman of an advisory committee for the regulators Investor Protection and Education Fund (IPEF).

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