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This was probably one of the most volatile weeks on Indian stock markets. With the markets oscillating wildly just about every day, investors got their first real taste of a sustained decline in more than a year. The volatility served a notice to investors that markets could also go the other way and investors should factor this in their expectations (read returns).
The BSE Sensex shed 10.96 per cent last week to close at 10,939 points; the S&P CNX Nifty slumped even harder to settle at 3,247 points (down 11.04 per cent). The CNX Midcap posted a loss of 11.96 per cent to close at 4,581 points.
What should be your plan of action in a falling stock market scenario?
Diversification is the key when it comes to countering stock market volatility. At Personalfn we like to see equity funds that are well-diversified both in terms of stock and sectoral allocations. It is critical that it is well-diversified on both parameters. Often you have equity funds that are well-diversified in terms of stock allocations but not so well-diversified on the sectoral front. Many of these equity funds have paid the price for a skewed diversification strategy.
One fund in particular, Sundaram Growth Fund, one of the most conservative funds in the country (31.4 per cent of net assets in the top 10 stocks according to the April 2006 factsheet), fell 13.44 per cent over the week. The sharp fall can be attributed to the fund's concentrated sectoral allocations (63.3 per cent in top 5 sectors) of which metals were a significant component. Investors, many of them Personalfn clients, got a rude shock to see a fund like Sundaram Growth fall this hard, but that is the price you pay for a concentrated investment strategy.
Equity Funds: Biggest Losers
| Diversified Equity Funds | NAV (Rs) | 1-Wk | 1-Mth | 1-Yr | 3-Yr | SD | SR |
| DISCOVERY STOCK | 13.73 | -15.46% | -13.10% | 31.26% | 53.99% | 9.52% | 0.41% |
| LIC [Get Quote] EQUITY PLAN | 17.96 | -14.46% | -13.08% | 43.27% | 44.14% | 6.07% | 0.36% |
| DEUTSCHE ALPHA EQUITY | 44.68 | -13.94% | -10.44% | 77.94% | 66.27% | 5.95% | 0.61% |
| FRANKLIN OPPORTUNITIES | 20.57 | -13.79% | -9.82% | 75.81% | 67.08% | 6.31% | 0.63% |
| MAGNUM COMMA | 14.13 | -13.74% | -9.94% | - | - | 7.43% | 0.55% |
Not surprisingly the biggest losers over the week were the aggressively managed equity funds. This category, along with sector/thematic funds, got their first taste of what a sharp fall in stock markets can do to their returns.
To find out the biggest losers in the sector/thematic equity fund category, click here.
Discovery Stock (-15.46 per cent) witnessed the steepest fall which is not surprising considering its rather concentrated portfolio. Likewise, LIC Equity (-14.46 per cent) and Deutsche Alpha Equity (-13.94 per cent) also bore the brunt of an unforgiving stock market.
Investors who had read our article on 3 equity funds to avoid and acted upon our advice should have no cause for concern. Sector-specific and thematic funds are usually the biggest losers in such markets and over the long term fail to beat the broader indices and their diversified peers. That is why these funds are permanently black listed at Personalfn.
| Debt Funds | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth | 1-Yr | SD | SR |
| PRUICICI FLEX INCOME | 12.89 | 0.14% | 0.60% | 1.94% | 5.21% | 0.43% | -0.55% |
| PRUICICI LONGTERM | 14.72 | 0.14% | 0.62% | 2.48% | 5.84% | 0.72% | 0.22% |
| KOTAK FLEXI DEBT | 10.92 | 0.13% | 0.60% | 3.10% | 6.17% | 0.06% | -0.76% |
| ABN AMRO FLEXI DEBT | 10.72 | 0.13% | 0.55% | 2.63% | 4.92% | 0.36% | -0.57% |
| ING INCOME | 17.57 | 0.12% | 0.32% | 1.05% | 3.61% | 0.60% | -0.61% |
The benchmark 10-Yr 7.38 per cent GOI yield settled at 7.55 per cent (up 0.11 per cent or 11 basis points over the week). Yields share an inverse relationship with bond prices. Higher yields translate into lower bond prices and with it a fall in bond fund NAVs (net asset values).
PruICICI Flexi (0.14 per cent) and PruICICI Long Term (0.14 per cent) led the charge in the long term debt fund category. Kotak Flexi (0.13 per cent) and ABN Amro Flexi (0.13 per cent) were close behind. Overall, a week where the flexi debt funds (dynamic debt funds) showed how their flexible investment style, that allows them to invest across corporate bonds and government securities and across maturities, can help them best their peers of the conventional long term debt fund variety.
| Balanced Funds | NAV (Rs) | 1-Wk | 1-Mth | 1-Yr | 3-Yr | SD | SR |
| BOB BALANCED | 21.5 | -13.10% | -12.46% | 32.55% | - | 5.36% | 0.50% |
| LIC BALANCE | 38.91 | -11.51% | -11.03% | 41.51% | 30.88% | 4.84% | 0.42% |
| KOTAK BALANCE | 22.88 | -9.43% | -3.95% | 59.72% | 49.52% | 4.28% | 0.76% |
| TATA BALANCED | 43.36 | -9.13% | -6.17% | 43.39% | 48.58% | 4.33% | 0.65% |
| ESCORTS BAL | 41.47 | -9.00% | -6.04% | 54.15% | 47.67% | 4.21% | 0.70% |
It is apparent from the table that balanced funds have not done the job for the investor. The fall in stock markets marred their performance this week with BOB Balanced in particular falling by 13.10 per cent, which is close to what some of the equity funds have witnessed during the week. As most, if not all, balanced funds up their equity allocations to a minimum of 65 per cent of net assets (to comply with the definition of equity oriented funds) investors can expect balanced funds to mirror a fall in stock markets pretty closely as the demarcation between balanced funds and equity funds is fast blurring.
Investors who are brooding over the volatility in stock markets must not ignore the silver lining in these tumultuous times. This is certainly not a pointer for investors to stop investing or redeem their investments. Far from it! Now more than ever before, risk-taking investors must stay disciplined and patient and even up their equity investments to benefit from the near 13 per cent correction (from all-time highs) in stock markets. Look for well-managed equity funds with track records and above all look for well-diversified portfolios both in terms of stocks and sectors.
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