ICICI Direct: Mututal Fund Review

In 2010, the BSE Sensex delivered 16% return. It was down around 4% in the last month ending January 15, 2011 while the Midcap index was down around 5%.

The year 2011, so far, has not been good for the markets as it has witnessed around 8% correction in the first half of the first calendar month of the new year.

Heavy selling pressure was witnessed across all sectors on concerns of a rate hike by the central bank later this month to contain surging inflation.

Persistent high inflation, particularly primary and food inflation, is a worrying factor for the economy as well as for the Indian equity markets as it will force regulators to slow down the economy to suppress demand. The same is already seen in the RBI raising rates and on low IIP data.

FIIs were seen as net sellers in January as high valuation and perceived risk of moderation in economic activity due to rising interest rates and inflation resulted in some profit booking.

Mutual funds were seen as net buyers in the recent correction and have bought around | 500 crore in the first half of January 2011.

Realty continued to underperform on the negative impact of interest rate hike. The auto sector witnessed profit booking on rate hike and slowdown in sales after record sales in the last quarter while FMCG and healthcare outperformed the broader markets.

Global markets remained positive with most markets outperforming the Indian markets, and, thereby, providing support to the markets.

Outlook…

The recent market correction in the first half of January has provided investors an opportunity to invest in a staggered way. From current levels, every dip should be utilised by investors to invest in equity markets

The appetite for equity investment from domestic institutional investors at lower levels seems strong.

Global news flows regarding tightening monetary policy to prevent rising inflation and sovereign risk may have a negative impact on the global equity markets

Higher commodity prices, including crude, are a major concern for the Indian economy

Foreign institutional flows may be volatile on global news flows. This may have its impact on Indian markets as they continue to be dominant market participants

India’s domestic economy continues to remain on a strong footing with visible growth prospects. The same is expected to drive the equity market over a longer period of time

Investors should avoid taking high cash call as fund managers themselves manage the portfolio in accordance with market development

Large cap biased funds offer a better risk adjusted opportunity for investors