Ugly ducklings of mutual funds are the new darlings

Mumbai, June 01: As the wheels of fortune roll on, winners turn losers and losers, winners. With the gush of foreign money chasing stocks, the worst performers have beaten the odds and mutual fund schemes, which were blamed for destroying investor wealth, have doubled their wealth (or whatever was left of it) in less than three months.

Infrastructure, mid-cap, and banking are the three prominent categories of funds among the top return-earners in the post-March rally.

An analysis shows that eight of the 20 worst-performing mutual fund schemes that destroyed three-quarters of wealth invested in them during the downturn are among the top return-gainers in the latest rally. In all, 11 schemes have given returns of more than 100% since March 9, when the current rally started.

JM Basic Fund, which lost 82% of its NAV (net asset value) between the peak in January 2008 and March 2009, has gained 140% since. Taurus infrastructure too lost 74% of its value, but has gained 135% in the past three months.

Infrastructure funds witnessed a washout over the past year. But the tide has changed since March when banks, led by Citigroup, posted profits, triggering a worldwide rally in stocks.

Sameer Kamdar, CEO, proposed asset management company by the ASK group, says, “All infrastructure stocks are catching up. Their business models were right, but their work got stuck because of the funds freeze around the globe. Now, with liquidity easing, their projects are up and running.”

But what the government does in the days ahead will be watched closely. Dhirendra Kumar, chief executive officer, Value Research, says, “The infrastructure space has done well based on the optimism surrounding a stable government.

It is expected that the government will spend on infrastructure, but reality has to match expectations or there could be huge disappointment.”

Banking funds have also made a comeback riding on the performance of private-sector stocks like ICICI Bank and Kotak Mahindra Bank. The Reliance banking fund returned 105%, while UTI banking fund has given a return of 95%.

With mid-caps moving up swiftly, especially after the election results, six mid-cap funds are among the top 10 funds which have delivered 100% returns.

But Jayesh Shroff, fund manager, SBI Mutual Fund, advises caution. “Stock markets have already gone up quite substantially, and though they may move up from here, I would not advise anyone to invest with a short-term perspective.”

Shroff says investors would enjoy decent returns if they have a horizon of two to three years. “The diversified fund would be the best option at this time,” he says.

Dhirendra Kumar, too, calls for avoiding thematic funds. “The investor would do better in a diversified fund. If there is an opportunity in infrastructure, then the fund manager will take advantage of it as opposed to an infrastructure fund where money is invested only in that sector.”

This is also a good time to realign and rebalance investments and move toward stable and credible mutual funds.