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February 13, 2008Visit us at www.sharekhan.com
Sharekhan Ltd
A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai - 400013, India.
January has been a brutal month for the stock market, with investorslosing trillions. As foreign institutional investors (FIIs) went on a sellingspree over concerns that a recession in the USA could trigger a globalslowdown, the market plummeted to sub-16,000 levels just five tradingsessions after having crossed the peak of 21,000 on January 10. Eventhough, the domestic mutual funds did try to provide some succourby upping their investments in the aftermath of the crashtheywere net buyers of equities to the tune of Rs5,289 crore betweenJanuary 21 and 30, their efforts were of little avail. Finally, it was thesteep interest rate cut by the US Federal Reserve (Fed) in anemergency meeting that provided the much-needed respite to theglobal markets. Though the market had gradually regained some ofthe lost ground, volatility reigns supreme in the market and investorscontinue to be jittery.The market will undoubtedly find the going tough in the near term,taking its cue from global factors that it is. We haven't heard the lastof the sub-prime mess yet. Losses of the world's largest banks andfinance companies with exposure to US sub-prime loans are mountingand are feared to cross $265 billion. These entities are likely to selltheir assets in the emerging markets to shore up their capital.Furthermore, the persisting fear of a recession in the USA is suckingup the global liquidity and reducing the overall risk appetite globally.Unfortunately, data emanating from the USA, the nerve centre of thewhole problem, shows that recession is a possibility in the world'slargest economy. Growth in the USA plummeted to 0.6% in the December2007 quarter from 4.9% in the previous quarter. The jobless rate isestimated to be at a two-year high of 5%. As many as 17,000 jobswere lost overall in January, making it the first decline in more thanfour years. Initial claims for unemployment insurance have alsoincreased to levels that point to recession.The good part is, the US government and the Fed are doing everythingpossible to stop their economy from going into recession. Thus,President Bush has announced an economic growth package worth upto $150 billion to revive the US economy, while the Fed has in a spanof eight days cut the funds rate twice! It slashed the Fed rate by 50basis points again on January 30, just eight days after the emergency75-basis-point cut announced in reaction to the meltdown in globalstock markets over concerns of a recession in the USA. More ratecuts cannot be ruled out as the Fed has recognised, "downside risksto growth remain." These measures of the US government and theFed are expected to revitalise economic activity, though with a lag,and prevent the USA from landing hard. If the US economy begins toshow signs of recovery, the global outlook too would improve, liftingsentiments across markets.If and when that happens, our market too will be able to shrug off itsglobal worries and focus on the domestic factors, especially thecontinued growth momentum in the economy. The economy remainson a strong footing. The revised gross domestic product (GDP) growthfigures show that in FY2007 India's economy grew at 9.6%, the highestin 18 years, as against the previous estimate of 9.4%. The GDP growthfigure for FY2006 has also been revised upwards to 9.4% from 9%.This has raised the average GDP growth rate for the past three yearsto 8.8%. The Central Statistical Organisation has put the advancedestimates for the real GDP growth rate for FY2008 at 8.7%.
Sharekhans top equity fund picks
In Q3FY2008, Sensex' earnings (ex-oil) grew by 16.6% on an annualbasis in spite of an unusually weak performance by certain stocks incement and pharma sectors. The earnings growth was marginallyabove expectations. India's attractive valuations in the wake of thestrong earnings growth, the impressive performance of its economy,along with the rate cuts in the USA would hopefully bring back the FIIsas well, not that there is any dearth of liquidity locally. While domesticmutual funds are sitting on huge cash piles collected via recentlylaunched NFOs, insurance companies are also expected to invest upto $5 billion in the stock market during Q4FY2008. The retailparticipation is also expected to improve significantly once themarkets stabilise after the steep correction.The results season is over and we expect the next trigger for themarket to come from the finance minister, who shall be presenting onFebruary 29 the last regular budget of the United Progressive Alliancegovernment before the general elections in May 2009. Although weexpect global factors to dictate the market's actions in the nearterm and keep sentiments depressed, yet the announcement of theUnion Budget towards the end of the month is likely to bring somerelief and cheer, as we don't expect any controversial announcementsand believe the finance minister would present a populist budget inkeeping with the exigencies of politics.
We have identified the best equity-oriented schemes available in themarket today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharperatio and FAMA (net selectivity).The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unitof the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns asmeasured by the standard deviation.FAMA measures the returns generated through selectivity, ie thereturns generated because of the fund manager's ability to pick theright stocks. A higher value of net selectivity is always preferred asit reflects the stock picking ability of the fund manager.We have selected the top 10 schemes upon ranking on each of theabove 4 parameters and then calculated the mean value of each of the 4 parameters for the top 10 schemes. Thereafter, we havecalculated the percentage underperformance or over performanceof each scheme (relative performance) in each of the 4 parametersvis-à-vis their respective mean values.For our final selection of schemes, we have generated a total score for each scheme giving 30% weightage each to the relative performance as indicated by the one and two year returns, 30% weightage to the relative performance as indicated by the Sharperatio and the remaining 10% to the relative performance as indicated by the FAMA of the scheme. All the returns stated below, for less than one year are absolute and  for more than one year the returns are annualised.
All the returns stated on next page, for less than one year areabsolute and for more than one year, the returns are annualised.
 
Mutual FundsMutual Gains
2
SharekhanFebruary 13, 2008
Aggressive Funds
Mid-cap Category
Scheme Name NAVReturns as on Jan 31, 08(%)
3 Months1 Year2 YearsStandard Chartered23.756.8772.9449.75Premier EquityBirla Mid Cap95.34-3.2642.7237.29Reliance Growth390.86-3.4441.3038.79ICICI Prudential38.160.9527.5432.43Emerging STARSundaram BNP Paribas119.34-5.0326.3138.22Select Midcap
Indices
BSE Sensex17648.71-11.0425.2533.38
Opportunities category
Scheme Name NAV Returns as on Jan 31, 08(%)
3 Months1 Year2 YearsKotak Opportunities45.800.7956.0344.21Tata Equity Opportunities84.91-6.5642.5836.26ABN AMRO Opportunities28.71-7.4034.9433.84DSP Merrill Lynch75.36-5.8933.4334.22OpportunitiesING Domestic Opportunities36.28-4.9331.0232.71Fidelity Equity27.62-7.4427.7934.01HSBC India Opportunities36.89-6.2025.7234.51
Indices
BSE Sensex17648.71-11.0425.2533.38
Equity diversified/conservative funds
Scheme Name NAVReturns as on Jan 31, 08(%)
3 Months1 Year2 YearsPrincipal Large Cap24.91-5.6442.7541.45Kotak 3098.80-5.2540.9138.35HDFC Growth68.43-7.1339.8938.38DWS Alpha Equity72.39-8.7339.9439.07HSBC Equity100.32-5.5137.3836.60Birla SunLife Equity253.93-7.2935.8937.16DSP Merrill Lynch78.02-9.3633.8936.74Top 100 EquityBirla SunLife Frontline68.12-7.4231.5337.31SBI Magnum Multiplier Plus 9374.13-7.5934.3236.92
Indices
BSE Sensex17648.71-11.0425.2533.38
Thematic/Emerging trend funds
Scheme Name NAVReturns as on Jan 31, 08(%)
3 Months1 Year2 YearsICICI Prudential Infra29.70-5.9554.7752.56DSP Merrill Lynch India Tiger49.72-7.9845.8045.08Tata Infrastructure36.67-9.2351.3047.78SBI Magnum COMMA24.13-8.2547.1340.81Tata Equity P/E38.09-6.5345.5235.65
Indices
BSE Sensex17648.71-11.0425.2533.38
Risk-return analysis
The charts on the following pages give you a snapshot of how the mutualfunds have performed on the risk-return parameters in the past. Wehave used the bubble analysis method to measure their performances onthree parameters viz risk, return and fund size. The risk is measured bystandard deviation, which measures the average deviation of the returnsgenerated by a scheme from its mean returns. We have tried to explainthe same with the help of a diagram, which is divided into four quadrants,with each quadrant containing funds of a particular risk-return profile.The size of the bubble indicates the size of the fund.The funds in the
high-risk high returns
quadrant follow a veryaggressive approach and deliver high absolute returns compared to itspeers albeit at a higher risk.The funds in the
low-risk high returns
quadrant outperform the peergroup on the risk-adjusted returns basis as they deliver higher returnscompared to its peers without exposing the portfolio to very high risk.The funds in the
low-risk low returns
quadrant are not very aggressiveand provide lower absolute returns, taking lower risks.The funds in the
high-risk low returns
quadrant underperform thepeers on the risk adjusted returns basis as they adopt a high-riskstrategy but the returns fail to compensate the risk taken by the fund.For aggressive, conservative and tax planning funds, risk is measuredin terms of two years' volatility while returns are measured as twoyears' average rolling returns as on January 31, 2008. For thematic andbalanced funds, risk is measured in terms of one year's volatility whilereturns are measured as one year's average rolling returns as onJanuary 31, 2008.
Every individual has a different investment requirement, whichdepends on his financial goals and risk-taking capacities. We atSharekhan first understand the individuals investment objectivesand risk-taking capacity, and then recommend a suitable portfolio.So, we suggest that you get in touch with our Mutual Fund Advisorbefore investing in the best funds.
Balanced funds
Scheme Name NAV Returns as on Jan 31, 08(%)
3 Months1 Year2 YearsBirla SunLife 95234.360.5430.3629.65DSP Merrill Lynch Balanced50.15-2.9128.2928.22Tata Balanced67.31-5.7733.1631.13FT India Balanced41.91-7.0825.0728.00HDFC Prudence144.74-4.4823.7128.38SBI Magnum Balanced45.13-6.3924.8427.02
Indices
Crisil Balanced Fund Index2987.95-7.4320.3721.78
Tax planning funds
Scheme Name NAVReturns as on Jan 31, 08(%)
3 Months1 Year2 YearsPrincipal Personal Taxsaver176.973.3546.8041.60PRINCIPAL Tax Savings109.99-3.1138.0238.71Birla SunLife Tax Relief 96136.15-8.6643.9240.78Kotak Taxsaver - Growth19.45-3.1232.1731.24Sundaram BNP Paribas38.70-7.4535.4329.76Taxsaver
Indices
BSE Sensex17648.71-11.0425.2533.38
 
Mutual FundsMutual Gains
3
SharekhanFebruary 13, 2008
Aggressive Funds
Risk-Return matrix
==Average Rolling Returns====>
  =  =   S   t   d .   D  e  v .  =  =  =  =  >
HIGHER RISK LOWER RETURNSHIGHER RISK HIGHER RETURNSLOWER RISK LOWER RETURNSLOWER RISK HIGHER RETURNS
Equity Diversified/Conservative Funds
Risk-Return matrix
==Average Rolling Returns====>
  =  =   S   t   d .   D  e  v .  =  =  =  =  >
HIGHER RISK LOWER RETURNSHIGHER RISK HIGHER RETURNSLOWER RISK LOWER RETURNSLOWER RISK HIGHER RETURNS
Thematic/Emerging Trend Funds
Risk-Return matrix
==Average Rolling Returns====>
  =  =   S   t   d .   D  e  v .  =  =  =  =  >
HIGHER RISK LOWER RETURNSHIGHER RISK HIGHER RETURNSLOWER RISK LOWER RETURNSLOWER RISK HIGHER RETURNS
HDFC Capital BuilderSundaram Select MidcapReliance GrowthICICI Pru Emerging StarFranklin India PrimaKotak OpportunitiesHSBC India OpportunitiesFidelity EquityDSP ML OpportunitiesBirla MidcapStandard Chartered Premier EquityABN Amro OpportunitiesHDFC EquityUTI Master GrowthSundaram SMILESundaram Select FocusSBI Magnum Global Fund 94SBI Magnum Multiplier Plus 93Reliance VisionICICI Pru PowerICICI Pru Growth PlanFranklin India Prima PlusFranklin India BluechipKotak 30Principal Large CapDSP ML Top 100Birla Sunlife Frontline EquityBirla Sunlife EquityUTI Master ValueTata InfrastructureTata Equity P/ESundaram Capex OpportunitiesSBI Magnum COMMASBI Magnum Sector Umbrella - EmergingBusinessSBI Magnum Sector Umbrella - ContraICICI Pru InfrastructureICICI Pru DiscoveryHDFC Core & SatelliteDSP ML TigerCanara Robecco InfrastructureBirla Div Yield
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