Markets rise and fall on hopes; positive or negative developments on ground happen with a lag. If this holds true even this time; markets might just have run ahead of their fundamentals. In the year 2012, Indian equities rallied on rejuvenated effort of the Government to push through some critical reforms and pro-growth stance taken by RBI. However, despite of all these efforts, demand in the economy seems to have failed to revive which reflects in dipping domestic consumption and wanning corporate profits. Foreign Institutional investors (FIIs) have pumped in money in India as flow of money in the global system remained robust.

Aggressive FII buying pushed market valuations upwards hoping that growth in corporate earnings would follow. However, optimism has been dashed once more. As per the report published by mint recently, about 296 companies on BSE-500 index have collectively reported 10.1% fall in profits on Year-on-Year basis in the 4th quarter of Financial Year (FY) 2012-13.This has been the first decline in last 4 quarters. Moreover, sales growth of 2.3% during the quarter ended on March 31, 2013, has been the slowest in last 14 quarters. This leaves us in a situation where markets have rallied on hopes and corporate profits have failed to catch-up.
 

Performance: CNX Nifty Vs. CNX Midcap	Valuations: CNX Nifty Vs. CNX Midcap

Data as on May 31, 2013
(Source: NSE, ACE MF, PersonalFN Research)  

Chart on your left shows how the investment of Rs 10,000 in CNX Nifty and CNX Midcap made on May 31, 2012 would have fared over last one year;while the one on your right depicts the movement of relative valuations. Investment of Rs 10,000 in CNX Nifty and CNX Midcap would return Rs 12,156 and Rs 11,339 respectively over the period of 1 year i.e. between May 31, 2012 and May 31, 2013. Midcaps have witnessed more volatility in comparison to their largecaps. Notably, valuations, as measured by Price to Earnings (PE) multiple, are dearerin midcaps now than they were a year before. On the other hand, despite the up-move witnessed over last 1 year, valuations in CNX Nifty have remained relatively consistent as compared to those in the midcaps. As a mutual fund investor, you might be keen to know how mutual funds have performed on the same time period. Let's find out...
 

Performance of Various Categories of Mutual Funds

	Returns (absolute %)
	1 Year	YTD#
Category Average of Largecap Oriented Funds	20.9	-2.2
Category Average of Midcap Oriented Funds	17.3	-8.1
Category Average of Multi-Flexi-Opportunities Funds	18.5	-4.5
CNX Nifty Index	23.6	0.6
CNX Midcap	15.3	-9.1

NAVData as on May 31, 2013
#YTD: Year to Date i.e. from January 01, 2013 to May 31, 2013
(Source: NSE, ACE MF, PersonalFN Research)  

Table above compares the performance of various categories of mutual funds focused on different market capitalisation segments. Category of largecap oriented funds as a whole has underperformed CNX Nifty over last 1 year. Largecap funds have failed to impress even in the current calendar year as returns generated by them so far this year have been lower than those of CNX Nifty. On the other hand, category of midcap funds has outperformed CNX Midcap over last 1 year as well as since the beginning of this calendar year. The third category which invests across market caps, multi-flexi-opportunities funds, has done better than CNX Midcap but worse than CNX Nifty. To put it other way, although, the largecap funds have outperformed midcap focused funds as well as the multi-flexi opportunities funds; they have failed to outperform the widely tracked largecap index, CNX Nifty. When checked for individual performances, only about 1/4th of the funds have managed to outperform CNX Nifty while about 1/3rd of midcap funds have outperformed CNX Midcap over last 1 year. As far as multi-flexi-opportunities funds are concerned, about 1 in every 8 has outperformed even the CNX Nifty Index and about 3 in every 4 have outperformed CNX Midcap Index.

PersonalFN believes that multi-flexi and opportunities funds have benefited due to flexibility they enjoy while allocating assets. Assessing the relative attractiveness of valuations in different market cap segments; the fund manager of a felxicap or opportunities fund may take bullish or bearish calls on various market caps. On the other hand, multicap funds always try to strike a balance in their allocation towards largecaps and midcaps. It is noteworthy that, performance of funds within the same category has been remarkably different. This goes to show that investing in any fund that comes to your way without analysing merits of such investment, may negatively affect your prospects of generating competitive returns on your investment.

PersonalFN is of the view that one should not invest blindly in a largecap fund believing all largecap oriented funds are safe. You may still incur steep losses if your selection goes wrong. Similarly, all midcap oriented funds wouldn't generate superior returns. There's no alternative to meticulous analysis to select a winning mutual fund.

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borys@vela.filg.uj.edu.pl Jun 22, 2013 PE backed cienapoms usually belong to specific fast growing sectors whereas Sensex, Nifty etc and other constituents consist of cienapoms across all sectors including old economy sectors like cement, steel etc. Secondly PE backed firms are much smaller in size compared to sensex constituents. So it does not actually make sense to compare PE backed firms with Index consituents. They must be compared with similar firms.

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