The Hindu Business Line : Rough road ahead for fund managers

CONSIDER the following. The Indian equity market has seen large-scale volatility, marked by nasty swings during the last few days, trading volumes are shrinking and stock prices are fast moving southwards.

Let's not get into the actual numbers, but these trends combine to convey a simple message to investors in equity funds: The road ahead may lead them to trouble. And that trouble may well manifest itself in the form of a further weakening of sentiments. Consequently, net asset values will decline and you go back to the same old story of capital erosion.

Fund managers are likely to be under a lot of pressure in the coming days. This is already evident from the statements that some of them have been making lately. It is clear that a few of them expect any major positive thing to happen at this point. Most have, however, said that they expect some pick-up before the Budget. But it all seems to be quite iffy at this moment.

While the market will closely watch the NAVs, a large section will look at how the newcomers behave during these difficult times. One is specifically referring to the likes of Reliance Diversified Power Fund, DSP Merrill Lynch TIGER Fund and Sundaram Leadership Fund.

The Reliance scheme, incidentally, is already open for fresh subscriptions; it had a NAV of Rs 9.53 on June 3. A few other funds, including certain sectors-specific ones, are waiting in the wings. The existing sectoral products - FMCG, pharma, tech - too will be under the microscope. Life for all of them may be difficult if the equity scenario worsens.

The latest AUM numbers will be, as always, a crucial indicator of the state of the market. AMFI's figures for May are yet to come out and a month-to-month comparison will reveal how our asset management companies have been performing in terms of mobilisations.

MF circles indicate that short-term options continue to be a big hit with an influential section of investors. It needs to be seen how liquid funds and STPs have actually fared in the last one month or so. Despite their obvious shortcomings, this category of funds seems to have great potential in India. They are at least better than bank deposits in so many ways.

Will the latest developments drive the average investor to re-consider his or her asset allocation? That may make sense to those who wish to modify their strategy and set fresh targets.

One feels that investing in balanced funds - which have large proportions of both equity and debt in their portfolios - can be a good idea in these circumstances.

A number of balanced funds are available in the market and investors need to look at their historical performance (and key factors like their debt-equity mix) before putting in money.

The more orthodox sections may also weigh MIPs, which are relatively less risky because of their lower ceiling on equity exposure.

Yet, at the same time, one must remember that MIP returns too have been declining.

Feedback may be sent to blcal@vsnl.net

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