The Hindu Business Line : Equity fund investors seem to have bright future

YOU might tsk-tsk and tut-tut when faced with the terrible performance put up by debt funds recently, but equity funds are not likely to turn you so disdainful. The reason is not far to seek - the last one year has seen debt funds provide single-digit returns compared to the 30 per cent or so delivered by diversified equity funds.

What went in favour of equity schemes is known to all and sundry. Overseas investors vigorously pumped in money, while their domestic counterparts displayed a sustained interest in the local stock market. All of this was backed by commendable corporate performance, which ultimately helped valuations to move ahead. Net asset values edged upwards too, and investors in equity funds got a reason to pull out and book profits.

This obvious euphoria, however, may not last long. In fact, many pundits have started suggesting that the bullish phase may be coming to a temporary halt. The Sensex is at a steep 6,000 points, supported as it is by positive sentiments that have been evident for some time. So this may be the time to be a bit realistic. Statements like these are coming thick and fast, all of them pointing to one conclusion: The market will retract and a decent chunk will be shaved off the indices.

Whatever the result, the committed investor has little to worry about. As our friends in the asset management industry are so fond of saying, the medium/long-term investor in MFs should stay put; in fact, a regular, systematic investment programme should be started without fail.

But should such a strategy be followed by all, irrespective of time horizons? One would like to think that the short-term participant has reason to withdraw, at least partially. Just check the latest performance figures if you do not agree with me. You will see that a number of equity funds have done reasonably well, which should prompt the short-term player to roll back his allocation.

The trouble is, an average investor may not know how to deploy the redemption proceeds once he has moved out of his preferred equity funds. Should he wait for a downturn before entering again? Should he shift part of the proceeds to `safer' avenues - may be fixed-income options? Should he move out only the capital appreciation part of it and stick to his original allocation? Each of these questions must be answered before decisions are taken.

There can be no single answer - after all, each investor is unique, complete with a distinctive profile and a special set of requirements. But as a general rule, a carefully-crafted strategy should be adopted to maximise one's returns in a tax-efficient manner. The future seems bright for those who are serious about equity funds.

For one thing, there would be many new offers to choose from. Right now, even as you are reading this column, SEBI is being bombarded by draft offer documents sent by fund houses for approval. Mid-cap funds, for instance, look like the next big thing on the IPO front. There would be many other innovations.

Feedback may be sent to nilanjan@thehindu.co.in

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