The Hindu Business Line : Immediate prospects may not be quite bright

Modest returns now look set to trouble equity funds in the days ahead. NAVs have already recorded a firm downturn, a trend that may not reverse in the near term.

The mutual funds industry is busy fielding questions from investors, most of them being asked with the specific intention of understanding where the market is going.

While it is much too early to prepare a list of the ultimate winners and losers, various attempts are being made to see which funds have lost more.

Those who have invested in diversified equity funds may be shocked to see that their one-month loss is nearly 30 per cent.

The situation prompts us to look back into the past, especially to the decline that was evident after the securities scam or when the tech bubble had burst.

However, the latter, as investment circles point out, were centred around individuals (Harshad Mehta, Ketan Parekh) or revolved around specific sectors (IT/ITES).

The latest development is quite different, they say while referring to the fact that the market has remained bullish for a good three years - considered by many as a fairly decent spell.

So, if this is a genuine rollback after a longish period of growth, what should equity fund investors do?

Is there a major case for averaging out their cost of investment - as some sections are fiercely advocating?

Or, should they turn ultra-defensive and get into cash or liquid funds?

These questions, it is felt, will have to be answered on a case to case basis, there being no universal yardstick applicable to all.

The individual will have to ascertain what his or her return expectations are, and act accordingly. But for those looking for general trends, it will not be too incorrect to say that investors' appetite for equity has become lower than before.

It will be extremely difficult for fund managers to turn in good performance in a market dominated largely by bearish sentiments.

The situation actually turns the spotlight on the recent performers; investors will desperately want them to stay on course and maintain the reputation they have built. Obviously, not all good performers (of yesteryears) will be able to do so.

The smart investor will probably not involve himself in predictions about index levels and market timings.

He will choose funds that have invested in good companies, each chosen carefully on the basis of critical parameters.

Four factors

Here is a list of issues that all equity investors should be aware of. One, interest rates are tending to move up. Two, corporate profitability is facing the challenge of rising input costs. Three, energy prices are unstable. Four, hedge funds are seen to be moving out in a perceptible fashion.

Now, all those factors may well add to the downside. On the other hand, investors should also be conscious about the fact that growth in the Indian economy cannot be wished away that easily.

There is scope for investing more, much more, in critical areas of infrastructure. Also, major segments will stand to gain from growing demand from within the country.

Which set of issues, the positives or the negatives, will rule the roost?

There can be no immediate answer. But while answers are being found, we can go back to where we started - to the ordinary investor and the kind of returns he expects to get from equity schemes. For him, the immediate prospects may not be quite bright.

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

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