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Aarati Krishnan

THE breathtaking rise in equity values over the past six months and the sweeping nature of this rally have done a lot to diminish the unsavoury experience that Indian investors have had with equity mutual funds.

In April 2003, just 63, or less than half, of the 156 equity funds in existence, had net asset values (NAV) hovering above their face value (usually Rs 10 per unit).

That is, far from providing investors with a healthy return on the capital invested, as many as six in ten equity funds actually managed to lose part of the capital sunk in by investors, during their initial offer period.

By November 2003, the picture was looking a lot better. With the Sensex hitting the 5,000-point mark, the laggards had dwindled to a minority, and 139 of the 156 equity funds now report an NAV of over Rs 10 per unit.

This is not something the fund industry can shout about from the rooftops. Having managed to recoup initial capital for their investors, these equity funds are now faced with the onerous task of managing a reasonable return for their investors.

This is going to be difficult. The stellar rise in equity values over the past six months has bid up the valuations of most large-cap stocks and a good number of mid-cap stocks, quite sharply.

With one bout of upward re-rating over, the gains on stocks may be more sedate, going forward. Certainly a repeat of the past six months, where the majority of equity funds have managed a 50-100 per cent appreciation in their NAVs, looks unlikely.

Second, with the more visible stocks already ferreted out by the market, it is going to call for some exceptional stock-picking skills on the part of fund managers, to consistently unearth new investment candidates which will outpace the broad market.

Investors who wish to ride any further rise in equity values, should now stick with the tried-and-tested funds, with a good five-year track record.

Fund managers who have weathered two or three boom-bust phases in the stock market are likely to be more wary of taking big risks, and may be better equipped to deal with a volatile market, than those who have piggybacked on just one boom period.

Therefore, if the NAV of your equity fund has just surfaced above par, after a wait of several years, the best course of action would be to quit now, while the going is good.

Holding on to your investment, in the hope that the fund will yet deliver good returns, now that it is out of the woods, may backfire very quickly.

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