If Year 2002 was the year of the brave investor, Year 2003 was the year of the very prosperous investor. After a rather listless 2002 when nothing seemed to go right for equity markets, Year 2003 saw everything fall into place to effect one of the most stunning turnarounds in the history of Indian equity markets.

When Year 2003 began there was nothing to indicate what was in store for equity markets. To begin with, nothing seemed to be working for the markets. Equity markets were languishing at 3,300 levels, stocks were ridiculously undervalued and they still had no takers, the economy was coming to grips with a very disappointing monsoon, there was uncertainty about technology  the driving force behind many a rally, and terrorism had struck fear all around  at home and away. To have expected the investor to enter equity markets under those conditions would have been asking for the moon. However, those who did invest then, probably made one of their best investment decisions ever.

It is difficult to put one's finger on a particular trigger that sparked the rally, when it happened in May 2003 after hitting 2,900 levels. It was probably a range of factors that had a combined impact on the markets. But yes, if one had to identify a catalyst that started it all early on, it would certainly be the Union Budget 2003-04 that had some meat for equity markets and equity funds. Dividends on mutual fund schemes were made tax-free in the hands of investors (with even distribution tax on equity and equity-oriented schemes being waived off). Long-term capital gains on equities were waived off to encourage long-term investments in the markets. The tax sops although ineffective at the beginning, did have the desired impact at a later stage.

A bumper year

SCHEME NAME	NAV (Rs)	ASSETS (Rs m)	1-Mth (%)	3-Mth (%)	12-Mth (%)	Inc. (%)	SD (%)
FRANKLIN INDIA PRIMA (G)	78.36	3,842	29.97	58.53	179.65	22.71	8.68
TATA EQUITY OPPORT. (A)	20.82	1,507	17.70	54.68	160.79	6.34	8.13
RELIANCE GROWTH (G)	75.77	2,591	20.63	49.80	156.21	28.05	7.35
SUNDARAM SELECT MIDCAP (G)	25.60	1,311	19.73	52.82	155.10	97.62	7.97
RELIANCE VISION FUND (G)	65.32	4,389	18.40	44.04	149.94	25.72	6.93

(NAV data as on Dec. 22, 2003. Std. deviation data is calculated after taking monthly returns going back 2 years. Growth over 1-Yr is annualized)

For the second year in a row, the midcap flavour ruled the markets. Franklin Prima (179.65%) heads the rankings once again (it was the leader even last year). A surprise entry is Tata Equity Opportunity (160.79%), which was a tax-saving fund from IndBank Mutual Fund which was taken over by Tata Mutual Fund. Sundaram Midcap (155.10%) and Reliance Vision (149.94%) were other funds that rode the midcap frenzy to the hilt.

If one had to identify the other trigger that did the trick for the markets, it would have to be the monsoons. Hardly two months into the monsoons and the verdict was out this was one of the best monsoons in a long time. The industry had not seen something like this in some time and the excitement in corporate circles was palpable. Strong quarterly results declared in June and September underlined the feel-good factor. Indicators like India's emergence as the BPO (business process outsourcing) destination, RBI's endorsement of 7.0% GDP growth, sustained FII inflows, breaching of the US$ 100 bn forex level were the other shots in the arm. Of course, that is not to say that equity markets saw a smooth run throughout the year. Volatility did make its presence felt time and again, although the rally maintained its strong upward trajectory.

Balanced Funds: Finding a place under the sun

If diversified equity funds were going to ride the rally, can balanced funds be far behind? After having got used to the cold shoulder, balanced funds finally came into their own in 2003. Some balanced funds even outperformed diversified equity funds, which means that by taking on lower risk (i.e. 60-70% in equities), they gave investors a higher return than diversified equity funds.

Doing the balancing act well¦

SCHEME NAME	NAV (Rs)	ASSETS (Rs m)	1-Mth (%)	3-Mth (%)	12-Mth (%)	Inc. (%)	SD (%)
HDFC PRUDENCE (G)	44.95	4,546	10.43	26.88	91.80	20.59	4.63
TATA BALANCE FUND (A)	23.01	1,004	14.88	34.09	82.46	15.88	5.10
DSP-ML BALANCED (G)	17.68	825	13.70	27.56	77.43	13.45	4.80
MAGNUM BALANCED	14.67	961	11.73	29.85	75.12	14.23	5.00
FT INDIA BALANCED (G)	15.86	1,119	15.35	29.26	69.69	10.66	4.92

(NAV data as on Dec. 22, 2003. Std. deviation data is calculated after taking monthly returns going back 2 years. Growth over 1-Yr is annualized)

As is evident from the table, balanced funds did the trick for the investor with a lower risk appetite. HDFC Prudence Fund (91.80%) continues to stand tall over the competition. Tata Balanced Fund (82.46%) and DSP ML Balanced Fund (77.43%) trailed HDFC Prudence by quite a margin. Magnum Balanced (75.12%) and FT Balanced (69.69%) were the other leading performers over the year.

What to expect?

Perhaps Mr. Prashant Jain (Head-Equity, HDFC Mutual Fund) view on equity markets best answers this question: It is in my opinion very difficult to predict the short term movements of the market. From a longer term prospective, while the markets are not as attractive as they were six months back, it would be correct to say that there is reasonable upside for the medium to long term investor.

While equity fund managers are unanimous that the rally has already factored in quite a bit of the positives already, that is not to say that there is no more steam left. When we asked Mr. Prashant Jain for his views on market valuations and investment opportunities going forward, he elaborated, There is reasonable upside due to the continued growth in the economy, exports and in corporate profits. Further, the PE multiples are low compare to the long term average PE multiples of India, compared to the growth rates in corporate profits, in relation to bond yields and also verses PE multiples in many other markets across the world.

Quite clearly its not really the end of the road for the equity fund investor. For an investor with a 3-5 year investment horizon and some risk appetite a good diversified equity fund or for that matter even a good balanced fund holds considerable growth potential. So don't fret about what could have been, proceed confidently towards what still can be.

PersonalFN provides research recommendations to its premium research subscribers and financial planning clients. To know the recommendation on this investment, become a subscriber or client today. Click here to know about our research services. or Click here to know about our financial planning services. Or, simply write to info@personalfn.com. You can also call us at +91 22 6136 1200.

Add Comments