Thank god for anti-climaxes! in a quarter in which war-not just one with the neighbour but one involving much of the world-was a distinct possibility, the Indian stockmarkets actually moved up by 16 per cent over the closing figures for the last quarter (July-September). The surprise gainers in the October-December quarter were the down-and-out tech stocks. And the star performers were the gilt funds, which provided investors with handsome gains-the likes of which they hadn't raked in recent times. Even the disclosure that the Unit Trust of India's flagship scheme, us 64, was worth under Rs 6 wasn't enough to take the wind out of the entire mutual fund industry. Perhaps the markets had already discounted the junk holdings in the Trust's portfolio.

To be sure, the mutual fund industry may not be celebrating, but they have little reason to complain about last quarter, with the asset base swelling substantially. Data released by the Association for Mutual Funds of India (AMFI) indicates that the total funds with the industry had crossed Rs 1,00,000 crore at the end of December, an increase of almost 11 per cent in just over three months since the terror strike in the US. Such a sturdy performance, given the prevailing circumstances, indeed augurs well for the industry and investors. Higher valuations may be one major reason for the rise, but fresh mobilisations too have contributed their mite, with debt-based schemes mobilising some big money from the public. Of the Rs 22,578 crore mobilised, income schemes accounted for close to Rs 7,500 crore, with the liquid and money market funds bringing in Rs 13,838 crore.

As the markets began to look up, a couple of players thought it a good time to flag off new schemes. And along with those new schemes came plenty of innovation. Benchmark Mutual Fund-the latest entrant to the mf industry-for instance, launched India's first exchange-traded fund, a concept that's pretty popular in world markets.

But doubtless, the highlight of the quarter was the performance of Prudential ICICI Mutual Fund. It occupying the pole position amongst private sector funds isn't the creditable achievement-it's been ahead of the competition for some time now. What is indeed laudable is Prudential ICICI's accomplishment of mopping up assets worth Rs 7,000 crore in the last quarter, making it the country's second-largest mutual fund, next only to UTI. ''We now expect to grow at least at the expected industry average growth rate of 30 per cent, if not more, although we have bettered the industry growth rate at most times,'' points out Shailendra Bhandari, CEO, Prudential ICICI Mutual Fund.

Turnaround Time

The debt-based funds may have been the ones mobilising the cash, but as far as performance goes, the equity funds were in top form-finally, considering that the equity schemes lagged behind their debt counterparts for the last several quarters. That trend was finally reversed, with equity outperforming debt for the first time in close to two years. And they did so in style. All the equity funds that are a part of the study have generated positive results. Of the 51 schemes considered for the study, 21 funds outperformed the category average of 18 per cent. Valuations are cheap, interest rates are low, inflation is down, the rupee is steady, and all these augur well for the markets. ''That's why we are positive on equities,'' adds Bhandari, who expects a global recovery by the second half of the year.

The top diversified equity fund in absolute terms was the ING Growth Portfolio, which has always been biased towards the ice sector. That strategy may have proved disastrous in previous quarters, but last quarter the focus on two premier but volatile it stocks-Infosys and Wipro, in which ING Growth still has 50 per cent of its funds-resulted in the fund posting an almost 50 per cent growth in absolute terms. The fund, whose asset base had eroded to roughly Rs 44 crore by end-September, turned around smartly by clocking an asset growth of close to 50 per cent by end-December, to Rs 65.12 crore. Clearly, this is a high-risk, high-return recipe, and if you're afraid of the heat, stay out of this kitchen. Asim Syal, Fund Manager (Equities), ING Mutual Fund, for his part, isn't fazed by the high-octane volatility. ''We believe in the tech story and feel that the tech sector will perform well over the next two years. That's why we're in no hurry to offload tech,'' he says.

Meanwhile, the good old debt funds continued their excellent run. But that can be largely attributed to falling market yields, with this category turning out a humdrum average return of 3.89 per cent. And that explains why as many as 28 out of the 47 debt funds (growth options only) outperformed the average.

PNB Debt Fund once again proved to be the top performer (it's been the star in many of our previous studies), generating 7.33 per cent in absolute terms. With close to 70 per cent of its investments parked in sovereign securities, it's little surprise that credit rating agency ICRA has given it a high rating. JM Income Fund comes in at a commendable No 2 position, with an absolute return of 5.66 per cent. That was possible because almost 40 per cent of jm's investments were in government securities. ''The performance has been more of a call on the duration of the papers,'' avers Nand Kumar Surti, Fund Manager (Debt Segment), JM Mutual Fund. ''By and large, the correct calls on interest rates have also helped, particularly in volatile periods.''

Indeed, gilt funds have been the major beneficiaries in a falling interest rate scenario-a drop in market yields results in an improved performance of long-dated papers. The average return of 39 gilt schemes (growth options only) that were part of this study was a staggering 6.17 percent in absolute terms. What's more, 19 schemes outperformed the category average.

As a result of the realignment of the yield curve, the top gilt performers of this quarter are those that hold long-dated securities. Kotak Mahindra Gilt (Serial) 2019 - Growth Fund has generated 15.82 per cent over the last quarter. The secret? The fund has investments in papers maturing in over 17 years. The quality of investments is good, with over 75 per cent of them in government securities and the rest in net receivables.

The Balance Shifts

For the past few quarters preceding the October-December period, equity turned out to be the villain for the balanced funds, negating the gains made by the debt holdings. This time round, though, it's equity that's been the show-stealer, thereby resulting in balanced funds turning out an impressive average return of close to 14 per cent. Of the 27 (growth option) balanced schemes considered for the study, 10 outperformed the category average, and the top performer in absolute terms was Pioneer ITI Vista Fund. The fund has been having problems with transparency (it hasn't disclosed its holdings till date) and persistent rumours that Pioneer is exiting the joint venture, but that clearly hasn't affected its performance; it posted phenomenal returns of 55.08 per cent in the last three months. The brilliance of that showing can be gauged from the gap between the Pioneer and No 2, Alliance 95 Fund, which notched up a return of 21.67 per cent-that's nothing to be sneezed at, yet it pales in comparison to Pioneer's performance. Yet, it has to be said that Alliance 95 has been a consistent performer, generating decent returns over a period of six years. The fund maintains almost 70 percent in equity and that strategy paid rich dividends last quarter.

Till recently, ice sector funds were the pariahs of the market, with investors not willing to burn their fingers once again by touching these highly-volatile schemes. The only sector funds that performed since the second- half of the year 2000 were petroleum and pharmaceuticals. ICE was in the dumps. Last quarter changed all that, with tech stocks fuelling some terrific performances, led by Pioneer ITI Infotech, which clocked a return of almost 80 per cent. A large part of that appreciation was courtesy its investment in Infosys, in which Pioneer had parked almost 23 per cent of its funds, as of December 31. Satyam Computer and Wipro are the other major constituents of the Pioneer ITI Infotech portfolio.

Let's now move on to what's emerged as an investor favourite in recent times: equity-linked saving schemes (ELSS). And they haven't disappointed either. Last quarter's top ELSS is Alliance Capital Tax Relief 96, which generated returns of over 30 per cent. Canequity Taxsaver Scheme is a close No 2. Alliance's ELSS has a good mix of stocks from the old economy (such as acc and ITC) as well as the new (Wipro and Infosys) and has been among the most consistent funds in its category. Of the 16 open-ended tax funds considered, half of them have managed to beat the category average of 19 per cent.

Liquid funds, in accordance with their objective of providing ample liquidity to investors, have to settle for lower returns. The point was once again underscored last quarter, with this short-term debt category notching up returns of close to 2 per cent. The top performer in this category was Chola Liquid Fund Series April 2002 - Growth. The fund managed a 2.63 per cent absolute rise over the last quarter and outperformed other category funds by handsome margins.

Adjusting For Risk

The risk-adjusted performance of any scheme helps in judging the adequacy of the returns generated by it with reference to the risk associated with it. If you look at the gilt funds, Kotak Mahindra Gilt (Serial) 2013 - Growth, which has government securities maturing in 2012, fared better than its category peers and is the top fund for the period of study (the growth options: all gilt funds with life of more than one year were considered for this performance study covering the last three years ending December 2001). This performance is all the more creditable considering the interest risk that comes along with its long maturity profile.

Among the debt funds, those that managed to reduce their maturity profile at the end of the previous quarter (September 2001) have emerged clear winners, as they could successfully counter the volatility witnessed in the October-December period. Kotak Bond Serial 2001 Plan B - Growth was the top fund, managing to beat its category funds via a consistent approach of holding decent papers. By end-November, the fund held almost 98 per cent in AAA or equivalent rated corporate papers. No 2 position has been taken by one of the newer kids in town, IDBI-Principal Income Fund - Growth. The only fund to retain its place in the top five funds is Reliance MIP.

It's time now for a surprise of sorts. After adjusting for risk, the top fund in the equity category is, hold your breath, UTI Growth Sector Fund - Services. Top holdings: BSES, SBI, Infosys (mercifully, no Shonkhs or Cyberspaces here). Among the most consistent of performers over longer periods among the balanced funds is the Alliance 95 Fund. The fund has been among the top rankers in the previous studies as well and continued to march ahead of its category peers by substantial margins. The fund has a good mix of stocks that include some of the top rung stocks in the country like Infosys and Reliance apart from decent debt papers of companies such as IDBI. The fund has maintained its exposure to equity and debt in a consistent manner. With exposure to equity consistently above 57 per cent, it has seen its performance being affected by the equity component. But in the end it has managed to generate returns commensurate to the risk that it takes.

The inflow into liquid funds is consistently high because of corporate interest, although the outflow is equally high. The performance of such funds is measured in terms of consistency of returns along with the ability to minimise the risks-two parameters that corporate treasury managers pay considerable attention to. If you consider any one year-plus period over the past three years as a time-frame, Kotak Mahindra k Liquid emerges the top liquid fund based on the risk-return framework. The fund maintains a decent mix of short-term debt papers issued by sound corporate houses and financial institutions and had quite a few floating rate papers in its portfolio as of end-November. That helped it maintain a very short maturity profile in keeping with its objective.

With the quarter ended December 2001 providing the kind of returns few would have expected in October, the question now is: what does the current quarter hold in store for investors? Last fortnight's two big bang disinvestments (of IBP and VSNL)-and the prospect of still bigger bangs to come-augur well for market sentiment. Equity is where the action is and these traditionally higher-risk schemes appear a good bet today. How much you set aside for these funds is, of course, totally dependent on your appetite for risk.

For a detailed report of the survey, please log on to www.mutualfundsindia.com and www.business-today.com