The asset value of a mutual fund is variable, we all know. By the way it goes up and down all the time, it even looks random. But in truth, it is a dependent variable, depending as it does on the underlying primary and secondary capital markets.

Just how randomly do these markets behave? Now, that's an entirely different story, and we have little space here to boggle you with chaos theory and all the rest of it. What matters is this: if the markets are in bad shape, expect mutual funds (MFs) by and large to be in bad shape too.

January was a month of jitters, originating largely from Wall Street and spreading across the world's stock markets. The Dow, the S&P 500, nasdaq, Russell-2000, Germany's DAX, Japan's Nikkei, the UK's FTSE 100, you name it, they were all down sharply as the year's first month came to a dismal end. Bourses in India could hardly have hoped to stay isolated.

Indian investors too were haunted by fears of war in West Asia and associated oil market uncertainties. The poor third-quarter showing of India's top companies did their own bit to dampen investor sentiment, which was worsened by the glum outlook of some leaders in the otherwise roaring technology space. There was a discernible 'flight to safety', with money headed for such options as gold and government securities. The loser, of course, was equity. The nse Nifty dropped by 4.7 per cent, and the BSE Sensex shed 3.8 per cent of its value in January. In these circumstances, returns of zero or more could be seen as success.

Equity-based MFs generated an average return of negative 3.4 per cent, with just a handful of the 154 schemes considered managing to emerge with gains over the month. Yet, three in every four MFs actually outperformed the markets (many of them losing less than the markets did, that is).

By sector, it took a battering. The BSE it sub-index lost 12.8 per cent of value and tech-specific MFs did rather badly. Public sector units, in contrast, did well. The BSE PSU Index went up 2.9 per cent over the month, buoyed by the massive gains registered by a few PSU bank stocks.

The winning performance for the month was turned in by the unglamorous Sundaram Select Midcap- Growth. With a well-diversified portfolio (and its heavy bet on TVS Motor, its largest single-stock exposure), this mf posted a handsome 2.7 per cent return in January. The interesting thing is that of the 29 stocks in its portfolio, not even one is a Sensex stock (not even TVS, which has had a terrific run these past few months, thanks to the success of TVS Victor). The fund's managers have obviously played a high-nerve game (midcap stocks are typically more volatile) to beat the Sensex... and have come up trumps.

Another mf that invests heavily in mid-cap stocks is Reliance Vision, which has also turned in quite an impressive performance, given the circumstances.

Long And Short Of It

January also saw some peculiar behaviour amongst MFs. The portfolio churning activity was largely concentrated in a few stocks. What were fund managers doing? Rebalancing their assets. They appear to have gone back to their basic premise of diversification. There are fewer portfolios now than there were in December last year with single-stock concentrations of more than 5 per cent exposure.

As far as fund purchases went, the hot stock of the month was Andhra Bank, which was snapped up by many fund houses, including Birla, Franklin and Prudential.

Reliance mf even managed to book handsome profits, as it had spotted the opportunity earlier-in December last year. Alliance Basic Industries Growth, which has a significant exposure to the banking sector (a third of its value), also managed to beat the market.

Another major gainer among public sector stocks was the telecom behemoth MTNL, which shot up by over 22 per cent. Prudential ICICI Mutual Fund was very aggressive in its purchases at this counter, while GIC liquidated part of its holding in the scrip.

The oil major HPCL was very much in and out of several mf portfolios. Franklin, Zurich and DSP Merrill Lynch thought it prudent to switch to HPCL and get rid of BPCL, while Birla did the very opposite. Prudential ICICI and Reliance were also HPCL buyers.

With the spectre of a US-Iraq war looming large, equities are definitely in for a rollercoaster ride. If the war is short, snappy and goes in accordance with the US script, stock markets across the world could revive. Indian markets are likely to go up sharply, too. February typically experiences a pre-Budget rally as well.

Consider the indicators: the huge foreign exchange reserves, the strong rupee, the long-term nature of our external debt, the southward inclination of the long-term interest rate trend, and the overall prospects a boost to the Indian economy from the Budget.

Moreover, many a company is waiting for an IPO opportunity. Of course, it doesn't help to gloss over the risks. Also, 4.4 per cent GDP growth for 2002-03 is dismal indeed. Here's hoping nothing else goes awry.