The price of war: Gulf War II sent stockmarkets worldwide into a tailspin

Dizzy yet? The roller-coaster continues. Mutual Funds (MFs), as permanent seat holders, are supposed to have constitutions that are hardy enough to handle the worst. But even they, it turns out, have not been able to escape the turbulence of 2002-03's last quarter. The entire MF industry seems to have got a severe case of nausea.

The prime culprit takes no guessing: the war in West Asia, with all its twists, loops and turns. Stockmarkets had initially welcomed the prospect of an end to uncertainty. But by the end of the first week, hopes of a clean quick regime change lay shattered, alongside a whole set of optimistic pre-war assumptions. By the end of the second week, while current oil prices hadn't quite flared up and the dollar had retained its composure, worries arose that the long-term price the world economy would have to pay for the war would be higher than America's rosy estimates. No wonder most world stockmarkets reacted to the unedifying spectacle in West Asia with dismay.

Domestically, indices were depressed by the 4.4 per cent GDP growth figure for the fiscal year and the lack of movement on the disinvestment front. Add to this the traditional 'sell' pressure that afflicts MFs every March, and you have all the conditions for gloom.

Numerical Nightmare

It was a quarter everyone would like to forget. The Nifty shed 10.5 per cent and the Bombay Stock Exchange Sensex slid 9.7 per cent. Had it not been for the PSU sector, things would have been worse. The BSE public sector index actually gained 0.3 per cent. The information technology sector was hit the hardest, with the BSE it shedding a nerve-wrecking 21.9 per cent. Funds with high it exposures had to scurry for cover.

In general, all equity funds got a drubbing. Of the 130-odd equity schemes, merely two delivered a positive return. The category's average return? A disappointing minus 7.8 per cent. The foremost trend-bucker was Alliance Basic Industries-Growth Fund, which managed to post a heroic gain of 2.7 per cent for the quarter, largely thanks to its bets on PSU banks and petro stocks. Yet, Alliance MF almost made an exit from the Indian market, before doing a volte face, putting to rest rumours of its takeover. Zurich Asset Management Company, though, did get taken over by HDFC MF, thus making the latter a member of the Rs 10,000-crore-plus assets league, together with Franklin Templeton MF and Prudential ICICI MF.

Debt Debacle

Indian debt markets were also hit, putting upward pressure on interest rates (which had been falling otherwise). The average returns of debt MFs were low. Of the 124 schemes, the average return was a meagre 0.46 per cent, down from the 3.5 per cent posted in the previous quarter, though more than two-thirds ended the quarter in positive territory. Just about.

Of the 58 gilt schemes, only a handful did well. The best performer was Birla Gilt Plus (Liquid option), which managed a handsome 3.9 per cent return-on its investment in treasury bills and call money plays.

Liquid funds did better. The best returns were given by LIC MF Liquid Fund at 1.6 per cent. The average return in this category was 1.3 per cent. Which isn't bad, considering all the turbulence.

Risk Adjusted Returns

In times of risk, it doesn't really make much sense evaluating the performance of funds from a short-term perspective of absolute returns. Which is why we have risk adjusted measures, which gives analysts an idea of the risks taken and returns delivered over a longer span of time.

So, which schemes have done well? By our risk adjusted reckoning, UTI Growth Sector Fund-Petro continues to outperform all other equity-based funds, and has delivered an absolute return of 80.6 per cent in the last three years. It is followed by JM Basic Fund, another fund which is highly skewed towards petro stocks. Alliance Basic Industries, which has been a consistent performer and invests largely in companies that are sensitive to economic cycles (and therefore less volatile in day-to-day trading), is in the fourth position.

In the balanced category, there has been no change in the top performing schemes from the previous quarter, except that Unit Trust of India's US-95 has slipped from the third position to the fifth place. Templeton India Pension Plan continues to perform consistently, and has generally moved in tandem with the benchmark. It has invested close to 40 per cent of its corpus in equity and about 15 per cent in cash (and equivalents). The portfolio is well-diversified, and has no concentrated holding in any single stock. Zurich Prudence is also a rather well-managed fund, and has always been among the top performers in the category. It invests close to 60 per cent in equities, the highest exposure being in banking and petro stocks.

Ranked by risk adjusted performance, income funds which have taken very low risks have done the best. Escorts Income Plan replaces Grindlays SSIF- Short Term plan at the top of this chart.

On the whole, the expectations of Indian investors have probably declined over the past quarter, and this could spell surprisingly good returns the next time round. Given the circumstances, of course.