The celebratory mood was unmistakable. And it wasn't just fund managers, but also mf investors who saw their wealth multiply. As the third quarter of fiscal 2003-04 began, having done a marathon rally already, the Sensex was expected to take a breather-or so some thought. Many decided to book profits. But those who stayed invested found the bull charge gaining momentum. India's equity markets finished the quarter zooming past all expectations to touch record levels. The BSE's 30-scrip benchmark index, the Sensex appreciated by a whopping 31 per cent, while the NSE's 50-scrip barometer, the Nifty, went up 33 per cent over the quarter.

The Big Surprise

Investors and analysts had expected FII inflows to dry up in December, which has been the pattern in previous years. But this quarter was a different story altogether, with FIIs reinforcing their commitment to Indian equities. Net inflows crossed Rs 6,000 crore in December, and MFs, which had been net sellers for the past few months, pumped in almost Rs 750 crore (net of outflows) during the month. The rally was broadbased, as revealed by the BSE's sectoral indices. Over the quarter, the BSE it index was up 37 per cent, BSE Healthcare up 30 per cent, FMCG up 19 per cent and the Bankex up 31 per cent. The crown jewel remains it, evidently.

Equity Funds

India's equity funds appreciated by an average of 36 per cent. The worst performance of any equity fund was a positive 12 per cent, while the top performer delivered a stupendous 55 per cent return. Franklin India Prima fund, with its mid-cap predominance of stocks, has topped the ranking table.

Balanced Schemes

The average quarterly return in the balanced category was around 23 per cent. Canganga emerged as the top performer. Though this is a 'balanced scheme', its portfolio resembles that of any other equity scheme with 83 per cent exposure to equities.

Income And Gilt Schemes

As inflation inched up, December saw yields harden. All in all, though, it was a good quarter for income fund investors; the benchmark index, I-Bex, appreciated about 2 per cent. Among income funds, Escorts Income Plan was the top performer with 2.8 per cent returns.

Gilt funds also witnessed a spurt in their NAVs. Chola Gilt Investment Plan, which has managed its bond-maturities well, ended the quarter on top.

Liquid Schemes

The performance of liquid funds, the least risky class in mutual funds, was in line with expectations. The average annualised return from liquid funds was around 4.5 per cent. Incidentally, all the top performers in the list are small in corpus size. LIC MF Liquid Fund, with a corpus of Rs 500-odd crore, topped.

The Outlook

On January 9, 2004, the Sensex marked a new all-time high of about 6,250, some 100 points beyond the old record. On present trends, much depends on FII actions. Though the market's undercurrent is still positive, one needs to be cautious. A reassessment of one's risk appetite might be in order, as the Sensex reaches new heights. Given the two devils of market sentiment-greed and fear-it would be prudent to balance the two.

Debt Advice
With equities in boom, what should the debt investor do? Sulk?

By Narendra Nathan

To the contrary, debt fund investors are a pampered lot for the moment. And with a lot less nail-chewing to do, too. Unlike equity fund investors, who've seen their NAVs zoom, crash and zoom again, it has been smooth sailing so far for debt fund investors. Annual returns have been consistent-in the range of 15 per cent odd-for the last several years.

Now, given the common knowledge of falling interest rates, how did they manage that? Price appreciation of old assets. Every time current rates (on new loans) go down, the secondary market demand for old better-paying bonds rises-and so do their prices (which therefore translates, by the way, into lower 'yields'). Assume you have paid (or 'lent' rather) Rs 100 for a one-year bond with a 10-per cent interest 'coupon rate' (so you are to get Rs 110 after a year). If interest rates suddenly fall, and the new bonds being issued are suddenly at 8 per cent (giving just Rs 108 after a year), another investor would be willing to pay something over Rs 100 (and under Rs 101.85, at which price this deal's 'yield' will touch 8 per cent) to acquire your higher-coupon bond in a secondary market transaction.

That's how debt asset values rise. And with banks and the like flush with funds searching for safe idling spaces, the demand for bonds-government bonds particularly-has been higher than ever. But now that talk of a grand economic recovery is in the air, shouldn't corporate demand for bank funds result in large sums of money moving out of bonds and into business projects? In a reversal of the earlier trend, shouldn't bond prices fall and interest rates rise?

So far, debt fund investors have been spared any such shock. "As there is a huge amount of liquidity in the system, there is no chance of this happening in the next 3-6 months," explains Rajiv Anand, Head (Investments), Standard Chartered Mutual Fund. "The chance of interest rates moving up is remote now, and instead, we will have a long period of low interest rates," says Sandesh Kirkire, Fund Manager at Kotak Mutual Fund. Businesses are to invest for the boom on internal accruals and so on.

What should debt fund investors do? Not expecting major returns would be a start. "Going forward," says Anand, "investors should expect a return of 5-6 per cent from the income fund." Interest rates may be pretty much near their bottom-given the floor put by inflation (hovering above 5 per cent). So don't expect big rises in bond prices.

Should you desert debt funds and shift to equity? No, unless you want to risk your 'safe' savings. Remember, debt funds also offer a tax advantage. Moreover, you might want to consider flexible rate income funds. These protect you from interest rate volatility, but deliver more modest returns.