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The rise and rise of mutual funds

1999 has been the year of mutual funds. The rise from disgrace to a preferred investment vehicle was driven by a series of factors. They were a) the consolidation and transformation of funds in terms of their structure over the past years, b) the dramatic turnaround of the equity markets in 1999, c) the virtual disappearance of safe and rewarding fixed return alternatives, and finally d) the tax incentive in Budget '99 making dividend from open-end equity funds tax-free.

Consolidation
The consolidation of players can not be more visible. During the year, three mergers took place. HB Mutual opted for a gracious exit by merging itself with the Creditcapital Asset Management Company; Zurich AMC (India) acquired the assets of ITC Threadneedle, after Threadneedle's parent BAT Industries merged its financial services business with Zurich globally; and Apple Asset Management sold its two schemes to the Birla Mutual Fund after Apple's promoters decided to de-emphasise its financial services business.

The Gold Rush
The year witnessed a comeback by funds. But it was still a year of ground-work for growth in the coming years. Besides the consolidation, many closed-end fund families transformed themselves in an open-end fund family by converting 21 closed-end equity and balanced fund into an open-end structure. And all the fund families were working hard to complete their fund-menu. During the year, 57 funds were launched. Notable amongst these was the launch of 16 sector funds, like Infotech, FMCG and Pharma.They were launched by Kothari Pioneer, Unit Trustof India, SBI Mutual, Alliance Capital and Prudential-ICICI. Besides this, ten gilt funds were launched by all the leading fund families.

Budget Sops
The balanced funds also gained prominence with the tax concession given in Budget '99. This category which lacked a personality came alive in 1999 with the conversion of three closed-end balanced funds and seven new launches.

Budget '99 removed tax on dividend income from mutual funds that invested over 50 per cent in equities. Result: Every other fund is in a race to give dividend to score brownie points.

NEW FUNDS LAUNCHED IN 1999
Income	11
Equity Diversified	5
Balanced	7
Equity Tax Planning	5
Debt-Short term	3
Equity Sector	16
Debt-Gilt	10
Total	57

Closing Time
The year also witnessed the death of closed-end funds. With 20 conversions, only five of the 57 new launches were closed-end funds. Even these five were cleverly packaged. Four of them —- Cazenove Chola Amity, Cazenove Chola HI '99, UTI's MIP '99 and MIP '99 (II) — were close-ended because they were fixed-term guaranteed return schemes. The fifth of new launches was UTI's MEP '99, a closed-end tax saver launched before open-end tax saving fund was permitted by regulators.

Performance
The average equity fund was up 134 per cent during the year. The best performing fund was the first infotech fund -- Kothari Pioneer Infotech(up 446 per cent), followed by Birla Advantage(285 per cent).

The average balanced fund was up 73 per cent and the top performing fund during the year was Magnum Balanced(up 160 per cent) followed by Alliance '95(168 per cent).

The open-end debt funds continued their steady rise with an average gain of 13 per cent in 1999. The top-performing fund during the year was Tata Income (up 15.73 per cent) followed by Sundaram Bond Saver (14.68 per cent).

Where to Invest in Y2K

Balanced Fund for Starters: If you have a low appetite for volatility and still want superior returns than a fixed-return avenue, a balanced fund should be your choice. With plenty of options today, these funds can prove highly rewarding for investors. Besides, in case the equity market plummets the decision to invest in a balanced fund will be smart.
(Balanced funds invest both in equity and debt.)

Diversified Equity Funds for long-term financial goals: With an overheated equity market, one should approach the equity funds with caution. A majority of these funds derive their gains from an extremely concentrated portfolio. Currently, these funds are extremely vulnerable to any negative sentiment in the infotech stocks. A marginal selling pressure in these stocks can trigger a dramatic fall in the value of the fund. Consider funds with a relatively diversified portfolio and consistency of returns. Discount the hot past performance based on a few big bets.
(Diversified equity funds invest most of their corpus in stocks.)

Sector Funds: Evaluate your tolerance. Make sure that you contain your exposure to these highly rewarding and risky funds only to the extent you can handle. If the party comes to an end it will leave a big hole. Some sector funds out of favour today could be significant potential gainers later this year. Consider the quality portfolio of the FMCG and Pharma funds. These funds have been ignored lately because of the infotech euphoria. A correction in IT stock prices could result in a vast improvement of FMCG and Pharma funds.
(Sector funds are equity funds that invest in a particular sector like infotech, FMCG or pharma or a combination of a few sectors.)

Income Funds: Consider them for steady returns with exceptional liquidity. They provide better returns than a short-term bank deposit. Moreover, with the provision of sytematic withdrawal and investment plans they prove to be sophisticated instrument for the risk-averse investor seeking steady returns. These funds are safer than bonds as they have better liquidity. Pay attention to the size and asset quality of these funds; it matters more than past performance.
(Income funds invest in debt securities.)

(All the above are open-ended funds which can be bought and sold from the mutual fund company or brokers at prices close to the Net Asset Value.)

Close-ended Bargains: A rare species now and soon-to-be extinct. Only two deals are available today—- Mastershare and Morgan Stanley Growth Fund. The portfolio of these funds look better than some of the hot open-end funds. With the prevalent discount on their NAV the funds are attractive. But these bargain funds are suited only for the long-term investor willing to wait for the redemption.
(Close-ended funds can only be redeemed when the scheme is closed. However, some of these funds are traded on stock exchanges but at a discount to the Net Asset Value.)

Fund Performance in 1999
Leaders		Laggards
Equity Funds	Gain (%) *		Gain (%) *
KP Infotech	446.12	Dhansamriddhi	31.17
Birla Advantage	285.17	UGS 10000	34.83
Birla MNC Fund	261.52	Master Plus '91	41.63
Alliance Equity	259.17	GIC Fortune '94	43.87
Tata Core	230.60	Dhanvikas (1)	44.93
Balanced Funds	Gain (%) *		Gain (%) *
Magnum Balanced	169.01	Dhanasahayog	13.19
Alliance '95	167.61	Canpremium(RO)	27.65
Zurich India Prudence	100.94	JM Balanced (D)	44.74
Tata Balanced	96.68	Canganga	44.98
Unit Scheme '95	62.59	Cantriple +	47.60
Debt-Medium Term	Gain (%) *		Gain (%) *
Tata Income	15.73	JM Liquid (D)	11.02
Sundaram Bond Saver	14.68	Magnum LIF (D)	11.69
JM Liquid (G)	14.08	Chola Triple Ace	12.07
JF India Bond	14.07	KP Income Builder	12.16
Escorts Income Plan	13.97	Chola Freedom Income	12.26
		Source : Value Research

Mutual Funds

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