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Mutual funds in Y2K: Year of ladders and snakes

Dhirendra Kumar

Equity Markets

Little did one expect that the rally, which swept the markets in year 2000, would fizzle so dramatically. But as it turned out, Y2K has been the year of ladders and snakes, both for the markets and investors. Global sentiment and particularly the Nasdaq took the Sensex to dizzy heights in the early part of 2000 as investors poured money into anything remotely connected with technology in a bid to turn 'overnight' millionaires. But the party ended as abruptly as it started with investors helplessly watching the fairy tale turn into a nightmare. In both the rally and the crash, the underlying momentum was driven solely by sentiment with fundamentals taking a backseat.

A glance at the report card for 2000 shows almost the entire lot of equity and balanced funds in the red. In the midst of this carnage, the lesson for investing is loud and clear - diversify. True, most diversified equity funds came up with a stellar performance in 1999, but remember that even those returns were achieved from concentrated bets in technology stocks.

Even though there are hardly any diversified equity funds in the positive territory, in a falling market, you focus on guarding your assets rather than notching up fresh gains. The funds that have witnessed a lower than average decline in their net asset values are largely the ones which have stuck to the golden rule of investing - diversification.

With investments spread across stocks that do not move in tandem, diversification ensures that portfolios are not exposed to the vagaries of one particular sector. So while your portfolio will not give you blistering returns, it would also ensure that the returns do not nosedive. Unfortunately, funds that had loaded their portfolios with ICE stocks to add that extra bit are way down on the return ladder.

Equity - Diversified

The Value Research category of 50 diversified equity funds posted a net loss of 26.52 per cent against the BSE Sensex slide of 20.65 per cent in calendar 2000. Taurus Discovery Stock is a surprise winner this year. While still trading below par, the fund's unflinching faith in Himachal Futuristic (average exposure at of 21.3 per cent) helped it gain by 6.43 per cent. That apart, two tax planning schemes have posted positive returns in 2000. It is interesting to note that both Zurich India Taxsaver '96 and KP Taxshield had declared dividends when the markets fell and had seen substantial inflows for bottom fishing.

Tata Tax Saving shed 51 per cent in the last calendar to emerge as the top loser among diversified equity funds. The average 60 per cent exposure to technology stocks and a 21.66 per cent holding in VisualSoft proved to be the fund's undoing. However, it is the SBI fund house, which finds the maximum representation in the losers' category.

SBI's Magnum Multiplier Plus, Magnum Tax Gain, Magnum Global and Magnum Equity have logged sharp losses during the year, to make it to the bottom of the heap. A similar investment philosophy across schemes - concentrated exposure to mid rung stocks, failed to deliver in 2000.

The 1999 star performer Birla Advantage was razed to the ground with a whopping fall of 45.81 per cent during the year, with one of its top holdings - VisualSoft shedding about 72 per cent in the current calendar. The fall in other funds has been broadly in line with their respective diversification.

Top gainers	1-year return (%)	3-year return (%)
Taurus Discovery Stock	6.43	21.73
Zurich India Taxsaver '96	3.15	71.09
Kothari Pioneer Taxshield	2.11	—
Alliance Capital Tax Relief '96	-0.55	79.58
Templeton India Growth Fund	-5.04	11.73
Tata Pure Equity	-8.52	—
Kothari Pioneer Blue Chip	-13.20	47.18
UTI Index Select Equity	-14.93	23.56
IDBI Principal Index	-15.19	—
Zurich India Capital Builder	-17.17	21.66
Category Average	-26.52 (50 funds)	19.64 (37 funds)

Top losers	1-year return (%)	3-year return (%)
Tata Tax Saving Fund '96	-50.83	41.94
Magnum Multiplier Plus	-50.31	16.71
Magnum Global Fund	-48.77	11.19
Magnum Taxgain	-46.61	37.26
Birla Advantage	-45.81	50.07
Kothari Pioneer Prima	-44.88	29.56
Canglobal	-43.03	-5.07
Dhansamriddhi	-40.94	-10.31
Birla Equity Plan	-40.87	—
Prudential ICICI Tax Plan	-40.59	—

Equity - Technology

Like everything else in the technology world, the returns from technology funds too have been ephemeral. The tech meltdown has wrecked havoc across all portfolios, independent of the underlying quality of stocks. The Value Research category of technology funds has posted a loss of 32.55 per cent in the last six months. The seven technology funds launched in 2000 are trading below par, and even a significant cash position has failed to stem the slide. Birla IT and Tata IT, converts from the diversified equity category have witnessed the sharpest loss.

Top gainers	6-month return (%)	1-year return (%)
Alliance New Millennium	-25.51	—
Sun F&C Technology	-25.90	—
Prudential ICICI Technology	-26.16	—
KP Internet Opportunities	-27.48	—
KP Infotech	-30.00	-39.96
Category Average	-32.55 (12 funds)	-40.93 (4 funds)

Top losers	1-year return (%)	3-year return (%)
Birla IT	-43.22	-49.71
Tata IT	-40.01	-41.97
IL&FS eCOM	-36.92	—
UTI GSF Software	-35.97	-26.87
DSP ML Technology.com	-34.85	—

Equity - Speciality

It is not gloom everywhere though, with two of UTI funds making it to the top of Value Research Speciality category and more importantly, with positive returns. UTI Services Sector, despite a 70 per cent exposure to technology stocks has emerged a net gainer with an impressive return of 42.04 per cent, thanks to a small asset base and aggressive management. UTI Petro is the other top gainer in the category, with a return of 33.9 per cent. The recent interest in oil PSUs with talks of divestment has worked well for the fund. JM Basic is the other top gainer in the category with a one-year return of 41.79 per cent.

Top gainers	6-month return (%)	1-year return (%)
UTI GSF Services Sector Fund	-17.78	42.04
JM Basic Fund	-0.53	41.79
UTI GSF Petro	8.61	33.90
UGS 10000	-7.20	-19.34
UTI GSF Brand Value	-10.09	-20.37
Category Average	-10.09 (12 funds)	-1.98 (8 funds)

Top losers	1-year return (%)	3-year return (%)
Tata Life Sciences & Tech	-29.36	-41.23
Canexpo	-21.73	-29.09
Birla MNC	-8.35	-23.50

Balanced Funds

Value Research category of balanced funds posted an average loss of 11.79 per cent in 2000. It is UTI all the way here with Unit Scheme '95 topping the charts with a net gain of 26.36 per cent in calendar 2000. However, not much is known about the portfolio quality and investment style of the fund for lack of disclosure. Kothari Pioneer Pension Balance, with its predominant investment in debt and gradual equity exposure in a falling market, has posted a gain of 9.95 per cent in the last calendar.

Two of LIC Mutual Fund schemes - Dhanvidhya and Dhanasahayog are top losers with a fall of 36.53 per cent and 29.12 per cent, respectively. Magnum Balanced, the aggressive fund from SBI has shed 30.50 per cent with an average equity exposure at 70 per cent.

While these returns will surely leave you unnerved, one-year returns should not be a reference point for determining your future stay in a fund. For this would mean that you are letting short-term circumstances guide your long-term investment priorities. Equity investments are ideally recommended as long-term investment vehicles and a glance at three-year returns from these funds shows that most of them are still in the pink of health.

Top gainers	6-month return (%)	1-year return (%)
Unit Scheme '95	26.36	31.24
KP Pension Plan	9.95	13.32
PNB Balanced Growth	7.48	—
Grihalaxmi Unit Plan '94	7.11	10.45
Canpremium (Rollover)	6.61	—
Category Average	-11.79 (23 funds)	13.83 (17 funds)

Top losers	1-year return (%)	3-year return (%)
Dhanvidya	-36.53	-5.25
Magnum Balanced Fund	-30.50	-28.50
Dhanasahayog	-29.12	-8.58
Pru ICICI Balanced	-28.95	—
Birla Balance	-26.93	—

Debt Markets

While it was a relatively calm 2000 for the bond markets, these markets did have their share of volatility. The year started with a bang with the Public Provident Fund (PPF) rate cut setting the ground for the mother of all rallies. Except for a brief period in March, the rally continued unabated with the bank rate cut in April adding to the momentum.

However, increasing oil prices, the drought-like situation, a sliding rupee and the burgeoning fiscal deficit joined hands to set the placid markets on fire. In a perfect foil to its stance earlier in the year, Reserve Bank of India hiked the bank rate in a bid to defend a falling rupee. However, the IMD issue from SBI with over $5 billion in subscription, salvaged the debt markets. Although it's a short-term measure for a long-term problem, the inflows have surely buoyed the sentiment.

Bond prices react positively to interest rate cuts and shed value when rate goes up. As the outlook on interest rates swung during the year, the Value Research category of medium term debt funds too oscillated between the prospect of an annualised gain of 26.28 per cent in February and a 3 per cent annual loss in July. The realisation that the debt markets can also throw up a nasty surprise finally dawned on the investors. Amid these fluctuations, it was actually the year of the cash funds, which have logged a gain of 9.21 per cent in calendar 2000.

Debt - Medium term

With the sentiment in the debt markets taking a U-turn, debt funds were relatively better off by the year-end with the Value Research category of bond funds posting a net gain of 10.78 per cent. PNB Debt, the gilt fund in disguise, has emerged the top winner to post a return of 14.51 per cent in 2000. The other top gainer, LIC Bond fund has posted a gain of 13.22 per cent in 2000 on the back of a lower quality portfolio.

Tata Income Growth Option, which till recently held an equity exposure, has lagged behind its peers with a return of 7.64 per cent. It's a tale of two funds at Dundee AMC. Dundee Bond PSU and Dundee Bond Corporate, the companion funds managed by the same fund manager have thrown up diametrically opposite performances. While Dundee Bond PSU is in the top league with a return of 14 per cent, Dundee Bond Corporate is way down the order with a one-year return of 8.76 per cent.

Top gainers	6-month return (%)	1-year return (%)
PNB Debt	6.12	14.51
Dundee Bond PSU	4.38	14.00
LIC Bond	4.62	13.22
Templeton India Income	5.02	11.49
K Bond Wholesale	4.59	11.47
JM Liquid-G	5.50	11.42
Sundaram Bond Saver	4.78	11.39
Escorts Income Plan	3.85	11.27
DSP ML Bond	4.79	11.09
Chola Triple Ace	4.25	11.04
Category Average	4.41 (29 funds)	10.78 (29 funds)

Top losers	1-year return (%)	3-year return (%)
Tata Income-G	3.29	7.64
Dundee Corporate Bond	3.01	8.76
ING Income Portfolio	3.95	9.02
IL&FS Bond	3.99	9.61
JF India Bond	3.69	9.72
Tata Income-DH	3.85	9.91
Magnum LIF	4.27	10.08
Chola Freedom	3.99	10.17
UTI Bond	4.67	10.32
IDBI Principal Deposit - EA/EB	3.96	10.37

Debt Funds with marginal equity

Top gainers	6-month return (%)	1-year return (%)
KP CAP-Gift Plan	4.51	10.07
Templeton MIP-DM	4.15	—
Templeton MIP-DQ	3.96	—
Templeton MIP-DH	2.29	—
Category Average	3.00 (7 funds)	9.83 (2 funds)

Top losers	1-year return (%)	3-year return (%)
Sun F&C	1.28	—
Alliance MIP	1.33	9.58

Short-term debt funds

Top gainers	6-month return (%)	1-year return (%)
Zurich India Liquidity Inv	5.16	9.86
Templeton India Liquid	4.93	9.86
Prudential ICICI Liquid	4.92	9.74
KP TMA	4.90	10.05
Dundee Liquidity	4.86	11.02
Category Average	4.54 (20 funds)	9.21 (17 funds)

Top losers	1-year return (%)	3-year return (%)
Tata Liquid-D	3.42	9.69
Tata Liquid-G	3.64	5.00
JM High Liquidity-D	3.64	7.58
Sun F&C Mon Val Liquid-DD	3.78	—
DSP ML Liquidity	4.24	8.35

Source: Value Research

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