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Indian mutual funds: worst year ever?

Investors in Indian stock mutual funds are no longer just licking their wounds. They're in shock after the July-September quarter.

Given the devastating numbers released by fund tracking agencies, investors are counting themselves lucky if they lost less than the 18.7 per cent drop in the benchmark Bombay Stock Exchange index during the quarter.

Only sustained strong performance is a likely answer, but debts funds too are now on course to decline, according to Dhirendra Kumar, managing director of the Delhi-based fund tracker Value Research.

"Investors are on the run," said Kumar, adding redemptions from medium-term debt funds totaled almost Rs 55 billion in September, the result of uncertainty and rupee depreciation in the wake of the US air attacks.

"The yield on bond funds will be on the decline from here."

Of course, India is no island of misery.

Worldwide about 90 per cent of stock mutual funds lost money last quarter, according to Lipper Inc. Altogether, the 8,627 stock funds it tracks dived 18 per cent -- and are down by almost a quarter since the start of the year.

But the losses by Indian stock funds are among the worst, as the domestic stock market has been pummelled since March by a succession of scandals and crises, with sentiment darkened further by fear now of global recession and war.

The past quarter began in crisis, as the nation's single largest fund, accounting for 13 per cent of all money invested through the industry, announced it was suspending redemptions.

Further downward pressure was created by steps taken to stem market volatility and restore confidence by clamping down on carry-forward trading, a speculative practice that had accounted for up to 90 per cent of turnover on some days.

The result: turnover plummeted more than 70 per cent in the April-September period on the Bombay Stock Exchange, and by 65 per cent on the busier National Stock Exchange.

"The quarter was undoubtedly the worst in recent history for the mutual fund industry," said Suhas Naik, a portfolio manager at IL&FS Mutual Fund, which oversees Rs 3.0 billion.

"The sequence of events couldn't have come at a worse time as the industry was already going through a bad patch."

UGLY NUMBERS

Of the 97 open-ended stock funds tracked by myiris.com, a financial Web site, only one gained value last quarter and over half fell by more than 15 per cent.

Over the past year, all 97 funds lost money -- with 34 plummeting more than 40 per cent, and 10 by over 60 per cent.

The 56 close-ended funds tracked by myiris fared no better. All fell last quarter, by 2.1 to 28 per cent.

Over the past year only one gained -- JM Basic Fund, up a scant 5.4 per cent. More than 40 plunged by a third or more, with the worst performer, Magnum Growing Investment Tax Saving Scheme 9, down a staggering 67.1 per cent.

INFOTECH FUNDS

Value Research's data paints the same gruesome picture in greater detail by breaking the results down by fund type.

Almost all 140 stock funds it tracks fell on both a quarterly and annual basis.

The 12 infotech/technology funds posted the worst results as a group, reflecting the BSE IT sub-index's whopping 35.7 per cent plunge last quarter and 71 per cent dive the past year.

The most modest declines, with even the odd gainer, were concentrated among sectoral funds investing exclusively in drugmakers, followed by funds investing only in companies making fast-moving consumer goods, or products like branded foods, detergents, soap and toothpaste.

DEBT FUNDS

Debt funds, on the other hand, have provided till now a wonderful refuge from the horrors affecting the equity market.

All 50 debt funds tracked by Value Research posted gains over both the past quarter and year, as a flood of shell-shocked stock investors piled into the safety of fixed-return securities with attractive coupon rates. The 10-year Indian government bonds currently yields more than nine per cent.

The 25 funds investing in medium and long-term government debt gained 1.85 to 5.9 per cent last quarter. For the year, the gains range from a low of 13.5 per cent to 24.5 per cent by Templeton India GSF.

The other 25 debt funds, which invest in the much smaller Indian corporate debt market, posted average returns of 2.5 per cent last quarter, and 15 per cent for the past year.

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