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Panic

Is the worst of the Great Panic of 2008 over? Well, i

Is the worst of the Great Panic of 2008 over? Well, it at least looks like it has subsided for a while. I won't say it's over because the current crisis has proven that it keeps coming at you even after it has been pronounced dead, rather like a zombie in a horror movie. While investors have been losing money on equity and equity mutual funds since the beginning of the year, the days from October 17 to October 28 were sheer panic. As the world's stock markets went into a free fall, there was this air as if all economic activity in the world was about to seize and everyone was going to lose all their investments.

However, as the dust begins to settle, a cool appraisal of the situation reveals a somewhat different picture. As usual, the worst horror stories one hears about investors losing everything are about those who had recklessly made concentrated investments with borrowed money. However, the world of a conservative mutual fund investor is very different. All of us who invest in equity through funds have lost money since equities started declining in January. However, we owe it to ourselves to go into things a little more deeply than others.

All equity mutual funds have suffered large losses, but they haven't all had the same kind of losses. In fact, there's a tremendous variation in the losses suffered by different funds. This is true even for funds of the same type. Take the example of the bellwether diversified equity funds. Since the peak of the market, the funds that have fallen the least, have lost about 40 to 45 per cent of the peak value. Out of a total of 230 diversified equity funds, about 25 funds that have lost roughly in this range. The median fund has lost about 55 per cent. In fact, in the middle of the scale, there are about 75 funds-a good part the total population-whose investors' losses are within two or three percent of the median value.

However, the worst funds are very far from this point. There are about twenty funds whose losses are in the high sixties, with the worst ones clocking in at around 75 per cent. This is a huge variation. In fact, percentages make the difference look smaller so let me put it in these terms. If you had ten lakh rupees invested in mid-January, that money would have been reduced to about Rs 5.5 lakh in the 'best' funds and Rs 2.5 in the worst ones. These are not small variations. In the Sensex, this money would have been down to Rs 47 lakh.

These kinds of distinctions may seem trivial to the punters who are gambling all, but they are important for mutual fund investors. Any sensible fund investor has been investing gradually for a long time is probably still positive compared to what he had originally invested. Those who are now underwater too hope to come up as soon as things take a turn for the better. Under these circumstances, it is important that even if one is making losses, the losses should be as small as possible. It is instructive to see of there is any pattern to which funds are doing well and which are doing badly.

One pattern emerges quite clearly. Funds that have a straightforward mandate to invest in a large universe of companies have done better than those that have specialised or 'innovative' mandates. It seems that those funds that have been designed to appeal to a featureset mentality have had an especially bad time. I don't know whether this pattern will hold in the future but I suspect that it might.

If this crisis is teaching us anything, it is that straightforward, understandable financial behaviour serves us better than taking a great deal of risk to chase something extra that may or may not be there.