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A Complicated Year

2012 may have been a hard year for the economy as well as for corporates, but investors did well out of it...

For anyone with any kind of market-linked investments, the end of 2011 was a particular low point. The stock markets had fallen a lot over the previous few months and there seemed to be little basis for any optimism at all looking forward to 2012. But 2012 turned out to be a positive surprise, particularly in comparison to what was expected. Now, a year later, the situation is exactly the reverse. Almost against all odds, 2012 turned out to be different.

So is the pattern going to repeat itself in reverse? Come January 1, are we going to start a year that will mean poor or negative returns for most investors? Perhaps, but in any case, to believe that you would have to have deep faith either in superstition or a rigourous reversal to the mean. You can take your pick.

Anyhow, the year past has been a happy one for mutual fund investors of all stripes (with the possible exception of some over-enthusiastic debt fund investors but that’s a separate story). In a year in which the Sensex and the Nifty rose by 22-23 per cent and the mid-cap indices by a hefty 36 per cent, most types of equity mutual funds did well. In the categories tracked by Value Research, mid and small cap funds were up by an average of 39 per cent, large and mid-cap funds by average of 28 per cent and large cap funds by 23 per cent.

There are two ways of looking at these numbers. One could say that great, investors made lots of money. Or, one could compare the average performance of different types of funds to their corresponding indices and say that actually, the fund managers didn’t add much—the average fund did as well as the index. The truth is a little more complex. In all these categories, the distribution of returns is skewed. 2/3 to 3/4 of the funds did better than the indices and the average was dragged down by a handful of stragglers who did very badly. This is not just of academic interest—it reinforces something I have observed for a while. As an Indian investor, all you have to do is to avoid a handful of the really bad (easily identifiable) funds. That alone puts you well ahead of the game.

Even if you don’t pay attention to the minutiae of funds’ returns, 2012 was interesting in other ways as well. A year ago, everyone was waiting for the Reserve Bank to start bringing down interest rates in response to the slowing growth rates. A year later, that’s exactly where we are.

However, notwithstanding the performance of the equity markets, or the mutual funds that invest in them, it hasn’t been a great year. For the first part of the year, at least till the time that finance ministry hasn’t changed hands, it seemed that the Government of India had abandoned even the idea of paying lip service to the idea of economic reforms or of considering engagement with the outside world to have any importance. For a few surreal months, it seemed that we were regressing rapidly to the 1970s mind-set. Even though that phase is now past, substantive change is a little thin on the ground.

Notwithstanding the larger economic crisis and inactivity, the year saw some significant changes to the way mutual funds work. SEBI introduced significant changes to the way the mutual fund business functions. These changes were widely perceived to be in response to the erosion of vitality that the fund industry had suffered over the last three years, ever since the abolishment of entry loads strained the business models of funds. In August, SEBI enhanced the amount that funds could charge from investors, based on how well they performed in expanding their reach beyond the bigger cities. It’s an interesting bargain, and if funds keep their end of it, then mutual fund investing—and the kind of easy returns that I talked about above could be within reach of a much larger population than it has been limited to till now.

It may have been a complex year, with no clear theme that defined it, but going forward, investors have more reason for being hopeful of 2013 than not.