The years 2000 and 2001 were extremely painful for equity investors, forcing them to give up hope of ever recovering their money. But little did they know that year 2002 would turn their fortunes around. Down 26 per cent in 2000 and 20 per cent in 2001, equity funds gained 17 per cent in 2002. Bond Funds too managed another year of double-digit returns.
The year 2002 started with the makeover of Unit Trust of India's flagship scheme, US-64. The repurchase offer was revised – the guaranteed price was extended to 5,000 units per folio, an assured price of Rs 10 was fixed in May 2003 for remaining units and it was decided that fresh investments in the fund would be NAV-based. The scheme was subsequently hived off as another fund: US-2002.
While US-64 was being given a facelift, the government decided to overhaul UTI too. This year it was decided that UTI would be split into two parts: UTI-I would comprise all assured return schemes and all liabilities underwritten (read: assumed) by the government and UTI-II will include all other funds. The UTI-II funds will comply with mutual fund regulations and will be managed by an AMC, which will be jointly owned by four banks.
While UTI brought relief to investors, Budget 2002 was a disappointment, clamping tax on dividends from funds. Besides this, communal riots, terrorist strike, drought and PSU disinvestment added to market upheaval. The bank rate cut in October and a general decline in interest rates boosted bond funds.
Equity Funds
Equity funds weren't on a roll but were pleasantly rewarding. An average equity fund was up 17 per cent backed by the spurt in PSU and technology stocks. The big gainers this year followed either an unusual style or they were too narrowly focussed. Reliance Growth and Reliance Vision topped the charts with over 50 per cent gain, pursuing an unusual strategy of buy any stock for a quick profit. The other noticeable trend was portfolio shift from large-caps to mid-caps. Based on Value Research Fund Style, 12 fund changed their orientation to mid-caps stocks. The resurgence in select cyclical sectors, especially automobiles, helped some funds. Alliance Basic Industries was up 39 per cent while DSPML Opportunities gained 25 per cent. Other star funds this year were JM Basic and UTI Petro Fund for their mandate to be in oil stocks. JM Basic, with just three stocks in its kitty, moved up 91 per cent and UTI Petro gained 71 per cent.
Although technology fund investors still reel under losses, but an average technology fund was up 10 per cent in 2002. As ever, these gains were coupled with wild gyrations. Pharma and FMCG funds were lackluster categories, barely managing to guard losses.
Bond Funds
The joyride for bond funds continued through 2002 as well. With three rate cuts in 2001, gilt funds turned in 25 per cent returns. And this year, with a single rate cut, they are still going great guns: up 19 per cent, thanks to savvy trading by bond fund managers. Even medium-term bond funds continued to post a double-digit return of 14 per cent. Apart from aggressive duration management, these funds had an opportunity to trade in corporate bonds too, as yields here fell sharply.
However, the journey through the year wasn't that smooth. After delivering high returns month-on-month, the volatility due to border tensions in May 2002 saw bond funds move to the negative territory. An average loss of 0.30 per cent loss was the worst posted by the category in the past five years. Due to this relatively high volatility, short-term debt funds were pushed into the limelight, becoming the second-largest bond fund category by November 2002. Positioned as less volatile than medium-term bond funds and superior to cash funds, short-term debt funds sold like hot cakes in 2002. With the launch of 20 more funds in 2002, this category had Rs 15,000-crore worth of assets under management as on November 30, 2002. And this category posted nearly 2 per cent more gains than cash funds during 2002.
For bond funds, the going has been too good and for a while. Good till its lasts….
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