The other day, while going through the Value Research archives, I pulled out the very first issue of our magazine Mutual Fund Insight. This old issue was exactly twenty years old, and I pulled it out to see how much everything has changed now when we are preparing our 20th-anniversary issue.
So while flipping through the pages of this issue, datelined September 2002, I came across a table of mutual fund returns for different categories. Over the years, I had quite forgotten how simple things used to be for mutual fund investors in those days. At first glance, I thought to myself, "Why is this table so small? Where are the rest of the categories?" And then I realised that my memory was playing a trick. There really were only 12 categories of mutual funds in 2002. The vast, incomprehensible zoo of funds - which makes things so difficult to understand for investors - came about in later years. In 2002, there were exactly two types of diversified equity mutual funds - one called simply diversified equity and the other tax-saving. Those two did the job, and come to think of it, they still can as far as the investor is concerned. There were also four specialised categories, and that was that.
This old table of fund category returns holds an interesting snapshot of that time, especially when one compares equity returns with debt fund returns. At that point in time, the three-year annualised returns for diversified equity returns were -9.49 per cent. That is, if you had invested Rs 1 lakh in the entire category in October 1999, your money would be down to just about Rs 65,000. This isn't really a surprise because these three years encompass the so-called dotcom crash. However, the real surprise lies in the debt fund returns. The three-year returns for the 'medium-term debt fund', which was the main type of debt fund at the time, was 13.20 per cent. The 1 lakh that shrivelled to Rs 65,000 from October 1999 to September 2022 in the average equity fund would have grown to Rs 1.45 lakh in the average medium-term debt fund. Quite the contrast!
Of course, that was a unique moment in the history of the markets. Equities had had a historic crash while fixed-income returns in India had been through a historic bump. That was the phase when India essentially transitioned from a high-interest rate economy to a low-interest economy. As a result, all the old high-rate bonds shot up in price, delivering a one-time bonanza to debt fund investors. I'm simplifying the story slightly, but that's what happened. To the casual investor, the transition from the old world of the Indian economy to this transitional phase and the period after this would seem like completely different worlds.
September 2002 was a scary time to be an equity investor. However, at Value Research, we worked with a complete conviction that an investor could only grow wealth by investing in equity. In fact, the October 2002 issue was titled 'Equity Without Fear' and was basically an exhortation to mutual fund investors. I think time has more than proven this right and happily, a whole generation of mutual investors has understood this. In September 2002, the total investment in equity funds was Rs 9,769 crore. Now, that number is Rs 19.54 lakh crore. That's just above 200 times! From the perspective of two decades ago, it's an incomprehensibly large number, yet the glass is only half full. India is still a fixed-income country, but nowhere near what it was.
In fact, there is a kind of compounding effect in investors' numbers too. Each investor who switches to equity does well serve as an example to those around, and the numbers follow an exponential curve. The process is well on its way and can only accelerate.
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