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Indian equity funds to see better 2002

Falling interest rates and attractive valuations are expected to lure investors to Indian equity funds in 2002, after a bloodbath this year left the industry licking its wounds.

"It has been morbid year for equity fund investors whose holdings were reduced substantially, but they seem to have tasted some profit towards the end of the year," said Dhirendra Kumar, managing director at Value Research, a fund tracking firm.

"They may not have been happy with the returns in 2001, but they haven't redeemed all the way out of equity funds."

India's benchmark 30-share Bombay Stock Exchange's Sensitive Index has recovered 29 per cent since sinking to an eight-year low in September. That helped pull up the net asset values of different equity funds by between 9.0 and 35 per cent in the past two-and-a-half months.

Rajah Sukumar, fund manager at Pioneer ITI mutual fund, with assets of Rs 14 billion, said declining interest rates would push investors to low-priced equities.

"I think the risk-return is moving in favour of equities in valuations terms. The price earnings multiple of the market is towards the lower end of the band," he said.

The bellwether index's PE is about 15.61.

"A drop in interest rates should have led to a further expansion in the PE. It hasn't happened as yet, but we expect it to," Sukumar said.

India has cut the key bank rate thrice in 2001 by a total of 2.5 percentage points to 6.5 per cent -- the lowest in 30 years. In contrast, the US Federal Reserve slashed its key rate 11 times by 4.75 percentage points to 1.75 per cent.

FORGETTABLE YEAR

A series of financial scandals, troubles at the country's largest mutual fund manager and the after-shocks of the September 11 suicide attacks on New York and Washington made 2001 a forgettable year.

NAVs plunged in the range of 5.0 and 36 per cent across all types of equity funds since the start of the year, according to data from Value Research.

Only three out of the 144 equity schemes mapped gave a positive annual return, it showed.

Assets under management of equity funds tumbled 36 per cent to $2.85 billion between December 2000 and November, more than double the 17 per cent fall in the Bombay index, reflecting depreciated stock prices and redemptions.

Fortunes of the state-controlled Unit Trust of India, which manages Rs 516.7 billion out of the industry's Rs 998.41 billion, will impact the outlook in the coming year.

A cash crunch forced UTI, which has about 41 million investors -- mostly individuals looking to steady returns -- to freeze redemptions in its flagship US-64 scheme in July, which rocked the stock markets and caused an uproar in parliament.

It later allowed partial redemptions of up to 3,000 units per holder in the flagship scheme which boasts of some 20 million investors.

Beginning January, UTI is scheduled to disclose the NAV of its US-64 scheme -- for the first time since its launch in 1964 -- and link sales and purchase prices to it.

Analysts say these are likely to be substantially lower than the last traded price of 14.25 rupees in May. The scheme now offers a limited repurchase at Rs 10.40.

"There could be a serious cap on equity markets if several large US-64 investors decide to exit the scheme," Value Research's Kumar said.

"This would force the UTI to be a net seller."

Still, foreign funds which pumped in a record $2.84 billion so far this year against $1.56 billion in the whole of 2000, may pep up the market.

"(Financial problems) at UTI may be a minor dampener, but they will not be a dominant influencing force in the markets," Pioneer's Sukumar said.

"We expect foreign funds to be net buyers and an increasing percentage of domestic savings to come into the equities market."

Analysts say privatisation hopes and bountiful rains led demand growth in rural areas, where the majority of India's billion-plus population live, could be the trigger for an upside.

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