MFs, it was explained, gather little drops of water into a vast pool and distribute it among risk-weighted assets: cash, government securities, bonds and shares-above all shares. Theirs is a portfolio approach, which no individual investor can match. MFs have the expertise to decide what and when to buy, what and when to sell: MFs know how to optimise profits for those investing in them.

MFs are the great instrument for sharing in capitalist prosperity. They are a great source of equity finance for capitalism. The retail investor took to MFs in a big way until the Harshad Mehta bubble burst in the early 90s. MFs made a come-back in the wake of policy-induced cutbacks in interest rates on bonds, on bank deposits and postal savings.

The steepest fall was in the interest on corporate (including FI) bonds: down from 16 per cent to 11 per cent per annum. Incremental savings went into MFs, away from bonds and bank deposits. Bonds were out. The president of NSE reportedly advised savers to shun bank deposits and go in for equities (and,by implication, MFs).

MFs delivered in 1998 and in 1999; high distribution was sometimes accompanied by bonus units. But by the end of the first quarter of 2000, MFs had lost their shine. Investors pulled out of MFs; presumably, they booked gains to invest in bonds and bank deposits. Investors were quick to realise that MFs were good only in times of a bull run in the share markets.

The USP of MFs is that they win in the medium-long term. But this does not cut ice with the investor. He expects a steady gain, not softening NAVs; he wants an assured income every year. For a long time, UTI's US-64 fulfilled these expectations, till it was caught on the wrong foot. Within the short space of a decade, the investor has learnt that private MFs spell no magic; their fortunes are bound to the speculative wheel of the share markets. And these days Indian share prices are influenced by goings-on in the US Nasdaq.

Economic prospects in the US nudge Indian share prices.The waning preference for MFs has helped to sustain the regime of low interest (bond and bank deposit) rates. Expectations of savers and investors have sobered. The counterpart rupees generated by the India Millennium Deposit scheme have reinforced expectations of interest rates continuing at current lows.

The soft interest regime is stabilsing in a milieu of rising prices: inflation is slated to rise by 8 per cent this fiscal. This means a slash in the real interest rate. Even if it is argued that inflation has stemmed mainly from high oil prices, it cannot be denied that real interest rates have eased.

This should spawn new private investment initiatives, ginger up the capital markets and thus create room for play for the MFs. What if private investment in new productive assets remains weak? The low interest regime will then reflect under-investment, excess savings. If capitalism does not seize the opportunity, savings will start declining.