Equity funds to see better 2002 as interest rates dip

New Delhi, Jan 1: Falling interest rates and attractive valuations are expected to lure investors to Indian equity funds in 2002, after a bloodbath last year left the industry licking its wounds.

The ongoing standoff between India and Pakistan may keep the mood cautious but investors are taking the opportunity to enter the market at lower levels as fears of an outright war between the two neighbours apparently fade.

"The impact in 2002 is likely to be of a very short nature," Mr Nilesh Shah, chief investment officer at Templeton India mutual fund said. "This provides an opportunity for investors to get into equities at lower prices."

"A full scale war between two countries is unlikely due to international pressure. The market is already factoring that there will only be a lot of rhetoric to please respective domestic lobbies."

The benchmark 30-share Bombay Stock Exchange index rose 2.45 per cent to 3,262.33 points on the last day of 2001 amid rising hopes that the border face-off would be defused. Mr Dhirendra Kumar, managing director at Value Research, a fund tracking firm echoed Mr Shah’s view but added: "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. They may not have been happy with the returns in 2001, but they haven’t redeemed all the way out of equity funds."

The main index has recovered 25.7 per cent on bargain buying since it cratered to an eight-year low in September. That helped pull up the net asset values (NAVs) of different equity funds by between 10 and 47 per cent in the past three months.

Mr Rajah Sukumar, fund manager at Pioneer ITI mutual fund, with assets of 14 billion rupees ($290 million), 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 (PE) multiple of the market is towards the lower end of the band," he said.

"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," Mr Sukumar said.
The country has cut the key bank rate thrice in 2001 by a total of 1.5 percentage points to 6.5 per cent -- the lowest in 30 years. A series of financial scandals, troubles at the country’s largest mutual fund manager, the aftershocks of the September 11 suicide attacks on the US and the December 13 suicide attack on the Indian parliament made 2001 a year to forget.

The NAVs plunged in the range of 7.0 and 36.8 per cent across all types of equity funds since the start of the year, according to data from Value Research.

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.

— Reuters