?No matter how far life pushes you down, no matter how much you hurt, you can always bounce back.? Sheryl Swoopes, author.

The last one year has seen gilt funds, money market funds, arbitrage funds and income funds do well. Equity diversified funds, ELSS funds, sector funds, index funds and even balanced funds on the other hand have been on a downward spiral, eroding a large chunk of the wealth they created in the previous year?s boom. That is in a nutshell essentially what happened in 2008 to the mutual fund market. Yes, the not-so-prim have gone as far as using words like ?butchered?, ?slaughtered? and other equally gruesome words to describe the bleeding, many a fund manager might have felt. However, all was not gloom and doom, for the fixed income market was rallying at an all time high, leaving bond experts surprised at the quantum leaps the market took in a 3-4 month period. However, with many within the industry feeling the best phase in the fixed income market has passed and with equity not quite having won market confidence back yet, portfolio allocation will have to be dealt with carefully this year.

The fine line between various investment options available in the mutual fund sector would have to be treaded on, and if investors have the discipline and focus to stay this course, there is a surprising amount of money that can be made before and of course during the Indian markets bounce-back story.

?In the light of current events, we would expect the first part of the year 2009 to remain challenging. However, the recent drop in interest rate, oil and other commodity prices should begin to play its impact on the real economy in the 2nd half of the next year. Recent measures in providing liquidity in the banking system would change the credit environment in the later part of the year. Coupled with the fundamentals, which continue to remain strong, the long-term perspective is positive,? feels A Balasubramaniam, CIO, Birla Sun Life Mutual Fund.

Sentimental equities

The Indian equity market, which has been hitting serious lows consistently, is an obvious choice to look into. With the good old feeling that from so far down, there is nowhere to go but up, coupled with the countries growing self-belief, a long-term view of equities is advisable. One can invest in market capital funds, equity diversified funds and even sector funds for the braver few who have keyed in on a sector they wish to back.

Last year, public sector banks and companies did very well, and sector funds backing them, likewise appeared on top. For those wishing to play it safe, large-cap funds are the best way to go, especially with many of them investing in either the top 30, 50, or 100 companies in the market. The reason a mutual fund is a better bet in such times is as it spreads your risks out and frankly speaking, there is complete uncertainty amongst all the market ?gurus? as to what will happen next.

Admitting the same was K Srinivas, MD, Saffron Capital Advisors who said, ?The way one should look at approaching this market is by giving top propriety to good management. There will be some sectors or sector that will set things apart and rolling, taking the market and economy forward. These sectors need to be identified, and only time will help us make this judgment. Beyond that, today, judging which sector or company or management will take leadership and come forward is not easy to predict. If one can look out and spot this, then investing in that company or that sector?s fund is a very good choice.?

While the selling of Indian equities as slated to rise has been a widely publicised and believed story, unfortunately the market has been hit too many times in the recent past. Be it with FII?s changing their stance regularly or with scandals like the Satyam case. Sometimes the markets have tanked for no apparent reason and these days, predicting the market sentiments has been met by as much success as men have in predicting the mood of a woman in labour.

Equity markets should rise and equity-related funds should do well, is the general consensus amongst analysts, based on the strong foundation many of our Indian companies have and our risk averse nature, which has stood us through these trying times.

Srinivas, while speaking as an ordinary investor, did mention, ?I think people within the mutual fund industry need to start selling the domestic story with more conviction. Their current attempts are not coming through and people need to start marketing convincingly. The fact is that it?s a good time to get into the market, especially in equity, and mutual funds seem a good market to do this via. I would personally want to put in at least 25% in the equity market and would allocate between 25-50% of my portfolio in mutual funds. Especially with interest rates dropping, the fixed income market does not look so attractive anymore and equity is definitely a better place to get into.?

Debt market – hits and misses

The other asset class while investing in mutual funds is the debt or fixed income market. Consisting mainly of gilt funds and fixed income debt funds, these funds performed very well in the last year. The debt market, which is essentially considered a safe haven with very little and often only predictable movements, rallied so heavily and suddenly late least year that most people missed the opportunity present there all together.

With interest rate movements and credits risks being the key factors in the fixed income market and the latter not affecting government securities, this relatively simpler market, grew substantially in value when interest rates were slashed from 9.5% to 5.5% in a bid to control inflation.

Srinivas explained, ?As far as debt investing goes, there are two things to keep in mind. In a debt portfolio, currently, the returns and capital appreciation are the most important factors. With interest rates falling, capital appreciation will go up. However, in turn, yields will drop, which will lead to a situation where bond values will go up but the yields will reduce. Ultimately, the pattern of investing is important.? The debt market, which people feel have passed its best, however, still may offer investors money-making opportunities in the interim period before equities rally again. Parijat Agrawal, head of fixed income, SBI Mutual Funds, feels, ?People should look at short-term and long-term income funds as well as gilt funds when thinking of the debt market.

A long-term view is better when one considers the way the interest rates have been moving. Also, with yields falling so heavily in the last 3 months, by almost 5%, the bond prices have gone up and this only goes to show the value of having income funds in one?s portfolio. Especially in the long-term, the fixed income market remains attractive.

On the other hand, investors who are not looking at any credit risk and only want to play the interest rate movements, I would suggest looking into gilt funds. These funds deal solely in government bonds and securities and make a good investment.? When being asked about the fixed income market boom and people fearing it has died down already, Parijat admits, ?The debt boom is still not over and fully done with. Even though, yes a large chunk of the movement has already happened. However, one should make use of what?s there in the market, and by investing now, one can still gain from the remainder of the boom period.

However, one should be cautious and look at interest rate movements constantly. This is more essential when one notices as to how swiftly and sharply the yields fell. In a period of one-and-a half months, yields went down by 3%. Though like I mentioned, there is still movement to be made use of.

Interest rate movements have been constant over the last few months. Parijat, however, felt, ?While RBI has cut interest rates considerably, the rates may still fall further. While the 9.5%-5.5% cycle is over, there is a chance that interest rates may fall another 50 basis point.?

As far as investments within the debt market go, Parijat adds, ?Investing for a six-month to a one-year time frame is a good start when entering the debt market in this stage.

Every three months however, one should review the market scenario and take note of interest rate movements. If the rates are however rising and bond values start to drop, one should consider moving out and can look at liquid funds or something along those lines to invest in.

Arbitrage and ETF?s

Arbitrage funds, since their inception, have been providing investors with a steady rate of return between 8-10%. Their earnings were positive even during tough times and this propelled them to the top of the mutual fund top performers list last year.

However, their returns were still lower in comparison to the equity or debt funds during their positive cycles. The year 2009 appears to be much the same for arbitrage funds, which have remained like ?the wall? of the mutual fund industry, slow, steady and unaffected by the conditions around.

Gold ETF?s were on an all time high last year, and this is not surprising given the fact that gold prices were soaring. What does the future for gold hold has also been highly debated, and while some feel it will do well this year too, others are not sure. However, if gold has proved one thing, it is that, it is the best alternate asset one could ever invest in, and hence having a small part of your mutual fund portfolio invested in gold ETF?s may not be that bad an idea, especially if one wants to build a comprehensive portfolio with hedges against equity crises or inflation melodrama.