This year we don?t need Santa to drop gifts; Indian investors never had it so good.

However, it is that time of the year when one looks back at gains and spoils, and starts contemplating the plan of action for the New Year – a moment to reflect on the lessons learnt, count our blessings, revisit some fears and gear up for the year ahead. Let us then look at what 2007 taught us, offered us and what investors in India gained this year. Also, take a moment to be aware of some fears that lurk around in the alleys.

Lesson: liquidity rules

Back in early 2007, experts the world over predicted that the Indian market had lost steam. It would rest, before it surged again. Strategists from leading firms said that India needed rest, after a huge race. But the race continued again to see a straight gain of 43% in a year. What a year!

While it proves that your relationship manager would not know well, you need to be clued in on the Indian story. The strategists were not wrong; what they anticipated, or rather did not, was the huge inflow of funds. Markets are driven by fundamental attractiveness or by fund flows. This was the year of fund flows. As we speak FIIs have invested around $16 billion, more than double of the $8 billion they invested in the previous year.

The essential lesson is that valuations are stretched, but there are more people willing to buy because little value is available elsewhere in the world. This is rare! So if your relationship expert tells you to buy based on fundamentals and gives you a great reason, be aware. There is no doubt that the India story is on.

Lesson: Old heroes deliver

Another point to note is that this year the Indian upward rally was broad-based. In the initial part of the year, frontline counters were moving with the R-group (Reliance group) leading the run. However, towards the end of the year there was a strong movement seen in mid- and small-cap counters. This largely indicates that the market is now really looking for value. The large-cap stocks have gained handsomely. IT and other new economy stocks did not gain as much as the others in the ?real? economy.

The year is earmarked for unprecedented growth in infrastructure, power and engineering stocks. The weak dollar impacted the export-driven sectors. The IT and ITeS are one of the worst hit sectors on the bourses.

Others to follow were textiles, auto ancillaries and leather goods. This has brought attractive valuations to the sector and should be seen as an opportunity to accumulate strong companies with a long-term view. This has certainly improved the fortunes of the import-oriented businesses.

Lesson: IPO indicates that value maters

On the one hand the market saw a slew of equity offerings by way of public issues and rights issues throughout the year. And on the other, there were delistings taking place on the Indian bourses. The public offerings comprising both the small ticket ones raising Rs 20 crore and the larger ones involving few thousand crore were well accepted.

However, the lesson is immense. The new listings gamble is off. Big brother (Sebi) is watching. And any foul play would be noticed. This is the reason why listing gains (selling on the listing day) for IPOs have dropped from 50% levels in the previous year to 20% levels now. And the trend clearly shows that good companies will give returns over the long run. This, analysts say, is largely a result of the regulators move to trap price manipulators, especially in the IPO business.

Lesson: value again

The delistings that took place in the Indian market include both Indian as well as multi-national entities. Free entry in the market must be accompanied by free exit and investors realise the same as the revised delisting norms turned out to be a blessing for those who opted to delist. Short-term investors here should make a killing and long-term investors will always get a golden handshake, by way of a better opportunity. Going forward, such opportunities are expected to remain in the Indian markets.

Lesson: volatility lessons

Throughout the year investors experienced a very high level of volatility. Living with high volatility and chasing momentum for returns is a part of an investor?s life now. Volatility will be the ?most expected? characteristic of the Indian market. And the lesson that investors can draw in around a 700 points drop is – opportunity.

In the long term, Indian markets are expected to grow. There is no doubt there. It might grow at a slower, more realistic pace, but it will grow, say all the experts that FE Investor spoke with. The average growth expected should be just about in the range of the nominal GDP growth (around 14%) and add up a small (two percentage points) premium as well. Anything more than that is a bonus.

Opportunity: regulator actions

The regulator also planned to come out with more products and reforms in the capital market. The streamlining of fund-raising activities, ?rationalisation? of the lot sizes in the derivative markets were some of the initiatives that were well received by the market forces. The concept papers and recommendation by various study groups and committees appointed by Sebi are hinting towards introduction of new products and some investor friendly measures. The recent one on short selling of shares on stock exchanges and proposed introduction of stock lending programme is a long awaited one. Going ahead in FY2008, all these if implemented well, investors on the Indian bourses are expected to have better times. You can make the best of the derivatives offerings to hedge your portfolios and enhance portfolio returns.

Alternative: debt gains

While equity turned out to be a positive surprise, fixed income instruments also did reasonably well. Though the interest rates were moving up, some smart rallies in segments like near-dated government papers and corporate bonds offered some good opportunities for the investors. The hikes in CRR though worked as measures to suck out liquidity from the system, it had little impact on the market, thanks to the huge liquidity pumped in by foreign funds due to a cut in Fed rate. The yields on Indian benchmark bonds remained in a range with a downward bias.

Most of the brokerages are expecting a rate cut in the next six months. If it materialises there will be a good northward movement in long-dated securities and some smart investors have already booked profits and moved their money in income and gilt funds. You can also be one of those smart investors.

Equity mutual funds, especially those dedicated for sectoral themes, emerged as the winners. Power sector funds, infrastructure funds along with the India story buyers did extremely well and most cases beat the broad indices by a handsome margin. Diversified sector funds also posted a good show. The laggards in this category were those sector funds that come from sectors that have underperformed the broad markets such as IT, pharma and FMCG sectors. The presence of sector funds in both the sections – best performers and laggards- make it a case, underlining the high-risk, high returns involved in the sectoral bets. Hence, be careful in the times to come if you are invested into the sectoral funds.

The emergence of hybrid funds like arbitrage funds and quantitative funds and the emergence of exchange traded funds have only increased the number of choices for the investor. All these funds provide a valuable portion of diversification and protection from a slide.

The debt mutual funds posted better results than their performance in past few years. The assets under management remained almost stable, although some could attract smart investments towards the end of the year due to a possibility of a cut in interest rate. Though the fixed maturity plans (FMPs) lost sheen due to falling yields, it still emerged as one of the preferred option for investors. Investors who intend to lock in their funds for a decent yield can still do so in FMPs.

The mutual fund industry came out with many new products this year for investors. The gold exchange traded fund received good response from the investing community. The firm gold prices and cost effective diversification option has made the gold ETF a must have for Indian investors. Till date, there are three gold ETFs listed on stock exchanges and some more are in the offing, offering you a good investment opportunity.

A distinct characteristic of the mutual fund industry is the slew of closed-ended fund offerings. The closed-ended funds offered were primarily thematic and offered to generate returns buy investing into specific sectors. There were many funds dedicated to international equity investing this year, and they collected a good amount of funds from Indian investors. Indian investors thus have reckoned the need of geographical diversification within equity. However, you must understand that the returns here won?t be in sync with what you have seen in Indian markets in the recent past.

Overall, the year that went by was a good year for the mutual fund industry and mutual fund investors. Sebi also came out with a proposal to waive entry load for direct investments in mutual funds. Investors are keen to see the same being implemented in the New Year.

Fears: embedded value

A large part of the euphoria in 2007 has been built on companies getting re-rated and their stock price jumping. Here, the valuation technique of ascertaining the value of subsidiaries and projects into the business has gained popularity. Hence, a lot of companies have been garnering what seems to be as bloated valuations. And these companies, have the leverage to shake the market sensibilities. This remains the largest fear in the year that resoundingly has been superb for investors.