The last year undoubtedly battered and bruised a majority of the mutual fund industry. This once vibrant business, riding on the back of our stock market boom, till two years ago was offering products that offered outrageous returns. A good 90% of the mutual funds that emerged during this boom period were equity-based. Today however, the scenario is more than a little drab for many of these funds. Asset management companies (AMCs) have lost most of their assets under management (AUM) due to increased redemption pressure over the last year and many feared that some would shut shop. However, while some firms merged and others collaborated, the mutual fund industry lived on. Gold exchange traded funds, gilt funds, arbitrage funds and some others flourished, while unfortunately the equity funds were the ones that were hurt the maximum. The average returns diversified equity funds shown as of January 2009, was (-57.1%). Sector funds, index funds and equity linked saving schemes (ELSS) did not fare much better. However, now that these funds have burnt their fingers and have undoubtedly learnt a lot, bearing witness to the worst global financial meltdown in history, analysing their portfolios and understanding their investment strategies, can give investors valuable insights on their own investing plans.

Analysts all over seem to have a standard opinion of trends within the mutual fund industry right now, ?They are all sitting on cash, that’s their biggest component and may remain so while they play safe,? says one amused analyst. However, one does tend to over-generalise such statements. In reality there are some funds that have done relatively better than the others, while sitting on a highly-invested portfolio and not a huge cash reserve. In fact, fund houses like Birla Sunlife and Bharti AXA, to name a few, are highly invested in the markets, with Bharti AXA being almost 96-97% fully invested in the equity markets at this time.

Sectors preferred

Data by Value Research as on March 12, 2009, shows that purely equity-based funds top performers over the last one year, have pharma, healthcare and the fast moving consumer goods (FMCG) sector funds being the top performers.

On the other hand, when one broadens the outlook to include all mutual funds related to equity, one also notices the banking sector, finance sector, telecom sector and oil, gas and natural resources sectors being the very popular.

Each of these sectors has been targeted for different reasons and all have the opportunity to be a forerunner in the future. The pharma and health care sector for instance has been slated to grow at a phenomenal rate till 2012, just to try and meet a majority of the domestic demand. Another favourable point for the sector is the fact that this industry will be needed and required no matter what the financial situation of the country or world, making it a very good defensive stock and sector to invest in. Also, the fact that many private equity players have heavily invested in various pharmaceutical companies, health care companies and hospitals in India, also provides mutual fund managers and investors with a certain degree of comfort and confidence.

The FMCG sector on the other hand has again managed to remain afloat and is doing well even during these times, thanks to the constant demand of the products offered by companies. These companies also find it easier to pass on any additional costs to the consumer thanks to the nature of the products they sell. The FMCG sector has now been touted for sometime, expecting domestic demand to keep this sector afloat even in bad times. Also, certain companies within this sector have been around for a long time, they have been time tested and are now being offered at very attractive prices, making them highly attractive.

The banking sector on the other hand, which has been very badly financially hit, both business wise and market capitalisation wise, more globally then domestically, remains a favourite. In India too the banking index has seen a sharp decline, especially in the private banking segment. However, this has also made these companies highly attractive to investors, especially when their share prices are less than half of their peak.

Indian banks are also fundamentally strong and have not faced as much bad debt as their international counterparts. Since these banks are not likely to shut down anytime soon, one expects their share price to rise further, making them worthy investments.

Also, given the fact that to overcome the liquidity crunch, interest rates will be slashed heavily and money will once again be seen flowing in and out of banks, this sector is looking much safer than it was six months ago. Last year, when US banks were badly hit and everyone feared the worst in India, as well due to their over exposure to foreign banks, the public sector banks (PSBs), which were stable and unaffected, stood out and led the way. With government banks being a sign of stability, conservativeness and necessity, their investment value too duly rose and has helped boost the overall banking industry.

The telecom industry in India has over the last few months continued to grow at a staggering rate and remains the sole industry to be prospering no matter what. The domestic growth has once more been the key driving force for this industry, which has been adding almost 10-12 million subscribers on a monthly basis. With such a strong untapped domestic market for this industry to target, they look all slated to grow at a quick pace till 2012.

The finance sector, like the banking sector, is doing well due to strong fundamental companies being offered at exciting prices. The oil, gas and natural resources sector is typically expected to grow due to the developing nature of our economy and with the aid and emphasis the government lays on this industry.

Prateek Agarwal, Bharti AXA Investmnet Managers equity fund manager, tells us, ?Our equity funds are almost fully invested in the market. The main reason for this is that we are bullish about the economy and want to make the most of the attractive prices that are on offer right now. We do not know the volatility that can hit us due to this move just yet, as it will due to political and global financial factors beyond ones control.

However, irrespective of the impact of these factors, we believe the downside will be limited. The price earning ratio (P/e) that some of these stocks are at is the best we have seen in the last 20 odd years and we do not want to waste this opportunity.?

As far as the portfolio goes, Prateek explains, ?Majority of our portfolio is being invested in Nifty shares and it is a heavily Nifty-linked portfolio that we are creating. Apart from this and the remaining 10-15% of our portfolio is dedicated to ideas and this is how we are approaching the current markets.?

When discussing sector preferences Prateek tells us, ?The 15% of our portfolio we dedicate to ideas is where sectors, industries and particular companies come more into play. The two areas we are investing in are areas, which will benefit from government spending in the future. These include industries like power, infrastructure, construction, developers and a maybe a few others. The other area we are investing in is companies, which will benefit from the lowering interest rates. I expect a liquidity infusion globally and domestically to occur and in this case, banks, financial companies and other companies with low liability and debt will benefit highly.?

Anil Advani, head of research, SBI Capital Markets, on discussing any trends he sees within the mutual fund industry says, ?Most mutual funds are sitting on cash and that’s the common trend these days. Although investing trends appear to show that pharma and FMCG are the preferred sectors currently.?

As far as the over all markets situation is concerned he added, ?In the recent past, FII selling, trailing the global financial markets and the US government are the only clear trends that has been emerging. Also, one sees a lot of buying at lower levels in stock prices. Once the lower levels stabalise, then I feel that certain selective stocks will start going up. One cannot predict, which stocks will rise, like what happened in the recent market rally, which was led by banks and Reliance. As far as finding the stocks go, one must adopt a bottoms up approach for, even a sector like FMCG, which is doing well, has both good and bad stocks. This time round the upturn will be stock selective and not sector selective. Currently, I would say large cap stocks are preferred and preferably ones with low debt are all the better.?