FEB 2001. An ‘event’ful year has passed by. Stock markets are on a roller coaster ride with the Sensex reaching the nadir of about 3000 mark. Investors shun the very concept of Mutual Fund investing. They are back to the good old days of saving their money in the form of fixed deposits.

Doesn’t this sound like a typical answer to a typical examination question, which says – "What are the differences between the stock market conditions in 2000 and 2001? Relate your answer to Mutual funds"!!! It's time for introspection.

If the markets crash, it must be the time to indulge in Mutual Fund bashing. If the markets are on a swan song, it's time to shower heaps of praises on the virtues of Mutual Funds. Unfortunately, of late, this ominous tendency has become the order of the day. And, so, once again we have been having investors and casual observers commenting on the bleak and the unsteady future of Mutual Funds. Is this domino effect justified? Are Mutual Funds really in for a sun-set?

Criticisms and concerns are however mostly a reaction to the falling SHORT TERM returns and an IMPROPER understanding of the funds. Investors fail to understand that fund managers are not demi-gods and that Mutual fund are also susceptible to market conditions and remain invested in the market. As a consequence of this, the NAVs will, more than obviously, respond to the market movements. If an investor were to expect that the decline in the NAV of his investment be put to a halt, then the fund manager would have to exit value investing, which is what he is paid for, and move into cash. If he were to do that, there is no reason why the fund managers have to be paid for and why investors need to bear the asset management fees!

The fall in the NAVs is a perfectly natural occurrence. The below par NAV of over 100 schemes today certainly disheartens the investors. A closer look at these Mutual Funds and their schemes would unfold the truth that most of these schemes are dividend options of a fund, where dividend pay out has been made. It is a universal truth that once dividend has been paid out, the NAV falls reflecting the payout which should be factored into while analyzing why most of these schemes have acquired a ‘below par’ status. Thus, inclusion of such schemes in this category and terming them ‘poor performers’ is really incompatible.

Secondly, funds whose NAV has remained above par for months or have given reasonable returns should not be counted with those funds whose NAV never crossed the par value. Fundamentally speaking, the below par NAVs show that the current value is less than the value at which one entered. This is no different from buying a fund at an NAV of Rs 14 and then seeing it fall below this level.

Another alleged ‘sin’ of a mutual fund is being overweight in technology. When the fund was performing with the same ‘overweight’ in technology stocks, that did not attract any complaints as the investor was getting high returns. If technology still is believed to be the business driver in the near future, it is all the more natural that the funds will commit a larger part of its portfolio to such stocks, albeit with the required realignment in the assigned weightages from time to time.