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Everyone expects the New year to usher an era of joy and prosperity and certainly looks forward to a windfall in terms of good things to come. Investor is no exception to this. But before one rushes to celebrate with new investments, it would be appropriate to take a look at how Y2K treated Mutual Funds (MFs) - the investment vehicle of the small investor.

A happy-go-lucky-man turned investor would have nothing to write home about, had he invested in the Year 2000 and stayed invested throughout the year. Positive returns seemed like a state of utopia in Y2K. What a transformation in an Industry that had witnessed almost triple digit returns in 1999 when BSE sensex had generated returns of about 65 percent.

What was common to MFs in Y2K was, the presence of technology, media & telecom sector scrips in portfolios of most funds, especially equity growth funds. Birla Advantage Fund with and exposure of 67%, Alliance to the tune of 71% are just to name a few. While the bull phases did not raise any questions about the portfolio compositions, the bear phases certainly did. NAVs of most of these funds plummeted raising questions on the extent of portfolio diversification.

When the bull phase came to an end and when most of the funds stood stripped with the downslide of most of the TMT stocks, most fund managers moved to quality portfolio levels and reduced their IT exposure to reasonable levels. Most equity diversified funds, today, maintain IT exposure at 20% to 37% while simultaneously picking up both old and new economy stocks. But fund managers still are willing to bet on TMT stocks despite the tumultuous experience they have had in Y2K. While accepting the possibility of a downward revision of their growth rate, they foresee no indications of a significant slowdown from atleast India based companies. They concur that the fundamentals of IT sector are strong with future growth, however, being at a modest pace. They are now of the view that a mixture of old and new economy scrips would form an ideal portfolio.

While the crash in IT share prices has resulted in a re-balancing of portfolios, action on the old economy front would further narrow the gap between the so called ‘click and mortar’ and ‘ brick and mortar’ companies-bring with it a greater diversification in MF portfolios.

MF Industry in India, like any other Industry, has had its nascent stage and is still trying to grapple with several inconsistencies. The Industry is now approaching a stage where a cross section of investing community has begun to comprehend that MFs provide and ideal investment vehicle to meet their varied investment objectives in the long run with adequate emphasis on portfolio diversification. All in all, MFs have had their share of lessons in Y2K and are waiting for newer horizons in Y2K+1 with abated breath.

S S Prashanth

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