Case for Stocks?

In 2002 through August 19, the market barometer, the sensex is down 6 per cent. The market is back to its bottom. But with all this, the pro...

In 2002 through August 19, the market barometer, the sensex is down 6 per cent. The market is back to its bottom. But with all this, the professional optimists, the equity fund managers are upbeat about the market outlook. And they have a solid 8220;justification8221;. There is a consensus that the recovery under way, stock valuations are attractive and interest rates are low enough to make valuations look all the more compelling.

With over two years in the doghouse, equity funds are rearing to gain the spotlight. Such optimism has driven funds to a line-up a series of new equity fund offerings. These include Alliance Capital8217;s Frontline Equity Fund, Prudential ICICI8217;s Dynamic Equity, Birla Mutual8217;s Mid-cap and an index fund, Zurich8217;s three funds Index, MIP and the Leadership Fund besides the HDFC, HSBC and UTI rearing to launch their versions too. While few other equity fund issues closed recently the Sundaram Select Focus, Sundaram Mid-cap, First India Growth Fund and the HDFC Index and Enhanced Index Fund.

The upbeat mood is understandable. Fundamentally, all factors point to turnaround in equities imminent8212;cheap valuation, strong economic fundamentals and sound corporate health. The only hitch investors are not forthcoming. With many investors still reeling from the previous years8217; carnage, investors will find it difficult to look at these equity funds with the same fondness they felt in 1999. And very likely that people will not soon go back to what bit them so recently.

The other factor, is the overhang of big sell off by UTI. Consider this. As things stand today, Unit64 by the design of its special repurchase offer is likely face massive redemption in May 2003, eight month away. This is because, investors holding upto 5000 units will get Rs 12 a unit and for their unit holdings over 5000 will get Rs 10 a unit. With its NAV at Rs 5.91, its unlikely to attain a value close to the promised repurchase price.

So it will be logical for investors to realise higher value of the fund than its worth then. The government will pay the difference between NAV and the guaranteed price. Despite this bailout package, UTI will have to liquidate its portfolio to redeem the Unit-64. This works out to massive Rs 8000 crore worth of stocks as the total assets of Unit-64 amount to Rs 12,662 crore as on June 30, 2002 of which 63 per cent is in equities.

Compare this with the total equity assets managed by the private funds in all their open-end equity funds Rs 4,800 crore. One really is at loss of ideas given the magnitude of likely equity sale by UTI. Indeed, government can always step in to buy the US-64 units or structure another tempting deal for investors to deter redemption. But it all depends on many 8216;ifs8217; and balancing each 8216;but8217; is with each 8216;if8217;.

That8217;s a view on market dynamics, which has the potential to drag the market to a low never seen before or a high much ahead of expectation. And all based on government8217;s approach to solving this crisis.

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Getting back to the core issue, barring this extremely unfavourable market dynamics, the case for long-term investment in equities is strong today. Anyway, equity is a long-term investment proposition. Buying into a growth fund before this group starts to climb out of its hole means you8217;ll be well-positioned when it takes off. After all, this way you8217;ll be buying relatively low. But with an understanding that market is unlikely to move either way in a hurry. And it could be very risky for a short-term investor.

About the new launches, I will still suggest to go with an established fund with proven credentials and character. Follow the key rule of sound investing8212;diversification, balance, and a long-term orientation. And there are plenty to choose from. For the novice, I will recommend, choose from the five and four star rated funds by Value Research.

The writer is the chief executive of Value Research, a leading provider of mutual fund data, analysis and opinion in India.