When the technology bubble
bust in early 2000 and
brought to end a strong
bull run in stock markets across the
globe, including India, no one would
have thought that the markets could
stage such a remarkable comeback in
such a small period of time. However,
led by factors such as improved
corporate performance, robust
economic growth, a stable
government, strong forex reserves,
and continued economic reforms as
well as PSU divestment, the bulls
made a smart comeback towards the
end of 2002. Strong FII inflows
further added to the buoyancy in the
market. As economic fundamentals
continued to show improvement, this
made India one of the most significant
investment destinations among the
emerging markets, globally.
FII inflows hit record highs during
2003 pumping in over $7.5 bn. Themajor beneficiaries of this bull run
have been the mutual funds, which at
one point of time, after the crash of the
market in the wake of the worldwide
recession, had fallen off the
investment radar of the common
investors. Buoyed by strong bullish
fervor in stock market, the
equity-oriented funds have generated
hefty returns of over 100% in a year!
This kind of a return was not heard or
seen of, at least in the recent past.
Debt-oriented funds were not
behind either. A falling interest
rate regime coupled with volatility in
debt market added to sterling
performances by debt-oriented funds.
A fallout of this has been that this
kind of performances not only raise
the expectation levels of investors, but
also create an illusion in the minds of
the investors that they are
investment vehicles to make quick
bucks. The truth is, they are not. A
fund’s ability to churn out consistently
good returns is better captured by its
long-term performance rather than
the short-term one, which smoothens
out the variations in performances
during different periods. For example,
a fund could have earned
extraordinary returns in the
short-term, owing to strong rally in
the market during that period and not
necessarily because of the investment
strategy or stock selection skills. One
example would suffice to drive home
the point. In the recent past,
valuation of PSU stocks rose sharply
on the back of expectations of
divestment by the government.
However, when the new government
announced this year that it would go
slow on the divestment front and that
it would not go for sell-off of profit
making PSUs, the stock prices fell
sharply. This shows how a fund’s
performance could get skewed if
looked at from the short-term
perspective. The long-term
performance, on the other hand,
smoothens these impacts and
provides a better picture.
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