A Dicey Floor For Investors

The past one month has been like a dream run for Indian investors as stocks shot up to a new high at a speed never seen before. But the last week has been like a roller-coaster ride.

During the rally, the index funds, which invest money only in the stocks comprising a chosen index, have outperformed the active fund managers, who constantly try to beat the index by following different strategies.

Between 27 September 2007 and 15 October 2007 the benchmark 30-stock index Sensex rose from 17,000 to 19,000, giving a return of 11%. Index funds too gave an average return of 12%, whereas the diversified equity funds gave an average return of 9%.

These funds found it tougher to beat the S&P CNX Nifty Index, which comprises 50 stocks that gave a return of 13% during the period. Only 14 funds could outperform this benchmark index.

It’s only a few index stocks which have led this rally, and that’s one of the reasons why index funds have done better than the actively managed equity funds.

But the sharp dip in stock prices between 15 October and 18 October 2007 took away almost half the gains made by the two fund categories. On an average, index funds were down by 6% and the diversified equity funds were down by 4%. The benchmark indices, Sensex and Nifty, lost 6% each.

Diversified funds put up a better show during this period as only 18 of the 174 funds lost as much as the benchmark indices or more. As a result, the top gainers during the rally were among the top losers also. Three funds from Sundaram BNP Paribas Mutual Fund—the Select Focus, Leadership, Growth, were among the top 10 gainers as well as among the top 10 losers. During the run-up, these funds gave an average return of 16-20% but lost an average 7-8%. Other losers included LIC MF Equity Fund, which was up by 17% but lost 8% during the fall.

Fund managers also admit that it’s getting tougher to beat the benchmark indices. It’s becoming difficult as there are more players; more people are searching for stocks. Further, in a bull market, particularly with large doses of foreign capital, which has at times a different way of looking at things and is sometimes not very well-informed, excesses are bound to be created that can result in underperformance over short- to medium-term.