“How will the markets behave after July 2nd?”.. is a million dollar question. With the introduction of the “Rolling Settlement”, both Badla transactions that can be used by buyers to postpone full payment and Stock lending options which can be used by short sellers to postpone deliveries will not be applicable from that day. It is expected that this system will remove speculative investors from the general market and only genuine buyers and sellers will remain. SEBI has simultaneously introduced futures and option trading in some key scrips so that Speculative investors can operate in these derivative markets.

This could however affect the trading volumes and liquidity of some scrips in the market place.   But in the long run, investors will be happy to hold scrips that have lower liquidity than those which are volatile. They can take investment decisions based on fundamentals strengths of the scrips and play for long term gains.

However, in the short term, many speculators will continue to operate in the general market because of their familiarity with this market and also because of their relative fear of the derivatives market. It will take some time for them to understand the derivatives market and shift their operations entirely to that market. It would therefore not be unnatural if some indirect operations to substitute Badla and Stock lending continue to operate. SEBI should take care that it does not over react to such developments and change the system once again to mix investors and speculators in a single market. 

In the emerging scenario where “Buying Power” with financial backing becomes the key to successful investments, Mutual Funds can be expected to have better investment options. In view of the strict investment norms, most of the funds have to remain in the investment market where the competition from speculative bears will be less. The funds can therefore pick up value investments and also nurture them to growth.

It may however be better for conservative investors to watch for a little while the relative strengths of mutual funds vs speculators and short term FII s before plunging headlong in the markets. A medium strategy for parking investible surpluses is therefore worth considering.

In this context, it would be worthwhile for investors to look at “Liquid Mutual Funds”. During the last one year when the stock markets have been volatile and when most equity funds have made losses, it is the debt instrument based funds that have really made notable gains.   

As an example, we can look at the performance of  JM Liquid Growth Fund. 

This seven year fund has clocked a return of 15.06 % p.a in the last one year and 14.26 % p.a in the last three years. The net return since its inception in 1994 has been 10.38 % p.a. Even during the last one month, the fund has turned in a great performance with a return of 1.93%. It is interesting to note that the holdings of this fund contains entirely of debt funds and 37 % of it being in Government securities.

What is even more commendable is the performance of JM G Sec Regular Plan – Growth which has 100 % of its investments in Government of India securities. This fund has appreciated by 2.07 % in the last fortnight and 2.91 % in the last one month. Last one year return has been 20.89 % while the return from September 1999, the date of inception is 18.31 pa.

As against these performances, the best of the equity funds seem to be still turning out negative returns. Both the above funds have no exit or entry loads and the minimum investment required is Rs 1000 for liquid fund and Rs 5000 for G-Sec fund. They are therefore good substitutes for Bank Deposits.

It is expected that the interest rates in the market are going to further come down in the next year and existing funds are expected to benefit from this trend due to the appreciation of old papers carrying higher coupon rate. Both the above funds are therefore good bets in the current market.

Large investors who have investible surplus of Rs 1 lakh and over can also invest in a new scheme called JM High Liquidity Fund, which would come into effect from the 2nd of July 2001. The fund would be paying out dividend on a daily basis, which would be compulsorily re-invested in the scheme, subject to distribution tax. This will provide a very high liquidity and possibly returns matching what has been recorded in the other debt funds managed by the same fund managers. For those who have short term surpluses in bank accounts, this should be a good scheme to invest in.

Na.Vijayashankar
June 29, 2001