It has been a bad year for everybody be it in the industry, stock markets or financial services. The slowdown has caught up with most of the sectors. quot;But things will change. Investors have learnt from the past mistakes. I expect more investors to take the mutual fund route. But more investor education is needed so that they can understand this area more,quot; says Hemendra Kothari, chairman, DSP Merrill Lynch, the Indian associate of Merrill Lynch of the US which manages funds worth 450 billion. Kothari spoke to GEORGE MATHEW about a host of issues ranging from industrial slowdown to capital market and mutual funds.

From my experience, I can tell you that foreign investors are optimistic about the Indian markets. It’s true that FII investment had come down recently due to political instability and South-east Asian crisis. FII inflows are likely to be subdued pending the outcome ofelections and the direction of economic policies thereafter. Foreign investors are also watching the restructuring taking place in the Indian industry.

The next two months will be crucial for the markets. The elections… and a new government will take over. Then the Union budget will also be crucial. Also much will depend on the economic performance. When the current economic slowdown is reversed, the impact will be felt on the markets also. Some of those who are waiting may enter the market after the elections. Foreign investors will also enter the markets as India is still attractive.

This being the situation, I feel the market should be in the range of 4,200-4,500 Sensex by year-end. I also think Indian markets cannot be driven by foreign investors alone… local investors should also be there. The new government should take up policies which will create confidence among investors.

Investors still consider mutual funds as a safe investment avenue. Their experience in the last three years when many equity issues fared below expectations. Many mutual funds have been giving good returns to the investors. Too often, investors select mutual funds based on recent performance. While this may be a logical approach, historical figures illustrate that past performance does not guarantee future results. Some mutual funds had made guaranteed returns… I don’t think it is a good practice.

One important point which I would like to make is that people need to be explained about various things like net asset value NAV. When considering mutual funds, it is important for investors to employ a well-developed asset allocation strategy that reflects their investment objectives, time horizons and tolerance for risk.

In recent times, mutual funds particularly debt funds have seen substantial inflows. This is because while banks were offering an interest rate of about 8-10 per cent depending on the tenure of the deposit, most well managed debt funds were offering investors returns of between 15-16 per cent. The other major advantage with these funds was the fact that all these funds promised liquidity with no load for purchase of redemption. In the current market scenario, the best option for an investor would be to invest in those funds which are largely liquid. Funds which had kept their portfolio liquid displayed a significant rise in terms of NAV, yield and annualised returns.

I’m optimistic about a recovery. As I said earlier, one will have to wait for the new government to take over and the budget for the year 1998-99.

Though we are engaged in mergers and acquisitions, corporate finance, investment banking, broking, equity and debt market operations our main thrust will be in the mutual fund sector. Despite negative perceptions towards mutual funds we are confident that this industry will grow much faster in the near future, once the small investors start testing the simplicity, the performance-oriented returns of the funds. In order to cater to this demand we plan to expand our retail distribution strength as also contribute towards improving investor awareness through education of brokers and sales agents.

Merrill Lynch internationally has over 15,000 broker-cum-sales agents under its umbrella, who also act as investment consultants for cross-section of investors. We intend to expand our distribution network further and extend our services to individual investors.