Mumbai: With the stock market turning volatile equity mutual funds (MF) are seeing huge erosion of value. Over the last two months investors of most of the equity MFs have disappointed their unit holders.

These funds have seen their net asset value (NAV) eroding by 30 per cent to 40 per cent in the last two months.

This is the case for both the diversified and sector funds. While most of the equity funds were badly hit by the sharp fall in the stock prices following the defeat of the NDA a government. Since the election results were announced the sensex lost over 800
points.

PSU, banking and power stocks plunged as there was fear that the new government may stall the reforms process in the sector. In order to reduce further hits most of these funds have now increased their cash positions in the portfolio.

The fund houses are now telling the investors that they should remain invested. So most of the investors are not redeeming their units but are waiting for the reversal in the trend. The expectation is that the market is likely to bounce back after the budget as the government may take some positive measures to boost growth in the economy.

Due to the erosion in value of the equity assists, most of the monthly income schemes of mutual funds are also affected. MIPs which invest large part of their portfolio in debt assets deploy 10 to 20 per cent in equity. Most of the MIPs have skipped their dividend in the past month, while some have reduced their payout. Some of the funds like UTI Mutual Fund have managed to maintain the regular payouts.

MFs are now advising their clients to go for systematic investment p (SIP) plans. SIPs follow the basic investment principle that include regular investments; buying more at lower prices and less at higher prices. Most of the mutual funds offer SIPs, thereby allowing investors to save a fixed amount every month or quarter by purchasing additional units of the fund.

By investing a fixed amount every month, the cost of holdings will be less than the average price. Let's take an example of a person, who invests Rs.1,000 every month through SIPs in K-30 (starting from May 30, 2003 till April 30, 2004).

As you notice in the example, the person has bought more units at lower NAVs and lesser units at higher NAVs. Thus, the average cost of his holdings through SIPs comes to (Rs 12,000/637.78 units) Rs 18.81, which is lower than the average NAV (Rs239.38/12 months) of Rs 19.95.

A cool savings of Rs 1.13 or 6.02%. The key to investing is "regular investing", that is at whatever price or date you invest, the average cost of holding will be less than the average price.