The mutual fund industry has never had it so good, especially in terms on fresh inflows coming into equity mutual funds.

Thanks also to a bull run in the equity markets the last five months, this segment has been able to show attractive returns and pay out liberal dividends.

In fact, it is an achievement the mutual fund industry has always wanted to put on its CV. But it has never been able to in the last 10 years, since the mutual fund industry was opened to private players.

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Take a look at the figures. The assets under management (AUM) of all equity mutual funds has gone up 57.52 per cent from Rs 10,000 crore (Rs 100 billion) in April 2003 to Rs 15,752 crore (Rs 157.52 billion) in August.

It isn't hard to understand why the equity funds are attracting fresh capital. They've been showing respectable returns after a long time.

Back in April when the market had fallen to a low the net asset values of many schemes had fallen steeply.

According to a BS Research Bureau study, the NAVs of 31 out of the 120 equity schemes that have been floated were under par on April 25.

Since then, the NAV of 24 of these schemes have bounced back to above par value, while seven schemes are still below par value.

It isn't only the equity funds that have performed well during this period. The AUM with all domestic mutual funds have increased about 35.63 per cent to Rs 31,802 crore (Rs 318.02 billion) between the end of April 2003 and August, the latest date for which the industry body, the Association of Mutual Funds of India, has collated and compiled data.

Are these figures a sign that equity funds are taking off after a long spell of being down in the dumps?

According to Krishnamurthy Vijayan, chief executive, JM Mutual Fund, fresh money has been coming into equity schemes in the last two to three months--ever since the contours of a strong bull rally became clear -- but this money is coming from high net worth individuals, the types who invest anywhere between the Rs 2 lakh and Rs 10 lakh (between Rs 200,000 and Rs 1 million) in one go.

"The big five fund houses have seen net inflows into their equity schemes," Krishnamurthy says, adding, "it is not so much a churn."

The numbers tell a mixed tale, and anecdotal evidence makes it even more confusing. AMFI data suggests that the AUM of equity mutual funds increased Rs 5,752 crore (Rs 57.52 billion) between April 2003 and August; that is only 18 per cent of the total accretion of assets in the whole industry.

This is surprising because, ideally, a bull market should have attracted all the fence sitters to the equity fold.

Worse, industry source says that the bulk of this accumulation of assets in equity funds comes from large institutional investors such as banks.

No industry insider will admit this on record but in private they confirm that investor expectations from equity mutual funds is so high in respect of safety of capital that fund advisors end up selling only debt or gilt funds to them even when the equity markets are booming.

Thus, gaining investor confidence is one Rubicon the industry has not been able to cross. But it is certain it has put all the building blocks in place for an explosive growth in the next few years.

N K Sharma, president and CEO, IL&FS Mutual Fund says, "Mutual funds are definitely seeing a swing towards investment in equity. Though a number of high net worth investors have only started approaching, it is just the early signs. I believe that the correction in the debt and equity allocation is a big opportunity (for equity funds). We hope to increase our asset base to Rs 3,000 crore (Rs 30 billion) by March 2004."

IL&FS Mutual Fund has a current AUM of Rs 2,276 crore (Rs 22.76 billion) and is looking forward to almost a good 30 per cent (Rs 700 crore -- Rs 7 billion) growth in the next six months.

Almost all other big fund houses are looking at growth rates roughly in the same range.

As it is, JM Mutual has seen its AUM grow from Rs 3,182 crore (Rs 31.82 billion) at the end of April to Rs 4,237 crore (Rs 42.37 billion) at the end of August, Kotak Mahindra MF has seen growth from Rs 3,344 crore (Rs 33.44 billion) to Rs 4,073 crore (Rs 40.73 billion), and Reliance Capital MF from Rs 2,530 crore (Rs 25.30 billion) to Rs 5,690 crore (Rs 56.90 billion).

The larger ones, such as HDFC MF have reported even more robust growth, from Rs 7,706 crore (Rs 77.06 billion) at the end of April 2003 to Rs 13,119 crore (Rs 131.19 billion) at the end of August, and Prudential ICICI MF has grown from Rs 10,623 crore (Rs 106.23 billion) to Rs 13,580 crore (Rs 135.80 billion).

For all the big fund houses, it matters little where investors are putting their money as long as they keep the cheques coming in.

But, unfortunately, according to JM Mutual's Krishnamurthy, smaller retail investors are still not coming into equity schemes.

"This is because they have seen their investments depreciate in the past and it is taking us a lot of time to convince them," he says.

Perhaps the task of convincing greenhorn investors to invest in debt schemes is easier, because value don't vanish overnight in the debt markets, at least not at the same rate as in the equity markets.

So in the past, they could be persuaded to put in their hard-earned money into debt schemes and once that inroad into consumer confidence has been made, getting fresh inflows even in a difficult market is not so much a problem.

Even the Non-Resident Indians who are staring at the possibility of falling yields in non-resident (external) accounts after the new restrictions imposed by the Reserve Bank of India are only willing to entrust their money to the debt schemes, while equity remains a definite no-no.

This is despite the fact that the bull markets have added a sheen to even the below par performers of the past.

Not to worry, says the industry. The last 10 years have been well spent creating 'the conditions.'

According to Ved Prakash Chaturvedi, chief executive officer of Tata TDWaterhouse AMC the Indian Mutual Fund industry has witnessed changes in four broad areas in the last three years, since the last bull run.

Firstly, the industry has worked on its distribution network. For example, there are more and more distributors who put a lot of importance on giving financial advice to their clients.

"We see that a vast majority of them undertake assessment of the client's risk profile, his needs, etc," Chaturvedi says.

Secondly, it has fine-tuned its communication strategy, toning down the hard sell to a moderate volume from the shrill "buy me" in the last bull run.

Many advertisements and product communications now talk of equity investments from a long-term perspective rather than enticing them to join the bull rally.

This is a significant departure as far as the overall marketing strategy is concerned. It also means in simpler terms that the industry is talking in one voice for itself--the whole equity fund sector--rather than each one for himself.

Thirdly, the industry is seeing consolidation, which is a clear sign that it is evolving in line with global trends. For domestic players, consolidation is as much a necessity to grow as it is to survive.

A bigger asset base, that comes from mergers and acquisitions, creates a semblance of security in investors' minds at the very least. The tangible benefits of lower operational costs and diversification etc are only peripheral.

And lastly, as Chaturvedi says, "The current uptrend in the equity markets was expected for quite some time. The significant feature of the bull run is that unlike the last bull run, there is no single sector which is driving the market upwards. Rather, what we notice is a sectoral rotation phenomenon which raises our hopes of a more broad based and a sustainable long-term trend in the equity markets. This would play a significant role in the development of the mutual fund industry as a whole."

With one part of the gameplan in place, the next component was a stroke of good luck. The markets have been kind enough in the last five months, ever since April 25 when the benchmark Bombay Stock Exchange Sensex tanked to a six-month low.

Industry sources say in a bull rally, retail investors generally enter towards the middle phase.

"The markets having risen from the 3200 level to 4200 level, and this shows that we have approached this middle phase. As a result, we see a lot more retail interest in the sector now. The fact that there is far more investment advice available nowadays has also contributed to strengthening retail interest in mutual funds," Chaturvedi confirms.

Among mutual funds, the investor focus is on diversified equity funds rather than sector-specific funds, Which is not surprising sources say because of two reasons.

For one, first-time investors who were attracted to information technology-focused funds in the last bull run hurt themselves badly after the bubble burst. Their experience is a stark reminder to all other not to put all their eggs in one basket.

Secondly, since the currently rally is spread across all sectors, it makes more sense to diversify one's risks by sticking to a diversified fund.

The industry is also seeing a lot of inflows into monthly income plans, which reflects to another developing trend: this class of investors are coming to mutual funds with expectations of a regular stream of monthly cheques over and above safety of capital.

But while all other segments of the mutual fund industry have a 'story' going for them, the equity fund sector is still the domain of corporates and high net worth individuals.

These are entities who have the option of weaving in and out of various asset classes since they are better informed than the average retail investor.

While the former can see trends building up, the latter needs to see a track record of trends before he can make an investment decision.

Unfortunately for the latter class, the rally always seems to be on the wane by the time he makes an entry.

But behind the Colgate-fresh grins in the industry there are nagging worries. Though fund managers are loathe to admit it on record, the undercurrent of scepticism is unmistakable.

The equity fund sector is worried about whether these inflows represent fresh money--in terms of new breed of investors coming into the mutual fund fold--or is it just a churn of investors who were already invested in debt funds and are now just migrating to the equity fold because returns in the latter are better.

It is a million dollar doubt, because an answer to that will finally determine whether the industry can look forward to sustainable growth or whether it will slip into stagnation once again.

The last piece in the jigsaw puzzle is the challenge of how to influence the investor mindset: to get him to have more faith in the equity fund industry so that he doesn't wait till the end of the rally to move.

Industry sources say it is difficult to conjure up sophisticated products for the corporate and HNI clients and at the same time design very simple products for the average retail investor.

If they can do that it would help to bring the nervous investor into the mutual fund fold -- at the right time to get the best returns.