If year 2003 was good, year 2004 was great. 2004 continued from where 2003 left. The year ended with the Sensex higher by 8.19%. Prima facie, a modest gain. But this gain disguises a significantly larger event that shook the stock markets -- an unprecedented crash.

2004 was a year of consolidation on the gains of 2003. The strong stock market rally sustained its momentum during the year, but this did not happen without its hiccups.

Ironically, more than economic fundamentals, it had more to do with politics. The NDA-led government, which was widely anticipated to return to power was relegated to the Opposition in a surprising turn of events. The Congress, which was acknowledged as having lost touch with the aam aadmi, did a Houdini to return to power.

That in itself did not hurt the sentiment in stock markets as did the 'outside support' to the government by the communists. Leftist reservations against disinvestments brought the market down to its knees. An 850+ point fall on the Sensex, the largest fall in a single day, on May 17 2004 became etched in stock market history as 'Black Monday'.

The Sensex was tottering at levels of 4,500 after seeing dizzying heights of 6,200 only a few months back.

However, a savvy finance minister and a stock market-friendly budget was just what the doctor ordered for a recovery. And what a recovery it was!

From 4,500 in May the market peaked at 6,520 at the time of writing this, an astonishing 44.89% growth in just 7 months! The Budget was stock market friendly and equity funds benefited from its largesse.

The STT (securities transaction tax) benefit was extended to equity-oriented funds, bringing them at par with stocks as far tax treatment on capital gains is concerned.

If equities were on a roll, could equity funds be far behind? Expectedly equity funds were major beneficiaries of the strong undercurrent in equity markets. 2004 saw large caps and mid caps rallying alternatively and equity funds were well placed to benefit from both rallies.

Fund houses saw the 'feel-good factor' as a good opportunity to launch a slew of IPOs (initial public offerings).

While 2003 was largely a year of monthly income plan (MIP) IPOs, 2004 was a year of mid cap funds, multi market capitalisation funds (funds that can invest across the spectrum) and thematic funds. This was an attempt on the part of fund houses to add breadth to their product lines.

However, the lack of breadth in the stock market did not allow for an exclusive stock selection strategy and there is now considerable overlap and even confusion in investor portfolios.

For instance, the HDFC Core and Satellite Fund (an IPO launched in 2004) is effectively a combination of HDFC Equity Fund (an aggressive fund predominantly in large cap stocks) and HDFC Capital Builder (a value fund predominantly in mid cap stocks) Fund.

Likewise Tata Infrastructure Fund (another IPO) overlaps with Tata Select Equity (a basic industries sectoral fund) as the latter also seeks to benefit from the potential of core/infrastructure sectors.

2004 saw long-term investing getting its due. Fund houses initiated a range of measures to advocate mutual fund investment with a longish 3-5 year horizon.

Fact sheets began mentioning the ideal investment horizon up front, viz. 3-5 years for equity funds, entry loads on systematic investment plans (SIPs) were waived off with a penalty on premature exit, schemes were re-positioned as 'long-term.'

What to expect in 2005?

That was the first question we asked Shyam Bhat (AVP-Principal Mutual Fund) in a recent interview. The positive undertone could not be missed, 'I think there is still some steam left in the market over the short-term, but we could see some volatility and minor corrections as well. Over the long-term we are quite positive on the equity market, since we are positive about the growth in Indian corporates.'

This a view shared by most fund managers. Short-term could see some volatility, but markets are on course as far as long-term (over 3 years) is concerned. And this opinion is not based on irrational bullishness on the part of fund managers, there is a solid, fundamental view to back it.

Shyam Bhat elaborates, 'Though the GDP growth estimate has been lowered, it is reasonably good, nevertheless. However, I think there is trend of consumerism that we have seen of late that is growing unabated. We have seen this increasingly over the last 12 months. As disposable incomes rise, this is likely to continue.'

There are several pointers for equity fund investors in these forecasts. Investing with a long-term (at least 3 years) perspective is one of them. At Personalfn, we maintain that in the short-term (1-2 years) there is little one can predict with any degree of confidence about the stock markets except that there could be volatility.

Investors who feel 'left out' by the run up in equity markets need not fret, they need not wait patiently for a correction, rather invest your money with a resolute, long-term horizon and as we have been advocating for some time now, go the SIP way.

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