With the Indian stock markets growing at a frantic pace in 2007 (much like 2006), investors who were willing to take on risk have been rewarded rather handsomely for their efforts. While the smart investor has been grounded, many an ecstatic investor has lost his bearings taking on even higher dosage of risk for that additional return.

Nonetheless, 2007 had a lot of innovation in store for the mutual fund investor, not all of which were positive. And there are indications that 2008 could prove to be just as innovative.

The year gone by
Given that the domestic mutual fund industry has far from matured, it is only natural to expect a lot of new products and innovation along the way. 2007 witnessed some of these innovations.

1) Gold ETFs make a debut
While there was considerable talk (which built up even more anticipation) about Gold ETFs (exchange traded funds) for quite some time, they never really took off. That changed in 2007. As regulations crystallised and there was greater clarity on this front, fund houses stepped in to launch Gold ETFs, actually they rushed in.

And like with all other innovations, every fund house now looks eager to launch a Gold ETF, even those who don't even have the basic mutual fund offerings in place.

2) Global funds take off
Another long-standing innovation � global funds, debuted in the industry. This is another investment option that never really took off as expected because a) there was lack of clarity regarding the regulations and b) fund houses were averse to launching global funds in the avatar of debt funds (since global equities are classified as debt from a taxation perspective).

Nonetheless, global funds did take off although fund houses adopted varying routes; while some invested directly in global equities, others opted for the Fund of Funds (FoF) route by investing in global funds.

3) Infrastructure funds storm the rankings
Like we mentioned, not all innovations were positive; infrastructure funds count among the innovations that the industry could have done without.

We believed that after the disaster with the technology/media/telecom (TMT) funds in 2000, fund houses would have become wiser regarding sector/thematic funds. But no, themes like infrastructure were as popular as ever and many fund houses launched infrastructure-centric funds. Those that already had one open-ended infrastructure fund did not hesitate in launching more infrastructure funds (although of the close-ended variety).

Of course, there is nothing to detract from the blistering performance of infrastructure funds. However, this has come at higher risk to the investor and unfortunately investors haven't been told this in as many words.

At Personalfn, our view on sector/thematic funds is that they are best avoided; instead investors should opt for well-managed, well-diversified equity funds which in any case do invest in infrastructure (and also have the flexibility to exit the theme when valuations have peaked).

It is apparent from the table why infrastructure funds were so popular with fund houses and investors alike in 2007. There were at least three funds among the top ten equity funds that were focussed on the infrastructure theme.

Another point worth noting is that with most funds a major portion of the growth has been registered in the last 6 months, a performance trait which is common with sector/thematic funds. This is because thematic funds tend to perform in shorter spurts as opposed to diversified equity funds which are known to clock growth steadily.

What lies in store in 2008

1) Guidelines on real estate funds
We expect the launch of real estate funds to be among the high points of 2008. A draft of the guidelines has already been released by SEBI (Securities and Exchange Board of India). Once the guidelines are finalised, you can expect fund houses to go all out with their real estate offerings. The launch of REITs (real estate investments trusts) will be the logical conclusion to the launch of real estate funds.

2) Entry load waiver
Despite the steps taken by SEBI to empower investors, it can be safely stated that fund houses and distributors continue to call the shots in the mutual fund industry. To further the cause of investor empowerment, SEBI has waived entry loads on open-ended funds.

Investors can now invest directly with the fund house without the intervention of a mutual fund distributor. The advantage of this move is that a) there will not be an entry load and investors can have their entire investment corpus invested in the markets and b) they will no longer be at the mercy of unethical mutual fund distributors for their mutual fund investments.

Finally, distributors will be forced to truly 'earn' their income and this bodes well for investors.

What should investors do in 2008?
For starters, investors would do well to appreciate the importance of sticking to the basics of investing. This is probably their best defense in light of the complex investment environment that they will have to contend with.