At present, he said, the average investor in the country was wary of putting his money in instruments other than bank fixed deposits. ``One can gauge by the spurt in the growth of bank deposits that investors are scared and their fear has compounded by the US '64 imbroglio,'' he said. Kotak also pointed out that mutual funds should not assure returns, even on fixed-income securities, leave alone equities. ``It is an uncertain environment,'' he added.

Regarding Kotak Mahindra's decision to enter the mutual fund industry at this juncture, when a host of players have alreadyestablished themselves, he said the company had been keeping a track on the developments in the mutual fund industry. ``We finally decided to approach investors with a gilts fund, K Gilt, which no other AMC has offered so far. A gilts fund will give better returns than bank deposits and, at the same time, carry no default risk as these securities are backed by the government,'' he said.

He added that the spate of downgrades had made the investor uncomfortable. In the last six months, as many as 95 companies have been downgraded while a mere five companies have been upgraded.

``At the same time, we wanted to have a product in the other extreme of the spectrum, viz; an equity fund as there still are some good opportunities despite the difficult period and one has to make the best use of them. Now, we can explore the possibility of launching other funds between these two extremes and have a family of funds,'' he elaborated.

The equity fund, christened K30, will not have more around 30 stocks in itsportfolio and is likely to have a bias towards defensive sectors like pharmaceutical, IT and consumer products. ``We are also looking at some good bets from the core sector,'' said Kotak.

Unlike a number of other finance companies, Kotak Mahindra Finance has been successful in negotiating the current downturn in the economy. The company has, in fact, decentralised its operations and evolved independent profit centres.

``We saw this downturn coming 2-3 years ago and changed the face of our operations accordingly. To start with, we gave minority stakes to Goldman and Ford, which ensured adequate capital inflow to help us tide over the slowdown. At the same time, we expanded our equity and brought down our lending assets to reduce our dependence on debt component. Thus, our capital has grown from Rs 300 crore to around Rs 700 crore while lending assets have been brought down from Rs 1700 crore to less than Rs 1200 crore in the last three years.

My return on capital may be low but we have achieved ourprimary objective of capital preservation in this kind of a situation,'' he explained. ``Other companies have increased their dependence on debt and lended out. In fact, money has got stuck in some cases,'' he added.