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Mutual Funds Also Hit Circuit

This comes in the wake of stock markets closing early for the day

The good news is that the markets are up, but the bad news is that fund investors could not benefit as they could not buy and sell, leaving them stuck where they were on Friday last.

Why? Because authorities have announced that Monday will be a taken as a non-business day for mutual funds.

This is the right thing to do by the authorities. The reasoning behind it is that the transaction time for all equity funds on a normal business day is 3 p.m., and on a day like today it would have been impossible to undertake any transactions at all. Therefore, it will be unfair for investors if fresh purchases and sales are allowed while the underlying asset prices are frozen. This also playing by the book, as it is in the caveat of every offer document that sales and buys can be stopped in extraordinary situations.

The rule-based approach that applies here will then come into effect. If mutual funds get purchase and redemption requests on a non-business day, then these will get executed on the next business day.

On a typical Friday afternoon post-3 p.m., if an investor files a request, his order will get executed on the following business day -- he will get the Monday NAV in effect.

The uncertainty has rubbed off on the mutual fund managers too and they are all groping for suitable answers, but what is certain is that the ball is in the court of the Association of Mutual Funds of India (AMFI).

At the moment, while some mutual funds have said they are going to declare NAVs only as a reference point, others have indicated they will not declare NAVs and the rest are awaiting notification from AMFI before deciding either way.

Be that as it may, but for those interested in ‘what if’ kind of situation, here were the possibilities:

The election results may have been unexpected, but the reaction to it was very much in line with general expectations. After poll results were announced many analysts and asset managers were of the view that come Monday the markets are going go up, the only thing dividing their opinions being by how much.

Still, nobody really expected markets to get shut down prematurely for the day due to excess buying pressure. In the opening session, Sensex jumped to a plus-14 per cent gain, which was the biggest rise on opening since 1995. The scene in the debt market was no different with the benchmark GOI yield going down by 25 basis points to 6.27% -- the lower the yield, bigger the gains. This was the two-week low for the benchmark gilt. Unlike its equity counterpart, the debt market may be forgiven for the lack of exuberance, as later in the week the Reserve Bank of India (RBI) would be coming out with another round of G-sec auction.

Considering the way the markets swung, this would have been a good day for mutual fund investors. At least, even the worst of the funds could not have, after this day, shown a negative return the day after. One-day returns of the funds were slated for a jump if we had got to see the end of the day net asset values (NAV).

A. Balasubramaniam, CIO, Birla Sun Life Mutual Fund (BSLMF), points towards a positive future, despite what happened today, by saying, “Since March, we have progressively deployed cash so as to benefit from attractive valuations. We have a fair mix of high beta and stable stocks in the portfolio.  Therefore, we would benefit out of the uptick reasonably well”.

Large-cap funds would have been be the biggest beneficiaries from the skyrocketing stock markets. The gains of these funds would certainly have been higher than the mid- and small-cap funds. Thematic funds -- infrastructure-related funds would have seen quite a jump in their fortunes too. Infrastructure-related sectoral indices like Power, Metal, Realty, Oil & Gas, all went up by 20 per cent today.

Likewise, nothing would have been able to stop the rise of the banking funds as banking index had crossed the 20 per cent threshold in the morning itself. Though IT had gone up by almost 10 per cent, still companies like Infosys did not take a major part in the rally, which implies that IT funds would not have gone up like their equity diversified counterparts. Similar would have been the case of funds betting heavily on FMCG and healthcare.

Among debt funds, with yields again falling, gilt funds and funds betting on longer maturity debt, like medium- and long-term debt funds may have seen another round of positive gains, while the funds investing more in short-term paper would have seen muted gains.

In all, Monday has been quite an eventful day, even though it was curtailed to quite an extent, especially for mutual fund players it was a total disappointment. However, if more days like this are going to be in the offing in the future, investors would be able to make up for the immense loses they suffered in 2008, in no time at all.