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Funds Chase the Bull

Mutual fund investors lost out on market gains as managers held on to cash. This changed in May.

Mutual fund managers have changed tack completely, transforming themselves from market bystanders to active participants.

However, before the elections, mutual fund managers had preferred to sit on the sidelines and watch as the markets bypassed them starting March 9. It was only when the new government was ushered in that fund managers persuaded themselves to participate in the market rally on the assumption that it would usher in far-reaching reforms that would spur the economy on a new growth path.

Of course, by then most stocks’ valuations had been driven to new highs and they may well have paid a higher price in May than they would have done if they had joined the rally sometime in April or earlier.

The pre-election rally caught mutual fund managers on the wrong foot as they adopted a wait-and-watch approach. They expected a correction in the run-up due to polls and did not participate in the market rally and as a result failed to register great gains from it – Sensex from March 9 to June 10 gained by as much as 90 per cent! Mutual funds were very high on cash and debt and consequently missed out on the gains in the initial stages.

However, the poll results cleared the clouds of uncertainty and a strong government was voted to power. This resulted in a sudden boost in the sentiments of retail investors as well as institutional players. Fund managers jumped into the market despite stretched valuations, this time trying to make sure they do not to miss out on the opportunity.

Therefore, months of inactivity turned to a hectic exercise in as funds reduced their cash and debt allocations to capitalise on the market upswing. Open-ended equity funds reduced their cash and fixed income holdings, in May, by 13.13 per cent. The amount held in cash and debt of these funds has come down from Rs 16,054.18 crore in April to Rs 13,946.74 crore in May.

The most active one in this race to the markets was Reliance Mutual Fund, which is known for maintaining high levels of cash, has recorded the biggest decline in its holdings -- Rs 1,330 crore. The huge calls made by the fund can be seen when contrasted with what the other mutual funds invested together. As such, Reliance MF’s investments in markets for May was a significant 63 per cent of the total decrease in holdings of mutual fund industry of Rs 2,107.44 crore.

Cash and debt accounted for 26.89 per cent of Reliance MF’s assets in April, which has come down to 15.95 per cent in May. The fund house now has the least cash allocation it has had in the past one year. Despite this, it still holds the highest amount of cash in the mutual fund industry. This is not surprising, given its large asset base.

UTI Mutual Fund emerged in the second spot by investing Rs 400 crore of its total holdings. Its cash and debt allocation came down from Rs 2,152 crore in April to Rs 1,752 crore in May. Then followed Birla Sun Life Mutual Fund, DSP BlackRock Mutual Fund and SBI Mutual Fund with reductions of Rs 295 crore, Rs 276 crore and Rs 275 crore respectively.

What came as a stark contrast was the cash and debt holdings of ICICI Prudential Mutual Fund as they actually jumped up by Rs 1,280 crore from Rs 880 crore in April to Rs 2,161 crore in May. This translates into a whopping 145 per cent rise. The underlying reason being one of its schemes — ICICI Prudential Infrastructure witnessing a rise of Rs 1,238 crore last month. The scheme had Rs 374 crore in cash as of April which shot to Rs 1,612 crore in May.

However, it is noteworthy that the month of May has seen the second-biggest reduction in cash and fixed income component of funds in the past one year. While October 2008 witnessed the biggest decline of 17 per cent, May 2009 has seen a cut back of 13 per cent.

NOTE: We have omitted two fund houses for which data is not available, these are Fidelity MF and Benchmark MF.

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