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MFs at Markets' Exit Door

Fund managers have decreased their investments in stock markets

Whether fund managers believe there is a stock market correction imminent, or whether they are fully invested already, there are no doubts regarding mutual funds’ gradual withdrawal from investing in equities.

Data with market regulator, the Securities and Exchange Board of India (SEBI) shows that mutual funds emerged net buyers from March, but in September and October, they have turned themselves off markets.

The last few weeks have seen stock markets at new highs, leading to enormous rise in valuations across the broad spectrum of indices in India. While it is the foreign institutional investors (FIIs) that powered markets the most, having invested almost $13 billion this year, yet Indian fund managers have chosen to turn reticent, says Financial Chronicle.

The reasons are not difficult to find as Diwali has come to Dalal Street early with Sensex and other indices doubling in value since March. Prices of small-, medium- and large-cap stocks are at huge highs (though less than the ones seen in January, 2008), making it very difficult to carry off a pro-investment argument.

At the same time valuations are sky-high with just the BSE large-cap index trading at roughly 21 times its historic earnings – it was 13 times in March. The story applies equally to the BSE 500 index. Sensex itself is up 80 per cent from the lows it fell to on March 9, 2009. More may well come in the near future. Foreign cues to move markets forward, aside from the positive FIIs data, are plentiful, with the latest being that the Dow Jones index has crossed the 10,000-point mark, exactly a year after it fell from the peaks to the very lows at 6,547.05 on march 9 – a 12-year low. This should help markets in India rise further.

Yet another reason that may be leading funds towards the exit door of stock markets is that they want to preserve their cash levels at safe levels, having invested as much of their money as they could. As a result, fund managers would be forced to withdraw themselves from markets, after they jumped in with gusto after March, when the bulls started rampaging in earnest (check table)

Fully Invested Funds
Date Equity Value (Rs Cr) Total Value (Rs Cr) Assets (%)
7/31/2009 1,30,513.87 1,51,806.05 85.97
8/31/2009 1,37,028.48 1,55,407.00 88.17
9/30/2009 1,38,382.95 1,54,688.05 89.46


In other words, mutual fund houses have reached their fully-invested limit.

It can also be argued, that, for want of any justifiable cues as to the future direction of markets, fund managers are waiting for the Indian corporates’ latest quarterly returns to be revealed to a large extent and then basing their decisions on the new data – if they get some new money to play around with. At the moment, as a result of the ban on entry loads, that brought to an end the era of paying commissions to distributors, has led to falling collections for fund houses.


In Withdrawal Mode    
Month Debt/Equity   Gross Purchases Gross Sales Net Investment
Total for July   Equity   626.70 792.60 -165.90
  Debt  963.20 521 442.20
Total for August   Equity   663.20 520.60 142.60
  Debt  1115.10 935.50 179.60
Total for September   Equity   965.60 872.10 93.50
  Debt  1916.50 1769.60 147
Total for October (till 15th) Equity   6426.90 9115.20 -2688.20
  Debt  41193.70 19511.90 21681.90
All figures in Rs cr
Source: SEBI