Even as foreign institutional investors continue to pour money in Indian equities, they have found little support from the other "institutional" family of domestic equity and balanced funds. While FIIs have been relentlessly swooping down on battered stocks, there has hardly been any cherry picking from mutual funds. For record, FIIs have already bought equities worth Rs 3800 crore in March alone while mutual funds have been net sellers, offloading stocks worth Rs 357 crore this month. The equity-oriented funds (including closed-end balanced and equity schemes) command a collective asset-base of roughly Rs 23,000 crore.
So, why are domestic funds not engineering a rebound in indices, especially when their net asset values have hit abysmal levels? Simply, because equity-dominated funds lack the necessary cash even though they desperately want the markets to do a Phoenix-act. The aggregate liquid assets were mere Rs 750 crore on February 28, including those under bulky funds from Unit Trust of India. While some of the UTI funds have corpus of well in excess of Rs 500 crore, they are closed-ended and hence, nearly fully invested. Mastershare, for example, manages Rs 1500 crore but had only 0.72% or 10 crore in money market pool in February. Surely, this kind of money cannot resurrect the market.
"Most funds are almost fully invested and have only been selectively churning their portfolios,'' says a fund manager at a leading mutual fund. "With tech-heavy portfolios, most funds are fighting shy of liquidating them at such low levels and book huge losses,'' he adds. Fortunately for equity fund managers, investors have not pushed the redemption button and hence, they are not under pressure to generate cash. At the same time, with fresh inflows almost absent, domestic funds have lost the opportunity to pick up top quality stocks at rock-bottom prices.
"Technology stocks have bore the brunt of the fall. Yet, with NAVs dropping like nine pins due to tech-heavy portfolios, there is hardly a fund manager who wants to exit other sectors and invest that money in technology counters. At most, some funds are upgrading the quality of their tech holdings. The losses are playing on their mind in this rudderless market,'' says another Mumbai-based fund manager.
While equity funds had an average cash component of over 10%, it does not translate into a substantial booty in absolute terms due to a small corpus. For instance, Tata IT held a sizeable 55% in cash on February 28. Yet, with assets of only Rs 27 crore, it means a mere Rs 15 crore. HDFC Tax Plan, with its size of under Rs one crore, had a 46% exposure to money market instruments. On the other hand, Alliance New Millennium leads the pack, but has a cash cushion of only Rs 57 crore. Its ditto for balanced funds (excluding US 64), where liquid holdings are at 8% but the total kitty is just Rs 150 crore since most schemes manage a small corpus. It does not come as a surprise that smaller funds have found it easier to liquidate a large part of their holdings even in a falling market - equity funds, with over 15% cash holding, have an average asset base of only Rs 37 crore.
The current situation brings forth the larger issue of critical mass, or rather the lack of it for Indian equity funds. Among the 100-odd funds, there are only 23 schemes with assets of over Rs 100 crore. Clearly, equity funds have yet to emerge as an institution where their collective investment can guide the market, even in the absence of fresh inflows. And with their inability to guard investors' money in the face of a bear run, it seems funds will have to piggyback on FIIs for some more time and await till they trigger a bull-run.