Thursday, May 21, 2009

Mutual funds sidelines in current rally

Mutual funds, flush with cash, are busy booking profits instead of investing in this rising market. While foreign institutional investors have pumped in Rs 1,012 crore in the last two days, when the market moved up from 12, 000 to above 14,000, mutual funds have pulled out Rs 1,720.60 crore, according to data from the Securities and Exchange Board of India.

Some fund managers said the market could come down later, which would allow them to re-enter at a later date.

Despite some mutual funds’ cash levels as high as 25 per cent, they are unwilling to deploy it. Reliance mutual fund’s cash level is the highest (26.89 per cent). JP Morgan mutual fund’s cash level is 25.54 per cent while JM Financial is keeping 19.43 per cent of its corpus as cash.

The result is lagging returns of equity funds when compared with Sensex. On a three-month basis, equity funds have posted 46.12 per cent returns while Sensex has given returns of 58.16 per cent.

With close to Rs 17,000 crore lying idle with mutual funds, experts say the retail investors have lost out. “Even the euphoria has not been able to bring them back. The money may eventually be deployed but they have missed the intial part of the rally”, said a distributor.

“There has been a sharp run-up in valuations, which are looking ahead of fundamentals in many stocks. Fund houses have been keeping high cash to hedge against uncertainty. Some amount of it could be showing as underlying for their exposure in derivatives”, said Navneet Munot, chief investment officer, SBI mutual fund.

“Mutual funds booked heavy profits yesterday as they had bought when the markets were falling. Probably, they are expecting the sentiment to cool off. Some redemptions would also have come”, said a broker.

“It is true that fresh inflows had dried up. But now, with the revival of the sentiment, people have started to look at equity. The spillover effect of buoyancy in sentiment will be reflected in collections by equity funds. Fund managers who have been waiting in the wings will probably like to invest now”, said another distributor.

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