Equities selling by mutual funds at 22-month high

In the last nine trading sessions over the last fortnight, post the government’s so-called reform initiatives, foreign institutional investors (FIIs) pumped in Rs16,376.80 crore into India’s stock market, taking their year’s tally to Rs81,787.40 crore. Markets soared more than 4%, coasting on heavy buying by foreign investors aided by global liquidity.

Guess what the domestic investors (read mutual funds) did during the same period? Well, they net-sold, their outflows touching Rs2,610 crore! Mutual funds have been net sellers of equities in all but two trading sessions in September, resulting in a 22-month high of net monthly outflows.

That is not all. This month, mutual funds have net-sold equities worth Rs3,017 crore, their highest outflow since October 2010 (Rs5,151.20 crore). To be sure, it’s not a case of the ides of September.

Mutual funds have also seen net redemptions from investors in seven out of the last eight months with outflows totalling Rs6,834 crore. Consequently, to meet such redemption pressure, mutual funds net-sold equities during eight out of last nine months, with aggregate selling touching Rs12,159 crore. (May was the only month when investors funnelled Rs506 crore into equities and equity-linked saving scheme funds, enabling mutual funds to net-buy Rs295.30 crore of equities in June.)

So, does this mean, domestic investors don’t quite share the confidence that foreign investors seem to have in the India growth story? Not quite.

Experts believe that apart from some profit-booking, redemptions led to this huge selling by mutual funds. (Redemption is the process of  investors withdrawing their mutual fund units whose value, in relation to the initial cost, may be higher / lower / same.)
Sanjay Sachdev, president and CEO of Tata Mutual Fund, said that although the market people are getting a little bit positive generally, there has been no major change in their buying behaviour.

“Markets are definitely looking buoyant, but as far as domestic investors are concerned, they are not yet banging the doors and are still cautious. Retail investors are likely to come in a big way when they see more concrete commitment from the government to move ahead on reforms,” said Sachdev.

Saurabh Nanavati, CEO of Religare Asset Management Company, said that there has not been any significant change in mutual fund industry fortunes. “It seems that people are turning positive but there has been no significant change in inflows. The equity mutual funds have been facing redemptions and the current selling is a classic case of funds meeting redemption pressure. Most of the people are still hooked to fixed-income products.”

According to Sachdev, redemptions alone may not be the only reason for selling by mutual funds. “Fund managers are engaging in a slight profit-booking and reallocation of their portfolios in light of the recent surge in markets. Some of them may be increasing their cash holdings so as to redeploy the same after some time.”

That may well be the case. Markets rose nearly 10% from June to August. Logic suggests this should have led to a decent rise in the assets under management of funds. But, according to data of market regulator Sebi, total equity exposure of all fund houses has come down from Rs1,91,085 crore in June to Rs1,86,700 crore in August. The data highlights that mutual funds may be reducing their equity exposure to increase their cash or to meet redemptions.

Dhirendra Kumar, CEO of Value Research, said there has been a change in the perception of long- term investment holding. “There are a lot of people who would have bought 2-3 years back. They may be booking their profits now.”

Going ahead, the mutual fund industry is hoping that the new regulations – Sebi has amended mutual fund rules in order to increase their penetration beyond the top 15 cities and to energise their distribution network – that will come into effect from October 1, may help drive up its business.

However, it may be some time before these measures start bearing fruit. Though the money that will likely come in from smaller cities could be more stable than urban investments, its magnitude is likely to remain insignificant in the near term.

“It will take at least a couple of years before we start seeing decent flows coming in from smaller cities,” said Kumar.

Until such time, domestic investors may well appear to be at odds with FIIs.