Indian Investor Getting out of Mutual Funds?

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Indian Investor Getting out of Mutual Funds?
Several retail investors, small as well as the high-worth variety, have surprised mutual funds by taking a direct plunge into the market. Its a bad time for local funds which have also failed to ride the market like foreign portfolio managers.

While foreign investors are shattering all previous records to pour big-ticket investments into equities here, local mutual funds have turned out to be net sellers in the stock markets this year.

FIIs have already bought shares worth more than $6.3bn with over a month still to go before the year ends.

In sharp contrast, MFs have sold stocks worth Rs 1,260.2 crore ($0.28bn). They have sold all year round except for May just for that one month they were net buyers.

MFs, in fact, took advantage of the post-election results melt down in the markets to buy stocks worth Rs 1,005.1 crore.

The sensex plummeted by over 500 points on a single day, May 17, on news that the NDA had lost the elections and a Congress-led government was imminent. Following hectic buying in May, MFs turned sellers and have stayed so thereafter.

Funds are forced to sell on redemption pressure from unit holders. Alternatively, they sell to book profits.

There havent been any major redemption pressures in equity schemes, but I also see no significant new money coming into these funds, said Dhirendra Kumar at MF tracker Value Research.

Fund managers cite a number of reasons for the trend. Some say that a bull run makes retail investors ambitious and they like to trade directly on the bourses instead of opting for the MF route. This may, to an extent, be responsible for the lack of keen investor interest in MFs this year.

Sales executives, however, say that investors are booking profits. The profit-booking trend by the retail segment can be seen from the quarter-on-quarter decline in public shareholdings in the BSE 200 stocks.

Of the top 187 stocks comprising the index, 66% or 124 have recorded a drop in the number of shares help publicly during the second quarter (Q2) of this financial year as compared to Q1. In comparison, only 63 companies registered an increase in public holding levels.

Investors who had entered at lower levels want to take home their profits which is why MFs are selling. They will return with their money bags for a fresh round of buying once the dust settles down and prices are back to lower levels, said UTI chief marketing officer Ashutosh Bishnoi.

The reason given is that the 6000 sensex level has become a barrier for local investors as they have seen the market topping out at such levels before.

This is not an issue for foreign investors who decide to buy based on macro-economic fundamentals and company-specific future earnings prospects. The sensex has remained range bound within 13-19 times the earnings ratio over the past three years.

There is wide consensus that going forward and even till 06, growth of 15-16% in corporate profits will be maintained which is the main reason drawing foreign investors to local bourses, said a dealer at a brokerage house dealing with FIIs.

Local investors, however, fail to see the growth potential of future earnings and give in to ball park sensex figures. They pressed the sell button to book profits as soon as the 6000 level was reached.

MFs are only vehicles for carrying out investor instructions. We have to execute orders. We sell when they want to book profits, added fund manager Swati Kulkarni, Bishnois colleague at UTI. The sensex at 6000 in February earlier this year had a similar effect on individual investors. It triggered sales which were exacerbated by the May 17 crash, Ms Kulkarni said.

She, however, also supports the view that there is another category of investors both high networth and small that get carried away by the shooting prices and take a plunge themselves. Seeing daily jumps in the market prices of the stocks on their portfolios, retail investors tend to become over confident once a rally gathers steam, she said.

Agrees Vivek Mahajan, chief dealer at IL&FS Investsmart, Retail investors are still buying stocks. They are booking profits in some stocks and MF holdings but are redeploying these into the markets as the dominant feeling is not to get left behind in the rally.

The enormous success of mega initial public offers (IPOs) like TCS and NTPC shows investor preference for circumventing MFs. These issues received record subscriptions from retail applicants. Direct participation in the secondary market, however, is unlikely to be as aggressive.

The secondary market story actually lies somewhere else. It is in the mid-caps. These have made sizeable gains that are broader than that captured by the indices, said Mr Kumar at Value Research.

The flare-up in mid-caps and their swelling volumes are fairly well-known now. Sensing the opportunity, a number of MFs have launched new mid-cap funds that have raised over Rs 400 crore in IPOs. Two years ago there was only one mid-cap fund from the Franklin fold. There are five funds in the market now.

Investing in MF IPOs is not a very intelligent thing to do. Yet, these funds have managed to mop up huge sums from investors, said Mr Kumar. But Rs 400 crore is only a very small fraction of the total money chasing these stocks on the bourses.

Large portions of this are likely to be from FIIs, though sizeable funds from individual investors cannot be ruled out.

Clearly, for whatever reasons, the MF industry has not been a huge participant in the ongoing bull run, which is completely FII-driven.

Industry-wide average returns over the past three months have been around 4% and the best funds have outperformed the indices. From hereon, at these levels, it would do investors no harm to invest via MFs.
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