Fears of rising redemption pressures have been unfounded as the latest data for May 06 show that the equity category of the mutual funds industry has received a net inflow to the tune of Rs 10562 crores. Existing equity scheme have seen a net inflow of Rs 9654 crores and NFOs have contributed around Rs 5884 crores, so even if we discount the NFO collection, the industry has seen a rise in assets.

The factor that has worried the market experts most is the rising redemptions pressures which would force mutual funds to liquidate their holdings, thereby turning them into net sellers in the capital markets, would lead to further market slide, but the redemption pressure has stayed within manageable limits.

Retail money has proved to be the least ‘hot’ money of all, and they have shown their loyalty towards funds which have rewarded them handsomely in the past, by staying invested, in these turbulent times.

The average cash level of equity diversified category is around 9.45% in May 06, which should be sufficient enough to meet any above-average redemption pressures. The highest the cash reserve ratio has gone to in the last one-year is 9.62% in Apr 05. Therefore, concerns over fund houses selling their existing holdings to keep higher cash levels to meet redemption request is unfounded.

The investment pattern by mutual funds in the stock markets this month certainly has changed though, as they have offloaded shares worth over Rs 2000 crore, whereas FII have bought equities worth Rs 486.4 crores. The sell-off by mutual fund is a knee-jerk reaction to minimize losses by selling holdings which they were not comfortable with, and not necessarily due to redemption pressures.

The great Indian Bull Run has made even the most conservative of fund houses and investment managers a little too adventurous in the past, which was understandable given the fact that even the most nondescript shares was trading at levels which belied valuations and fundamentals. So in effect, this speed-breaker has acted as an eye-opener for most of the fund managers, who were lured by the promise of easy money.
The stringent risk-measures and controls which, in the first place has earned the mutual fund industry its reputations of being investor-friendly and first choice for earning decent inflation-adjusted returns, it seems was forgotten to an extent, and to be fair to them, record mobilization form NFO was also putting them under a lot of pressure to deploy the cash rather quickly and that too in places where they would otherwise would have ignored.

The situations it seems have been corrected a bit, as the latest disclosed portfolios suggest that on an average large cap stocks account for more than 75% of the holdings, whereas Midcap and Small cap stocks from 10.74% and 0.43% of the total net assets respectively. Debt and Cash investment account for 10% of the total equity assets.

Schemes which were having over-exposure to companies, which were not fundamentally sound, and were only riding on the liquidity excesses in the capital markets, have redeemed their positions. The present levels of the stock markets have provided the mutual funds with an excellent opportunity to re-enter the markets, at definitely more cheaper, attractive levels. The corrections has been healthy in more ways than one, and apart from driving the ‘excesses’ from the system and in general ‘cleansing’ the whole system, valuable lessons too have been learnt from this ongoing corrections, and more disciplined approach towards investing is likely to emerge after the dust settles.