The recent trends in the mutual funds industry has certainly reversed, which was expected given the state of the capital markets. If we look at the FII figures for the last three months, month-on-month they have turned from net buyers of Rs 6688.80 and Rs 521.90 in March and April respectively to net sellers of equities to the tune of Rs 7354.20 crores in May, whereas, local mutual funds consistently bought equities worth Rs 4476.81, 3120.56 and 7893.37 crores in the last three months, aggregating a total investment of over Rs 15000 crores. Although their buying spree has not helped to prevent the slide in the markets, but the situation could have been much worse.

The fresh inflows have been possible because of the swelling asset base of the industry, and the huge NFO collections, which resulted in MFs sitting on huge amount of cash. Total industry assets has grown from around Rs 2.3 lakh crore in March to over 2.76 lakh crore in May. The industry assets have grown despite the conditions of the markets, whether bullish or bearish.

Category-wise look at the net inflow for the last three months reveals that liquid fund in general are witnessing fresh inflows whereas equity category is facing redemption pressures The transaction trends are certainly reversing and the total industry AUM is rising chiefly because of inflows in liquid and money markets funds, whereas equity and debt-oriented funds face redemption pressures. Out of a total of 25 equity-oriented NFOs (sorted on close date) launched this year cash and equivalent holding is around 13.36%.which translates into 2000 crores of assets, whereas earlier, cash reserves of around 5%-8% was considered good enough.

Though the mutual funds have supported the markets, it can not be said that Indian MF has moved in to take the position of FII; they are just not that big as yet. Although they pumped in a record amount in the capital markets it has not prevented from the markets to slide further. With the spate of new fund offers drying up with the recent guidelines by Sebi on their structure, channelising new money into the system will be all the more difficult, coupled with the panic-effects of the falling markets.

Mutual funds due to their huge mobilization in earlier months through NFO were sitting on cash and were forced to make investment at the earlier high levels against their wishes, as higher cash ratios was killing them, and probably they saw the falling markets as a minor correction and good opportunity to deploy extra cash, but that correction has expanded beyond anybody’s imagination, resulting in losses for majority of the schemes
The situations it seems is bothering them in this falling markets also, as the extent of corrections is deepening every day and the rot does not seem to stop, and fund managers are again forced to deploy the remaining cash in this markets, where in an ideal situation they would have preferred to wait and watch, till sentiments improve.

Markets do not recognize positive factors in falling markets much like, when they refused to factor in any of the negatives in the bullish markets. Strong GDP growth, favourable monsoon and other factors are failing to revive the markets in the short term, but Indian growth story is still pretty much intact, and present levels have made the Indian markets all the more attractive, fundamentals can’t be ignored for long, and here’s wishing the bulls are back with a vengeance, bigger and stronger after this “extended healthy correction”.