Equity MF investments set for two-and-a-half-year low over poll anxiety

The mutual funds (MFs) have slowed down their investments in equities as fund managers brace for election-related volatility. According to data from the Securities and Exchange Board of India (Sebi), MFs had invested Rs 12.9 billion till December 20. 

If the flow remains tepid in the remaining four sessions, this will be the lowest monthly investment by MFs since August 2016. 

Domestic fund managers have been net-buyers in only five out of 14 trading sessions this month. On the other hand, foreign institutional investors (FIIs) have been net buyers on seven occasions. They have purchased domestic shares worth Rs 30 billion this month, taking their two-month investment tally to Rs 92 billion. 

According to experts, recent events such as the resignation of Reserve Bank of India (RBI) governor and a setback for the Bharatiya Janata Party (BJP) in key state 

elections have made mutual fund managers cautious. Meanwhile, the improvement in FII flows comes amid softening in the 10-year US bond yield to 2.8 per cent. In September and October, the domestic market had seen sharp outflows from foreign investors as the Treasury yields crossed 3.2 per cent.

The US yields crossing 3 per cent levels tend to trigger risk-off sentiments among global funds. 

While equity MFs are flush with funds, money managers are keeping a close eye on political developments. 

“Our investment strategy would be to take money off the table if the markets start pricing in a favourable election outcome. However, if the markets correct anticipating an adverse outcome, we’d be buyers. This contra approach is advisable as volatility is expected to pick up going ahead,” said a fund manager.  

Experts suggest that not only the elections but other concerns are also combining to increase the noise levels in the markets.

“Given the existing global macro headwinds (trade-war escalation, slowing global growth, US recession concerns) and concern over the RBI autonomy, we expect enhanced volatility environment to persist and have a negative bias towards market performance in the near term,” said analysts at Elara Capital.

While the fall in crude prices helped domestic markets recently, the fears of a government shutdown in the US on Friday hit global markets and India’s resilience caved in. 

The BSE benchmark Sensex fell 2 per cent to end at 35,742 on Friday. The average monthly investment by MFs this year has been nearly Rs 100 billion. They have been net-buyers on 177 out of the 233 trading sessions of 2018, pumping in Rs ­­­­­1.2 trillion during the year. Despite the sharp buying, the Sensex is up only five per cent this year. However, the buying has helped negate the FII pullout of Rs 350 billion. Overseas investors have been buyers only on 99 occasions this year.