MFs may be cautious in June

Redemption pressures and the overall market direction may force fund managers to be more conservative in their purchases in June.

May tuned out to be a record-breaking month for two main institutional players in the secondary market, with mutual funds breaking all previous records for monthly purchases and foreign institutional investors setting new records in net monthly selling.

However, many in the market feel that mutual funds may not be on a buying spree this month.

"How much money is left to invest is not just a function of how much has already been deployed," said A Balasubramanian, Chief Investment Officer at Birla Sun Life Asset Management Company.

"Because, when the markets are volatile, a larger proportion of a fund's assets needs to be kept in cash to deal with possible redemptions.

For example, though I would have been happy with a 3 per cent cash reserve during normal times, I have to increase it to around 5 per cent in choppy markets," he added.

While nearly Rs 30,000 crore is expected to have flowed into new and existing equity schemes since the beginning of the year, mutual funds have invested only Rs 15,350 crore in equities over the last three months, with the first three months of the year registering minor profit-booking and redemptions.

During the last month, for example, they invested nearly Rs 7,900 crore, an all-time record. Though mutual funds' investments into equities picked up during the middle of the month, they have slowed down over the last few days, with the average inflow for the last five days amounting to less than a third of the average investment made during the previous five days (see chart).

"On the one hand, it could be that some of them may have reduced deployment in anticipation of future redemptions, to maintain cash reserves etc, but another big factor is the market fear. While, initially, the funds saw the big falls as good buying opportunities, but now we have reached a situation where we are wondering whether we are in a long-term bearish phase," said Suraj Saraf, head of mutual fund research at ICRA Online.

"Right now, the redemption pressure is limited because many funds are sitting on returns of up to 90 per cent, so investors can shrug off a 20 per cent chop. But once it begins to bite, there will be a further pick-up in redemptions, which will exert further pressures on fund managers' purchasing decisions," he added.