 "MFs to play bigger role in new calendar year")
In 2014, mutual funds saw record inflows of Rs 49,458 crore. The markets have continued to rally in January; the BSE Sensex touched an all-time intra-day high of 29,408.73 on Friday.
Sunil Singhania, chief investment officer (equity), Reliance Mutual Fund, says there is potential for significantly higher allocations to equity mutual funds in the days ahead. "Net investments by the equity fund managers have been the highest in the sector's history. But I think we are just scratching the tip of the iceberg. India's gross domestic product (GDP) is $2 trillion. Total cumulative value of savings in India is $23 trillion. The wealth in Indians' hand is almost equivalent to the market capitalisation of India, at $22-23 trillion. Of that, $12 trillion is in real estate, $7-8 trillion in fixed income, $2 trillion in gold & silver and diamond, and only $300-400 billion in equities. So, as a percentage of total wealth, we have only 1-1.5 per cent in equities," he says.
Deutsche Bank in its 'India Equity Strategy: 2015' outlook report, dated January 8, says inflows into mutual funds are likely to continue. "As we have been highlighting, the share of financial assets in India's household savings had dipped to multi-decade lows of 32 per cent, and this should reverse as India's economic distortions start to normalise and the real interest rate sustains in the positive territory. While 2014 marked a turning point in allocation towards financial assets, we believe the transition will continue well into 2015, and even further," says the report, authored by research analysts Abhay Laijawala and Abhishek Saraf.
Interestingly, asset management companies might well be sitting on plenty of dry powder - at least if one goes by the difference in their capital collection and deployment data, which show they have invested less than 50 per cent of the net inflows in 2014.
Equity mutual funds, which collect money from investors and put it to work in the stock market, collected Rs 49,458 crore in 2014, show data from the Association of Mutual Funds in India. Numbers from the Securities and Exchange Board of India show they have deployed Rs 23,842.7 crore.
Investors put an average of Rs 4,122 crore into equity mutual funds every month in 2014. Ten of 12 mutual funds saw more people putting money into these schemes than those that took out. These net inflows hit a peak of Rs 10,845 crore in July. Even December saw inflows of over $1 billion (Rs 6,651 crore).
Deployment of this cash into the stock market peaked in the last month of 2014, when mutual funds emerged net-buyers to the tune of Rs 7,036.90 crore. On average, they have been net-buyers of only Rs 1,986.89 crore worth of stocks per month during the year.
S Krishnakumar, head of equities at Sundaram Asset Management Company, said some of the capital would have been deployed in primary market transactions. "A lot of qualifies institutional placements happened (and also) rights issues (which are) off-market transactions," he said.
Chandresh Kumar Nigam, managing director & chief executive officer, Axis Asset Management, said arbitrage funds could also have played a role, and added there was little evidence of high cash positions in the industry.
"Mutual funds are not holding cash… A small part of it could be explained by payment of dividends," he said.
The payment of dividends returns money to unit holders, but it would not show up on the Sebi data, which only measure deployment of capital in the stock market.
Krishnakumar also points out that the equity assets under management have gone up from less than Rs 2 lakh crore to over Rs 3 lakh crore. Any mutual fund has to keep a certain percentage of its assets as cash to meet redemption requests. A four per cent cash level means schemes would need to keep an additional Rs 4,000 crore in cash, in light of the increased level of assets under management.
A few thousand crores of rupees have gone to arbitrage funds. Krishnakumar says their investments involving the derivative market will also not reflect in the net investment figures, since they only reflect the cash market.
The deployment of funds raised in a new fund offer (NFO) can take up to two months. Equity mutual funds raised over Rs 12,219 crore through NFOs. The relatively slow deployment of this capital might explains the gap. This, coupled with higher cash requirements in line with the higher equity assets, and some capital allocation towards arbitrage funds, could help explain the difference, according to experts. Dividend payouts, and primary market action for which regulatory data are not available, might also have played a role, they say.
Cash levels are likely to come down further if the market rallies, says Nigam.