Redemption pressure continues on mutual funds

For the third month running, mutual funds are facing redemption pressure, and there is nothing they can do about it beyond letting the pressure play out.

"It is circumstantial," said Raj Raman, senior vice-president, sales and marketing at Prudential-ICICI MF.

Call money rates have become much higher and corporates are pulling out money from funds and putting it in directly into the call money market where they get higher yields.

While actual figures are not available each fund on an average has already lost Rs 500 crore each so far.

"We can get a fix on the actual numbers by the end of next week," said Raman. Industry sources indicated that the net outflow is at around 2 per cent of the total assets, which is still much lesser than in the previous two months.

Fund houses are hoping that at the end of the year, a good number of corporates will be sitting on cash which they might deploy in mutual funds.

Mutual fund transaction figures show that they have been huge sellers in the market. While in the equity markets they have been net sellers, in the debt markets the gross sales are high, all indicators of mutual funds encashing to meet redemption pressures.

In September gross redemptions were over Rs 81,000 crore while the net outflow was Rs 4503 crore and the assets under management dipped to Rs 1.53 lakh crore.

In October gross redemptions were at Rs 62,000 crore, net outflows at Rs 3,715 crore and the AUM slid further to Rs 1.48 lakh crore. Figures how that during the period April to September 2004 gross redemptions in funds have been to the tune of Rs 4.11 lakh crore.

In September losses were across the board in income funds, balanced funds, liquid schemes, gilts schemes and also equity linked savings schemes.

In October income liquid and ELSS were the scheme categories which lost money. In the current month, there could be outflows in growth schemes again since investors are booking profits at the high levels.

Shyam Bhatt, fund manager at Principal MF agreed that there were redemption happening and said investors were becoming extremely cautious and preferring to sit on cash rather than stay invested and watch their portfolio depleting in case the 'bubble' burst.