Lingering suspicion

One would have expected that last year's bull charge in the stock markets should have resulted in heightened investor interest in equity funds.

All the more so because equity funds posted average returns of 93.50 per cent in 2003, much better than the 72.89 per cent recorded by the Sensex and the 71.90 per cent by the S&P CNX Nifty.

Yet the data on inflows and redemptions show that till October last year, mutual funds were net sellers in the market. That changed in the next three months, but February is once again showing net sales.

The latest available figures for inflows into growth funds and redemptions show net accretions of over Rs 2,000 crore in December.

That seems to indicate that while investors in mutual funds woke up late to the party, they did pump in substantial amounts in December and January, until the current weakness in the market and the volatility took their toll.

A more positive way to view the data would be that while net purchases of around Rs 1400 crore in the market this fiscal are very small, this is the first time in three years that the flows have been positive.

Analysing the data also shows that while inflows into equity schemes have been strong, redemptions have also been substantial.

While some of the selling by mutual funds may be on account of the hefty dividends they have distributed, it is also true that long-term investors have taken advantage of this rally to redeem their holdings "" a trend markedly at variance with the usual behaviour of the retail investor, who typically enters a rally at its top.

The data also indicate that far larger amounts have been flowing into debt funds. For instance, figures collated by the Association of Mutual Funds of India show that, in December, while growth funds garnered Rs 4,569 crore, income funds were able to attract Rs 19,990 crore, while short-term liquid funds mopped up Rs 37,870 crore.

Of course, redemptions were equally high in the income and liquid schemes, but there's no doubt that interest in debt funds has been greater.

More recently, interest in the Monthly Income Plans has increased, possibly a result of their debt investments being at the short end of the market, where a change in interest rates would have a less negative impact.

Liquid funds have become cash management tools for corporates, and the large volumes in these schemes are only to be expected.

The much lower volumes in growth funds seem to indicate that retail investors who are not high net worth individuals, still have inhibitions about the stock market in general and equity mutual funds in particular.

The UTI trauma and allegations of special favours shown to big investors by mutual funds have kept small investors away.

Nevertheless, retail investors now account for a large proportion of the investment in income funds, which shows that they are making the transition from bank deposits to debt funds.

Whether they are willing to take more risk and invest in equity funds depends on the level of trust that mutual funds can inspire, and the reach of these funds.

Only when there are strong domestic funds can India's stock market stop being hostage to the ebb and flow of foreign money.