Cash-rich funds may go for the kill

Small- and mid-cap mutual funds will be looking at the meltdown on the Street as an opportunity to invest at lower prices as they have yet to deploy the over Rs 3,500 crore raised in the last two months. Also, they do not expect too much redemption from unitholders.

Top fund houses DSP Merrill Lynch, Reliance Mutual Fund, SBI Mutual Fund, CanBank Mutual Fund and LIC Mutual Fund have recently launched schemes, most of which are close-ended and aimed at investing in small- and mid-cap equities for a long period.

However, these funds do not see the market fall to result into early redemption, as mutual fund investments into close-ended funds are seen as less volatile in initial phases of a fund. The BSE Mid-Cap Index fell by 4.13 per cent, while the Small Cap index shed 4.12 per cent on Tuesday.

"I do not expect the fall to create panic among investors of these funds. But, it could definitely affect their asset values to an extent," a fund manager with SBI Mutual Fund said.

During the May-June market fall, open-ended funds witnessed redemption worth Rs 5,500 crore, which was less that 5 per cent of then total equity corpus. The closed-ended funds virtually did not witness any big redemption as investors redeemed only investments worth Rs 5 crore during the crash.

"Mutual fund investments are normally aimed at long term capital appreciation. Given the rising number of close-ended funds, we do not think there would be more redemption pressure on old and new funds belonging to both categories," he added.

However, according to Dhirendra Kumar of fund tracker firm Value Research, the situation is tough for fund managers who have already established their portfolios, if the correction brings down the market similar to the May fall.

"In two days of fall, we have already reached the mid-October levels. Even though there may not be redemption, the funds could see a fall in their NAVs. Taking cue from this, the managers will have to maintain enough liquidity in their portfolios, which is very crucial," said Kumar.