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After missing out on the sharp rally on the day the results of the 2009 Lok Sabha elections were announced, equity fund managers have decided to stay invested this time.
“It is unlikely mutual funds will take cash calls this time because they were caught on the wrong side in 2009, when the markets went up,” said Dhirendra Kumar, chief executive, Value Research, an online mutual fund tracker.
On May 13, 2009, when the results of the previous Lok Sabha elections were announced, the markets had hit the upper limit, leaving mutual funds with cash calls, some as high as 35 per cent, high and dry. This time, despite the imminent volatility, fund houses have decided not to sit on cash piles. Now, cash calls are restricted to two-three per cent of the corpus.
“As fund managers, we are expected to be invested at all points. Increasing cash calls can go against us this time. We don’t want to take that chance,” said the chief investment officer of an Indian mutual fund.
Not oblivious to the fact that markets could correct if the election outcome, to be announced on May 16, isn’t on expected lines, some fund managers have hedged their exposure through derivatives. “We are not looking to do major changes in the portfolio we have been holding in the recent past. We may hedge our bets only for stocks that have run ahead more than fundamentals or where we see a reason for a correction in case of disappointment,” said Nandkumar Surti, chief executive officer, JP Morgan Asset Management.
Since the beginning of this year, several large-caps such as Larsen & Toubro, State Bank of India, SBI, ICICI Bank and ONGC have gained about 30 per cent each.
According to regulations, mutual funds are allowed derivatives exposure in stocks only if the scheme concerned permits this. For schemes that do not allow derivatives exposure, one has to take special permission from unit-holders.
Officials of fund houses said while most new funds had derivatives exposure, most old ones weren’t allowed to take derivatives bets.
For funds without derivatives exposure, fund managers are looking to resort to a defensive strategy. “While most of our funds do have derivatives exposure, for those that don’t, we will consider a strategy of some increase in cash calls and higher exposure to defensive sectors such as information technology and pharmaceuticals,” said S Krishan Kumar, head (equity), Sundaram Mutual.
Through the last five years, the mutual fund industry has been faced with redemption pressure, as investors have been exiting at every high in the markets.
While a redemption scenario sees fund managers increasing cash calls, this time, the situation is somewhat different. “Last time, the market was relatively illiquid. There were thematic funds that had poorly-traded stocks. But this time, the volumes are such that the market has become very liquid,” said the chief investment officer of a domestic mutual fund.
While redemptions were slowing, fund managers said retail investors might not be entering the market. “We have been seeing inflows into mutual fund schemes from retail investors, but that is still not a significant number. Going into the elections, the Indian investors has always been under-invested,” said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management.
ONCE BITTEN…
* MF cash calls down sharply this election as compared to those during the 2009 elections
* Fund managers upped aggressive bets to cash in on election euphoria
* Use derivative bets to protect against volatility instead of selling in cash
* In some cases, take exposure to defensives as hedging strategy
