Mutual funds hit by redemptions

Mutual funds have been hit severely by redemptions in the last couple of days as stock markets continue to tailspin.

Fund houses that were relieved at not seeing large outflows in May are now facing redemptions of Rs 100-250 crore a day since Monday.

"We are seeing a reversal of trend and there is incremental redemption pressure now. In May, redemptions were not very high as investors thought the markets would recover. Now, with the continued fall in the stock markets, investors are choosing to book profits," said Sanjiv Roy, chief executive officer, Birla Sun Life Distribution Company Limited, a third-party distributor of financial products.

Fund houses have been maintaining a higher portion of their corpus in cash during the last three weeks in order to be able to meet redemption pressure.

While only 2-3 per cent is usually maintained in cash, the fund managers have now increased this to 9-14 per cent. Despite this, they were forced to be net sellers in equities because of the higher than anticipated redemption.

Mutual funds were net sellers to the tune of Rs 417.42 crore on Monday, according to data released by the Securities and Exchange Board of India.

This is in contrast to their buying spree in the equity markets in May. Domestic funds were net buyers during all trading sessions of May, barring two. Market sources say three large fund houses with sizeable equity corpuses have been big sellers in the last two days of trade.

MF distributors and investment advisors have been pitching the slump in the markets in May as ideal entry opportunities. Net asset values have come down by 15 per cent and asset allocations were being reworked as some funds had become attractive.

But now, with voices on the street predicting the bear cycle to continue for the next few months, investors are reluctant to commit money to equity investments, according to them.

"There is also a slight liquidity crunch in the market now. Some clients who run small to medium-sized enterprises or are highly paid professionals have now stopped even their systematic investment plans. Of course, these are high-ticket SIPs," said Gaurav Mashruwala, certified financial planner.

Distributors say the advice now to investors who have met their investment objective is to book profits. "There are people who have entered funds in March, April and May, who have been hit by the slumping markets. We are advising clients who have met their investment objective and have taken the tax advantage to book some profits. But investments that have a long-term view can still be made; in fact, now is the time for asset allocation," Roy said.