Financial Daily from THE HINDU group of publications
Thursday, Mar 11, 2004
Markets - Mutual Funds
MFs unlikely to face redemption pressure
Mumbai , March 10
UNLIKE in the past, this March would be an easy ride for mutual funds. The pressure on redemptions corporate and retail is anticipated to be low this March, according to fund managers.
In March 2003, the mutual fund industry saw redemptions aggregating to over Rs 41,500 crore, 48 per cent of the total assets under management. This year fund managers expect redemptions to be under 30 per cent of total assets managed by them.
The redemption impact on income and balanced funds is higher as the share of corporate participation in their corpus is larger.
Corporates and banks tend to redeem their mutual funds investment in March to comply with advance tax requirement and to show cash reserves in the balance sheet.
"Only banks that have a tight capital adequacy ratio are likely to redeem this year. As for corporates, mutual fund investments are no longer looked at as speculative, so acceptance of these in the balance sheet is as high as a line item indicating cash reserves," said Mr Amitabh Mohanty, Head - Debt & Fixed Income, Alliance Capital.
"There has not been significant redemptions in the last 10 days. Also, there are only two days left to redeem, if the funds are required for advance tax payments. This is a clear indication that this year is bucking the March trend," said a fund manager.
"This year has witnessed high volatility coupled with concerns over inflation. Because of this, investors have moved to floating rate or liquid instruments in the last few months. Investors used the market movements and the six large public issues to rebalance their portfolios. So this year, the steady state has been achieved well before March," said Mr A. Balasubramanian, Head - Fixed Income, Birla Sun Life Asset Management Company.
Contrary to trends, this year has witnessed inflows into funds including equity funds as many investors are using the dips to enter the market, according to Mr Ved Prakash Chaturvedi, Chief Executive Officer, Tata Mutual Fund.
In normal times, most funds are fully invested or hold maximum of 2-3 per cent in cash reserves. This shoots up to nearly 10 per cent in March.
This year, most funds are maintaining 5-7 per cent in cash, reflecting the optimism of fund managers.
"This time around, March is going to be very different. Foreign exchange inflows are continuing and liquidity is not a concern. The part of the portfolio that is maintained as cash reserve is not very high, portfolio managers are aware that the system is sloshed in liquidity, so even if they have to sell debt instruments, they can sell at a good rate," said Mr Mohanty.
"January and February witnessed some retail redemptions - to invest in the IPOs as well as in instruments for tax savings. Since this happened at a time when the market was highly volatile, the redemptions were made up by fresh entrants into equity funds. So the overall balance was maintained," said Mr Rana Kumar of Karvy Distribution Services.
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