Where do we go?

Aabhas Pandya

Where do we go? That's the question hounding the Indian fund industry after the recent carnage in both equity and debt markets. It is one of the rare occurrences, when equity and debt markets have seen simultaneous erosion in less than a fortnight. No wonder, fund houses have little option when it comes to selling or recommending funds for investments. The balanced funds have also been hit hard since they carry a mix of debt and equity instruments. While fund houses argue that it is indeed a good time to enter a fund, they also agree that there is lot of uncertainty surrounding the markets and do not rule out a further downslide.

Industry sources say so far there has been little redemption pressure on the funds. "Funds have been selling in debt markets to cut losses and stay liquid in order to meet redemption, if any. Those who want to invest or redeem are waiting for the markets to stabilise," says an official with a private sector asset management company (AMC).

"Even debt funds, which used to be steady and could be recommended for stable returns or when equity funds turned volatile, have also become so volatile," he adds. On July 21 and July 24, mutual funds have sold securities worth (net) Rs 800 million while they have been net buyers in the equity markets. Industry officials point out that amidst all the volatility, it is short-term debt funds and money-market mutual funds which can be sold to investors. "However, the problem there is that these funds hardly have a retail interest," says the marketing head of a Bombay-based mutual fund.

Fund houses also fear that a part of the fresh investments, otherwise headed for funds, will now move to fixed deposits. Some money already moved to fixed deposits in June, when mutual funds saw a drop in collections. "With the recent bout of volatility and interest rates moving up, we fear that the trend to invest in fixed deposits will only pick up as investors find fixed return with preservation of capital in AAA companies an attractive option," says a mutual fund official.

Since July 12, 2000, the Sensex has lost over 775 points from its recent peak of 5058.90 points. The hike in cash reserve ratio (CRR) and bank rate by the Reserve Bank of India only precipitated the fall, with the 30-share benchmark losing 275 points on Monday and heavy off-loading by foreign institutional investors.

In July alone, foreign institutional investors (FIIs) have sold equities worth Rs 15 billion till July 25. In the case of equity funds, the average decline has been around 11 per cent while balanced funds have lost an average 8 per cent between July 14 and July 24. The fall in equities has largely been triggered by sales in technology counters and index heavyweights.

On the other hand, RBI's reaction to guard a falling rupee has sent the debt markets in a tailspin with a sharp erosion in the net asset values (NAV) of debt and gilt funds. On an average, open-end, medium-term debt funds have seen a decline of over 1 per cent in a matter of just two days. The fall in gilt funds, especially those invested towards the longer-end of the market has been sharper, since government securities or gilts are most sensitive to any changes in interest rates. The impact is more pronounced in case of medium and long-term securities since these instruments carry a higher interest rate risk due to a longer tenure.

However, the current turbulence also carries some positive tidings. One, barring three, all diversified equity funds have lost less than the Sensex, which dropped 13.76 per cent to 4188.34 points in the bear onslaught. The technology funds have also lost an average 13.5 per cent. This in stark contrast to the sharp fall early this year, when the category of diversified equity funds lost 17 per cent against a 5 per cent drop in BSE Sensex for three months ended June 30, 2000.

Two, debt funds are still up from their March 31 levels when a cut in CRR and bank rate had led to a surge in NAVs. The category of open-end debt funds is still up 1.71 per cent from its March 31 levels. Thus, all those investors, who entered around that levels have not seen any capital depreciation.

Three, as the Delhi head of a private mutual fund puts it, "Investors are beginning to realise that investments in mutual funds is not for the short-term, even in the case of debt funds. This means that the time horizon for investments is increasing and the investor must learn to be patient with his investments."

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