High-altitude Sensex leaves fund managers breathless

Investors keen to cash out when the returns are high throw equity fund managers' calculations out of kilter

In the past, when the Sensex crossed the psychologically important 20,000-mark, it mostly brought cheer to equity fund managers. At present, though, the elevated Sensex levels are making them uneasy.

This is because many investors consider the Sensex crossing 20,000 a good time to redeem their investments. This is happening now, said fund managers.

In this month, as of Monday, showed statistics from the Securities and Exchange Board of India (Sebi), mutual funds (MFs) sold shares worth Rs 2,800 crore. If this pace continues for the rest of the week, fund houses could end with the highest such sales for several months.

"Last month gave an opportunity to enter the markets. The industry also got fresh inflows. We also used the cash holdings to buy. But we did not know that within a short span, the markets would climb to nearly their earlier highs. In short, we bought only to sell in a matter of weeks, to service redemptions," said the equity head of a mid-sized fund house.

According to sector officials, on an average, equity schemes had cash holdings of four per cent; in some cases, as high as 10 per cent. This was deployed in the markets last month. Investors pumped in fresh money of Rs 458 crore and fund managers bought shares worth Rs 1,607 crore, nearly four times the net inflow.

According to the chief investment officer of one of the largest fund houses, "Investors are unable to think anything beyond an exit strategy during such times. The kind of participation is no more there that we witnessed when the markets were at higher levels earlier. We have no comfort and at the back of the mind before investing, we are bound to think whether it is sustainable or not."

This is the plight of fund managers who are unable to ride on the rally, as investors tend to pull them back. "Even at these levels, if the Nifty VIX remains in the range of 25-30, which is quite high, it impacts our investment calls. We tend to increase allocation to cash and cash equivalents and miss the bus. And, in this case, we leveraged and deployed most of our cash holdings, only to face redemptions," says the equity head of a foreign fund house.

Buoyed sentiment had made officials expect investors would return to the markets, as August was seeing far lesser exits. After almost 18 months, the number of equity folio closures dipped below 100,000 in August, a big comfort for the segment.