Watch out for MF redemption data

Support from domestic institutions has been a silver lining in the latest sell-off in Indian markets. In the first half of this financial year, foreign portfolio investors (FPIs) were net sellers during four months. Data from depositories show the year began well, with such investors pumping in Rs 11,720 crore in April. In May and June, there were worries pertaining to a Greek default, while the Chinese stock market collapse and slowdown fears August and September led to selling.

As such, despite net inflows in July, FPIs took Rs 15,500 crore out of Indian stocks as of September-end.

On the other hand, mutual funds have been net buyers in all these six months; they net-bought Rs 48,390 crore worth of shares. Mutual funds clocked a stock purchase of Rs 10,533 crore in August, the highest this financial year (FPI selling peaked at Rs 16,877 crore during the month). In September, when FPIs sold Rs 6,475 crore of equities, MFs bought stocks worth Rs 8,671 crore.

The question is, has the structure of local markets changed permanently and can mutual funds continue to offer such support? The money investors are putting in mutual funds hasn't been very steady. Data from the Association of Mutual Funds of India (Amfi) show net inflows into 300-odd equity schemes dropped to a low of Rs 5,840 crore in July from a high of Rs 11,999 crore in June.

As reason behind the sharp drop in July was a spike in redemptions. From 27-30 per cent in the first three months, redemptions jumped to 56 per cent of the overall inflows in July, before moderating to 44 per cent in August.

Redemption levels have fallen from the highs of 96 per cent and 75 per cent in April and May 2014, respectively, taking their cue from heavy FPI inflows after the National Democratic Alliance government came to power at the Centre. As foreign flows took stocks to new highs, redemptions fell to 39 per cent in September 2014, before settling at mid-50s in the last months of FY15.

After the Sensex hit 30,000 in March, domestic investors cut redemption levels below 30 per cent April-June. This gave these funds some cushion to be buyers during the ensuing FPI sell-off.

Even if redemptions stabilise at around 50 per cent, their level during the corresponding period last year, the funds will have second thoughts: 50 per cent redemption amid foreign inflows is very different from that amid a sell-off by FPIs.

Redemption data for September, which Amfi will release in the coming days, could provide a clue to sustainability of the 'domestic support' to stock markets.

A second way of looking at the silver lining questioning whether mutual funds are being prisoners to their own inflow patterns, and catching falling knives. In the past, there have been instances of domestic institutions not reading warning signs quickly enough. Is history repeating itself?

Despite about Rs 50,000 crore of domestic funds going into the markets, the Sensex is about 10 per cent lower. That is a reality check on the strength of the domestics.

In a volatile global economy, the silver lining might last only till the next cloudburst.