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From their participation in the equities market over the past three months, mutual funds (MFs) seem to have joined the stock market party. After dumping stocks worth a net Rs 18,000 crore since September last year, equity fund managers were net buyers in July for a third month in a row.
This happened after the Narendra Modi-led National Democratic Alliance (NDA) took office in May after the general election. In a little over two months since then, equity fund managers have net-bought equities worth Rs 7,000 crore. After being net sellers of shares in the previous five financial years, MFs have purchased shares worth nearly Rs 4,300 crore so far this financial year (starting April 1).
Higher inflows, coupled with a drop in redemptions, has provided fund managers the capital. A shift in investor preference from debt to equity, due to the sharp rally, has helped.
“The sentiment towards the market has turned positive. This has resulted in better inflows for the equity markets. Inflows have been coming from retail investors as well,” says S Naren, chief investment officer (CIO) of ICICI Prudential AMC, the second largest fund house.
Fund managers stepped up buying during the end of May. In July, MFs net-bought shares worth Rs 3,600 crore, after pumping about Rs 3,340 crore in the previous month.
Dinesh Khara, managing director, SBI MF, says: “We have seen flows predominately from the high net worth individual (HNIs) segment. Incremental inflows from the retail segment in equities have yet to gain a faster pace.” Adding that HNIs were showing increased interest in equities compared to debt funds.
Unlike foreign investors, fund managers are said to be going aggressively after mid-cap stocks. “They made an effort to increase their schemes' portfolio allocations towards mid-caps and small-caps. This has created reasonable alpha in many portfolios over the past six to eight months,” says Naren
The MF inflows since the election have been far higher than after the previous two Lok Sabha election results, of 2004 and 2009. During May-June, net inflows in equities surpassed Rs 9,000 crore. During May-June of 2009, the comparative net inflows were Rs 3,362 crore. And, in 2004, net inflows were negative.
Gross sales for the MF sector have been encouraging over the past three months. Data from the Association of Mutual Funds in India put those in May-June at Rs 22,500 crore.
However, with the benchmark indices gaining 15 per cent since May, valuations are no longer cheap. Still, fund managers are positive on the prospects of equity markets in the long term. “Over the next three to five years, we believe equities have the potential to provide reasonable returns. The market is fairly valued, neither cheap nor expensive. There is a huge play available for equity markets, with the earnings likely to improve,” says Naren.
