Cash-rich Mutual Funds play cautious

By ET Intelligence Group

Unitholders of equity mutual fund (MF) schemes will not be able to redeem based on Monday���s net asset value, as fund houses declared Monday a ���non-business day��� for equity and hybrid schemes. This is because several stocks were not transacted, after exchanges halted trading, with indices hitting the upper circuit filter.

Just like retail investors, MFs were also in a helpless situation, as the surge was too rapid for these institutions to do any transactions. So, Monday���s surge would remain a hypothetical benchmark for MF investors.

Fund managers said they were not excited by the abnormal surge in the market and would have stayed on the sidelines or booked profits if trading was not halted, as they felt aggressive stock purchases at these levels were risky. This is because current stock valuations have turned pricey and if the market continues to rise, it will factor in even earnings growth estimates of 2011-12, they said.



���A stable government and the confidence of stable reforms and policies will bring FIIs back to the country and we will move towards a bull rally gradually. But for now, those (MFs) sitting on heavy cash are likely to limit their (buying) ideas,��� said A Balsubramanian, CIO, Birla Sun Life Mutual Fund.

Including the surge on Monday, benchmark indices have risen roughly 50%, without any significant correction, over the past couple of months. But many MFs have not been able to capture these upsides, as they chose to sit on cash in anticipation that the market would revisit the existing lows.

Fund managers felt a correction, triggered by a possible disappointment in the general election results, would be the right point to invest. But the thumping Congress victory upset their plans. Though the undertone is still positive, and there is a likelihood of the market rising further, fund managers are unwilling to commit their cash at this juncture.

���While the political stability may bring FIIs back to the market, there is not too much comfort in terms of valuations,��� said Nilesh Shah, deputy managing director and CIO, ICICI Prudential Mutual Fund. ���We are neither anticipating aggressive deployment of cash nor profit-booking at these levels by MFs. However, there will definitely be active churning of portfolios,��� he added.

As of April 2009, equity MFs held roughly Rs 14,500 crore in cash. Reliance Mutual Fund���s cash as a percentage of its total equity assets was the highest at over 26%. The ratio was 17% for UTI Mutual Fund, 11% for ICICI Prudential Asset Management and 12.5% for Birla Sun Life Mutual Fund, according to Value Research.

Fund managers only hope the market does not rise sharply from these levels, as their schemes would underperform benchmarks, if they choose to hold cash. The phase in 2008, when funds chose to stay out of the Sensex rally from 14,000 to 17,000 and their decision to re-enter after the index crossed the 17,000-mark, is still fresh in their minds.