BOMBAY, 18 March — The Indian stock markets might have got over the budget euphoria and its hang over too. But for the Indian mutual fund industry, it is only now that the real work has truly begun.
There is now a perceptible change taking place in the mutual fund industry.
Till now, citing the reason of the volatile stock indices, most of the funds had stopped giving a very high weightage to the equity funds and instead concentrated more on debt funds. This is now undergoing a change.
Very distinctly, funds are moving from back to equity from debt, marking the end of a bull run on debt funds. Take a look at these statistics. Between April 1, 2001, and March 11, 2002, mutual funds were net sellers in the equity market to the tune of Rs.35 99 billion. In contrast, they were net buyers in the debt market to the tune of Rs.109.93 billion.
Most of the well performing mutual funds, in the past year, had a distinct tilt favoring debt. Alliance Capital AMC, had 32 percent of its corpus invested in debt in December 2001. Pioneer ITI’s exposure to debt, stood at 56.27 percent of its corpus in December 2001. The same trend was seen in Prudential ICICI whose exposure in debt increased to 51.52 percent in December 2001. This not all. The debt-gilt category has seen a fall in its average yearly returns from 20.34 percent absolute as on Feb. 8 to 17.91 percent absolute for the year ended March 8. Debt-Medium Term schemes have seen a minor fall in the yearly average returns from 14.55 percent to 13.34 percent, while Debt-Short Term schemes witnessed a small rise in average returns from 7.76 percent to 7.97 percent.
But what is important to note is that Debt-with marginal Equity schemes went further with a noticeable rise in average returns from 7.1 percent to 9.7 percent.
But this has all undergone a change after the budget was presented on Feb. 28. The figures for March reflect the changing trend. Although funds continued to remain net sellers in the equity market, notching up sales of Rs.2.74 billion up to March 11, 2002, they also turned net sellers in the debt market for the first time since September 2001, with net sales of Rs.411.7 million.
But why this change in the focus? The reason is not very far to see. Over the past year, thanks to the two credit policies which have liberally cut the interest rates which have nearly halved over the past decade, the price-earnings multiples on the Sensex have not changed. Analysts say that this is an anomaly that should be corrected and this is automatically leading the funds to opt for equity funds over debt. Moreover, the budget has taken away several incentives from debt funds. While these funds gave double-digit returns last year, their returns were negative in February 2002.
It is not that the mutual funds have formed a negative opinion about the debt markets. But it is just that next year, debt will not yield the same kind of returns it has done during the current year. Why then the preference for equity markets? Most of the analysts confer that the in the present circumstance, equity valuations are indeed very attractive. They feel that with the US economy showing signs of revival, and technology stock valuations linked to those on the NASDAQ, they see the sentiment improving for technology and other sectors dependent on the US economy. Also interest rates have come down and privatization has also provided an impetus to the equity market.
Another point which goes in favor of the equity markets is that they have remained more or less stable after the budget. And on the other hand, the gilts market were volatile and the inverted yield curve has made it a riskier investment option.
Even the largest mutual fund of India, Unit Trust of India (UTI) is undergoing a complete overhaul, that too in some of its popular schemes. It is now reviewing its investment strategy for Mastergrowth, Mastergain, Masterplus, Grandmaster and other popular open-ended equity schemes. While most UTI fund managers feel that the fast moving consumer goods (FMCG) sector should be dumped for the time being, they perceive the cement, telecom, pharmaceuticals and banking sectors as growth engines of the future.
In Mastergrowth, fund managers plan to increase its exposure to sectors such as cement, information technology and pharmaceuticals. Fund managers are also planning to increase the exposure of Mastergain 92, another big scheme with a corpus of Rs.9.00-odd billion, to the banking, telecom and power sectors. Masterplus, a large fund with a corpus of Rs.5.20 billion, is positive on sectors like cement, pharma and automobiles.
Grandmaster, a small Rs.33 million scheme, is also in for realignment, increasing its exposure to quality stocks in the telecom, power and banking sectors, where the scheme is an underweight. In the coming days, though this shift in the focus is expected to continue into this fiscal, yields are expected to bounce back by the end of the month ahead of the credit policy on the expectations of a series of initiatives including rate cuts. So hold on to the debt funds, do not rush for any panic redemptions!
