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Behind large-scale mutual fund redemptions

NetScribes/Janaki Krishnan

These are difficult times for the mutual fund industry. Of the Rs 384.32 billion inflows the sector witnessed during the April-September period, Rs 336.79 billion has exited the funds due to redemptions or repurchases according to the figures available with the Securities and Exchange Board of India. This is more than 87 per cent of the total funds mobilised. For the whole of 1999-2000, redemptions and repurchases were only around 69 per cent of total mobilisations.

It is hot money (corporate monies, in this case) that has been finding its way into various schemes, and which is flowing out within a short span of time, accounting for the huge redemption or repurchase figures reported by the sector. The MF sector insists that it is not redemptions in the ordinary sense of the term - in other words, what is happening is that this money is short-term funds for the sector which it has factored in anyway.

None of the mutual fund sources were willing to go on record about the 'high-powered' money flowing into the sector. However, industry insiders confirmed that corporates who wanted to park their funds for a short time were pouring money into the MFs and redeeming it just as fast.

"This means that a large amount of money is available with the funds, which they are forced to park in liquid investments such as money market instruments," said a fund manager at a large public sector fund.

A lot of companies are flush with funds from recent IPO offerings. For such companies, putting money into income mutual funds having money market instruments and short-term debt instruments in their portfolios makes more sense, as these offer higher returns than long-term debt instruments in today's markets. Heightened volatility in interest rates has meant that longer term instruments have registered unsteady returns.

An interesting factor to be noted is that private sector mutual funds are mobilising more money and the redemptions are equally high - in the region of 81 per cent.

In this respect, it may be pointed out that there is a symbiotic relationship between the MF sector and the corporate sector. In the event of an imminent fall in NAVs, corporates are fast to react and exit at the earliest.

The withdrawal of hot money from the funds has an effect on the net asset values of the schemes depending on the quantum of money which has actually come in, the quantum of money withdrawn and the profits booked by the funds.

Shyam Bhatt, fund manager with Tata Mutual Fund, admitted that the redemptions were a cause for worry, but there was little that could be done as corporate fund inflows imparted more flexibility to the funds' investment strategies.

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