Numbers belie fears over MF redemptions
-------------------------------------------------------------------------------- Fears of massive outflows from mutual funds appear overdone going by the picture so far. Much of the erosion in assets is due to fall in the price of underlying stocks. -------------------------------------------------------------------------------- K.Venkatasubramanian October was a month of mayhem for the mutual fund industry with lots of noise on 'redemption pressures' and challenges faced by fund houses to maintain liquidity. But data from the AMFI (Association of Mutual Funds in India) from the start of this year suggests that the picture on redemptions is definitely not as bleak as painted. Not at least in the equity, ELSS and balanced funds, which have witnesses net inflows for most part of the year with a relatively small outflow in October. While equity funds' assets under management (AUM) have shrunk over 25 percent in absolute terms during the year, much of this is attributable to the market meltdown, rather than to investors actually pulling out money. In contrast, liquid/money-market funds have faced redemption pressures for most of the last few months. Withdrawals from these funds, which are a temporary parking ground for surplus money, are understandable in a scenario where corporates (the key investors in such funds) have faced a liquidity crunch. However, one category of funds that has been quite vulnerable to redemption pressures is income/debt funds, which have witnessed net outflows on a year-to-date basis. Here, we try and understand some of the trends and possible reasons for the patterns in mutual fund flows this year across fund categories. Equity Funds For eight out of the ten months this year, equity funds have witnessed net inflows; at the end of October, this stood at Rs 1926 Crore (compared to Rs 8,673 crore for the same period last year). Net inflows into equity funds, over the past ten months, actually rose when markets witnessed sharp corrections. For instance, there were net inflows into equity funds in January, March, June and September when the markets (the Sensex value) fell between 11-18 percent. This suggests that investors have actually perceived market corrections as an attractive entry point into stocks, at lower NAVs. October (23.9 percent fall) saw a break from this trend, when there was a net outflow of Rs 706 Crore. However, the outflows were not large enough to have caused any liquidity problems or pressures on the funds in question. The net outflowamounted to 0.5 percent of the total AUM of equity funds. Equity AUM has itself fallen by around 25.9 percent from the start of this year. This is largely explained by the erosion in market value of NAVs over this period. One key trend in equity fund inflows during this period was the shift in fresh money from new fund offers (NFO) to older open end funds from fund houses. Barring January-February when a couple of big ticket NFOs (Reliance Natural Resources Fund and DSP ML Natural Resources Fund) were successful, there has been little action in 2008. This has resulted in drying up of gross inflows which is in complete contrast to 2007 when NFOs contributed the bulk of gross inflows into equity funds. Existing funds may have seen inflows which indicates investor preference for funds with an established track record. The above trends suggest that lower net flows into equity funds are the result of fewer NFOs rather than an actual pullout of money by retail investors, so far this year. Despite markets falling over 50 percent so far this year, equity funds have had insignificant redemptions. The shift in inflows towards funds with a reasonable track record is also a healthy one. Income Funds Income funds have faced considerable outflows this year, with October witnessing the highest monthly redemptions. So much so, that the year-to-date picture for income funds is one of net outflows. As much as 21.9 percent of the assets under management with Income funds were redeemed during October. 70 percent of redemption has been on open-ended funds while about 19 percent is from the closed-end category. October's surge in redemptions could probably be traced to two factors. One, fixed maturity plans, a closed-end debt category, have witnessed outflows due to a number of factors - premature redemptions by investors jittery about portfolio quality, corporates redeeming for their own cash requirements and some instances of FMPs maturing. In open-end funds, hybrid income funds such as Monthly Income Plans, which have a certain percentage of their portfolio invested in equity, may have witnessed outflows. The market fall may have caused risk-averse investors to exit such funds. With October's numbers, overall AUM for income funds has shrunk by 2.7 percent during the year, suggesting a fall in returns or outflows. However, the contribution of debt funds to overall AUM has actually risen from 36 percent to 49 percent this year. ELSS Funds This equity fund category has witnessed net inflows every single month this year. This peaked during March, being the closing month for all tax-planning investments for the previous year. Outflows also appear to have been effectively deterred by the lock-in period of three years, stipulated on these funds. Most tax funds which are in operation today have managed reasonable returns over a three year period, even after factoring in the meltdown. Investors who have stayed with their tax saving funds for three years may not have been keen to withdraw at this juncture. Staying invested may help them benefit from market upsides from current lows. Liquid and money-market funds Liquid funds have traditionally experienced considerable volatility in their assets, as their key investors are institutions and corporate treasuries rather than retail investors. Redemptions from liquid and money market funds spiked in March, June and September 2008, following historical patterns as these are months when companies may need additional liquidity to pay taxes and advance taxes. However, redemptions this year have also been influenced by tightening liquidity over the past four months, corporates facing a funds crunch and an investor flight to safety. Worries about a deteriorating credit environment have led to corporates and institutions moving to fixed return investments such as fixed and bulk deposits as also hard cash. Interest rates on alternatives such as bank deposits started to rise sharply in the second half of the year. These offered attractive and safer options, atleast for high net worth investors, which may explain some of these non-seasonal redemptions. Conclusion Clearly, the fears of massive redemptions in mutual funds appear over done going by the picture so far this year. Much of the erosion in the AUM of various funds is attributable to fall in the prices of the stocks underlying equity funds. The fact that there have been redemptions even in liquid and income funds also suggests that there could be considerable cash sitting on the sidelines, as investors wait out the current phase of uncertainty and unprecedented volatility. http://www.thehindubusinessline.com/iw/2008/11/16/stories/2008111650150700.htm The only use of an obstacle is to be overcome. 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