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Mutual funds as contrarians

Aabhas Pandya

Mutual Funds have emerged as contrarian investors amidst the bloodbath on the bourses in the last few months. An analysis of the transactions in the last four months since February 1, 2000, shows that mutual funds were active sellers when the markets peaked in February but emerged as selective buyers when the valuations started to crumble.

Thus, while funds were net sellers of equities worth Rs 6.63 billion in February (the highest for the year so far), they were net buyers of stocks worth Rs 2.86 billion last month. Incidentally, the net investment of Rs 2.86 billion in equities is the largest investment so far for the current calendar. While the Sensex touched its all-time high of 6150 points on February 14, it hit an 11-month low at 3831 points on May 23.

The fact that fund managers have continued to buy in a falling market is nothing great to talk about. Any fund manager will hunt for quality stocks, which are going for a song in a sliding market. However, it does speak volumes about the maturing Indian investor. The average mutual fund investor has not panicked in the meltdown but has stood by his investment.

This also puts to rest the rumour of a run on equity funds; especially the technology funds, which saw a record mobilisation early this year. With investors willing to wait and watch, it has given fund managers some breathing space to hunt for bargains rather than selling stocks in a falling market to meet redemption.

"The fund flow remains steady in our equity funds with an average number of 1500 applications per day since April. In fact, the steady inflow is a sign of increasing maturity where investors see such downsides as buying opportunities rather than signs of a crisis," says Prem Khatri at Kothari Pioneer Mutual Fund. "Most investors are now beginning to understand the downside associated with investments in equities or sectoral funds like IT funds. Hence, they have entered these funds with a medium- to long-term perspective," adds the marketing chief of another mutual fund.

Month	Gross purchases (Rs billion)	Gross sales (Rs billion)	Net investment (Rs billion)
February	29.67	36.30	-6.63
March	27.74	26.05	1.69
April	13.75	12.84	0.91
May	13.20	10.34	2.86

Source: Value Research

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