From the Big Crash in May 2004 to the Bear Hug two years later, it’s been an exciting ride for the markets. But one that has been marked by different investment strategies by two key players: Foreign Institutional Investors (FIIs) and Mutual Funds (MFs). Ever since the Bulls took charge, MFs and FIIs invested with the same zeal, strongly believing in the ‘India growth story’. That changed when the Sensex touched 8,000 last September. In six of the last nine months, FIIs have done the exact opposite of the mutual funds’ investment strategy. If the FIIs bought, MFs sold. And vice versa.Data with market regulator Sebi shows that in May, 2006, when the FIIs sold shares worth Rs 7,354 crore and the markets tanked, it was the MFs which provided them with an exit option by buying shares worth Rs 7,893 crore. But since June, MFs sold shares worth Rs 1,000 crore while the FIIs went on a buying spree worth Rs 1,437 crore. And in October last, when the FIIs sold shares with Rs 3,693 crore, it was the MFs which provided a cushion with purchases of Rs 2,981 crore.Even in March and April, during the exhilerating runup to the crash, MFs were far more bullish on the market than the FIIs.This time round, the MFs’ role reversed as jittery investors queued up to redeem their mutual fund units and inflows to funds trickled down. Industry insiders say that, in the last few days, some MFs have even doubled their cash in hand to 7-8% of holdings from 3-4% earlier to meet redemptions.Admitting that inflows to funds have come down, Chairman of Association of Mutual funds of India A P Kurien says MFs are just taking a long-term view and investors should not panic. ‘‘Each scheme has its own long-term investment objectives and they are finetuned to take a longer view of the markets than the FIIs. The recent crash though causes concern but funds are not getting overawed or panicking. They will always look for good shares and look value buying.’’This is the time, suggests Kurien, for small investors to get into a scheme—provided he has a 4-to-5 year investment plan. ‘‘Studies show that over a longer period of time, equities have given relatively better returns than any other investment options. Thus, investors should not panic,’’ he adds.But with the foreign funds planning to pull out further, all eyes will be on MF’s performance, which hasn’t exactly been shining. Though MFs reject facing any redemption pressure, the ‘opposite strategy’ is attracting attention considering that the stock markets depend heavily on foreign flows.Analysts contend that there could be many reasons for the FIIs to be buying, the primary one being arbitrage opportunities arising out of the volatility in the cash and futures market. ‘‘The stock markets have come down to a more reasonable level, but it is still at a premium to the other emerging markets. With the hike in interest rates and the increase in fuel prices some demand could slowdown and there we could see some earnings downgrades,’’ says Andrew Holland of DSP Merrill Lynch.Of course, analysts also contend that some FIIs could be buying into their favourite stocks because of the attractive valuations. Whatever the case may be, and whoever gets it right, there can be only one winner from this differing strategy.
