The Indian mutual fund sector is resounding with the echo of war drums beating in Iraq. So far considered as the safest avenue of investment for retail investors, mutual funds—especially fixed-income debt funds—have been witnessing a huge outflow from their kitty. The combined net outflow during the month of February touched a whopping Rs 5,500 crore. March is expected to be no better. Considering that the financial year is coming to a close, big players are expected to book profits to avoid war risk. The cloud of uncertainty engulfing the markets could be the main reason for panic-stricken investors to pull out their money from mutual funds. Interestingly, financial institutions, which park part of their funds in income and short-term debt schemes, have played the spoilsport. Reflecting the mood, income and short-term debt, actively managed and gilt funds witnessed total outflows of Rs 9,500 crore. While part of this (around Rs 4,000 crore) was switched to liquid funds, net outflows were to the tune of Rs 5,500 crore. The outflows were largely by institutional investors. “Fixed income funds witnessed a testing period as sentiment was very bearish and investors and fund managers positioned conservatively. Returns were positive, following the sharp fall in yields on the day of the budget. Moderating expectations, event uncertainty, tighter liquidity, rising inflation and widening corporate spreads were reasons for the poor performance until the February 27, 2003,” said a study by DSP Merrill Lynch. On the positive side, liquid funds benefited from the risk aversion in the markets. “Flows were likely on account of near-term uncertainty and switches through the month. Average maturity fell from 76 days to 55 days. The sudden spurt in assets might not have been deployed immediately thus increasing the cash/call component,” the Merrill Lynch study said. What’s more, the falling interest rates and the volatility in the securities market prompted investors to pull out from debt funds. “Average maturities were governed more by changes in allocation due to flows, rather than duration strategies. Maturities were largely reduced though maturities in some fund categories slightly increased. Some funds were taking a contrarian call on the market,” said a fund manager. “Funds with lower mark-to-market exposures such as short term funds are likely outperform. Investors will yield better returns if they direct their investments to liquid and floating rate funds,” said the DSP Merril Lynch study. Investors are already upset with the Finance Minister Jaswant Singh for cutting the interest rate across the board. “The investment climate has turned from bad to worse. The reduction in provident fund (PF) rates will have its impact,” said stock dealer R.A. Podar. But investors are closely watching the performance of fixed-income funds. On long-term funds, the Merrill Lynch study says “Our long-term view remains largely unchanged. However, if the correction in the markets is large on account of sentiment or in reaction to a war, if any, then we would recommend adding to income and gilt funds.” In the case of short-term debt funds, it said the assets in this fund category halved as investors redeemed close to Rs 7,000 crore in February. The fall in returns was marginal when seen in light of the fact that the redemptions were large and this category of funds was positioned aggressively. The exposure to gilts fell drastically to 0.74%, while the allocation to cash increased marginally. Income funds too, witnessed large redemptions since 9/11 as investors took a negative view on the markets. Gilt (government securities) and cash levels were reduced to meet the redemptions. While returns closed the month on a positive note, they were in negative territory for the most part on account of the weakness in the gilt segments and widening credit spreads. On long-term Gilt funds, the study says redemptions in this fund category were marginal compared with others. “There seems to be a segment of investors with relatively higher market awareness or long-term investment horizon that keep monies invested. Average maturities fell and cash levels climbed,” it said. Will there be more outflows from fixed-income funds? One will have to wait and see so hold on to major investment decisions in this segment for now.
