Nishant Kumar / Reuters
Mumbai: Investors are shying away from Indian equity funds as a sustained slump in the stock market wipes out a major chunk of their stunning gains in 2007, but the industry is not yet facing pressure from redemptions.
Diversified stock funds delivered returns of nearly 60% in 2007, as the benchmark stock index rose 47%.
But with the market down about a quarter so far in 2008, investors have seen the value of their holdings cut by almost a third and have started cutting back on new investments.
“There has been a slowdown in the flows of equity funds in the last two months,” Sanjay Prakash, chief executive of the Indian fund unit of HSBC, told Reuters.
“We are seeing net inflows every day, but very small amounts,” said Prakash, whose firm saw its average monthly assets drop 0.95% to Rs184.7 billion ($4.3 billion) in the six months ending May.
Mesmerised by a six-times rise in the stock market in the five years to the end of 2007, investors saw a 23% drop in the March quarter as a buying opportunity, pouring in Rs449 billion into the funds, 67% more than a year earlier.
But as the market slump persists, euphoria has given way to caution. Flows into equity funds slumped to Rs45.9 billion in April, the lowest since August 2006, and about Rs48 billion in May, data from the Association of Mutual Funds in India (AMFI) showed.
The money is mainly coming from preset investment plans where a fixed sum is deposited regularly into the funds. The industry body estimates there are about 3 million such accounts.
“Slowdown is in the high net-worth and institutional segment,” said Vikrant Gugnani, the chief executive of India’s number one fund firm, Reliance Capital Asset Management.
He said big-ticket investors were no longer looking at stocks, shifting instead to real estate, gold and fixed-maturity plans, which are essentially close-end bond funds investing in securities in line with their maturity profile.
Investors may not be topping up their funds, but they are also not in a hurry to pull out of them. Outflows of Rs36 billion in May were lowest since July 2006, AMFI data showed.
Outflows from equity funds in January, when the stock market hit a record high and before dropping sharply, were more than two times those of May, but inflows were even higher at a record Rs212.5 billion.
Equity funds are not likely to see any major redemption pressure if the stock market held above 14,000 as investors would like to wait for a recovery, HSBC’s Prakash said, adding there might be higher redemptions if the market dropped below 13,000. Indian shares fell to a 2008 low of 14,645 on June 10.
While the market was trading above 15,000 on Thursday, Credit Suisse saw it falling to 13,000 by end-2008.