Local mutual funds (MFs) are buying stocks again.

For the moment, at least.

They invested Rs1,459 crore in December, the first time since July 2009, when they had a net monthly buy of at least Rs1,000 crore. They did invest in Indian equities in May last year, but a mere Rs98 crore.

The buying last month was driven by two factors, according to fund managers. One, a fall in the market following the all-time high reached during muhurat trading on Diwali day provided buying opportunities. By the end of November, the Sensex index of the Bombay Stock Exchange had shed nearly 1,900 points, or 8.8%, from its highest close.

Secondly, asset management companies were sitting on a decent amount of cash. Value Research data shows undeployed cash as a percentage of assets under management (AUM) in diversified equity schemes was 6.5% at the end of November. This is a bit above the 5% average cash level they maintain. Several funds were holding as much as 25% of AUM as cash. This was the money that found its way into local stocks in December, fund managers said.

Graphic: Yogesh Kumar / Mint

Fund managers are divided about whether retail investors, who have shied away from equity MF schemes since February, would return to the market at the end of the year. Prior evidence weighs in the favour of the naysayers.

The issues that the MF industry has been facing since August 2009 remain. Fund managers still complain distributors aren’t pushing their products in the absence of an entry load, a fee that asset managers collect and pass on partly to the middlemen.

Secondly, after burning their fingers in the crash of 2008, retail investors still don’t have the confidence in entrusting their money to equity fund managers. The latter haven’t done much to win their trust. Four of every 10 equity funds covered in the Value Research database have underperformed the BSE-100 index.

India will likely have to fight for foreign fund flows with both developed markets and export-oriented Asian nations this year. But in their absence, those expecting MFs to support the local market may well be putting the cart before the horse.