Stocks surge washes out equity fund inflows

Stocks surge washes out equity fund inflows

Mumbai: Net inflows into Indian equity mutual funds are set to drop about 90% in 2009 from a year ago period as investors liquidate their fund portfolios, taking advantage of a sharp surge in domestic share market.

While many investors are booking profits after recovering their losses of 2008 when Indian shares had dropped by more than half, others are growing wary of market valuation and prospects of domestic shares in 2010.

Investor appetite has also been hit by sulking distributors who are not enthusiastic to push funds to clients after India’s market regulator banned entry fee charged by funds from 1 August, cutting their fees.

“The biggest problem is the investor mindset," R.S. Srinivas Jain, chief marketing officer of SBI Funds Management, said.

“They have not been comfortable with the sharp surge. The volatility has made them encash their returns."

Drop in equity fund inflows hurt money managers’ profits the most as they earn up to 100 basis points in management fees, the highest among all major fund categories.

Stocks up, sparks caution

India’s benchmark stock index has surged about 80% in 2009 and more than 110% from a low in March.

This has helped equity funds generate average returns in line with the index with nearly half of them outperforming the main share index, according to data from global fund tracker Lipper.

But the swift surge is also making investors nervous about the market valuation.

“We have run ahead of fundamentals. Also, there are still concerns on the global economic recovery," said Chintamani Dagade, a senior research analyst at Morningstar India.

Net inflows into equity funds up to November 2009 was Rs34.35 billion, a near-90% drop from 2008 when they had collected a net Rs310.5 billion, data from the Association of Mutual Funds in India showed.

These funds have seen cash leaking every month from August and executives say that though the outflows have slackenend in December, the trend has not changed.

Between March and September, new investor folios created by equity-oriented funds have dropped, while relatively safer category of fixed income funds rose, indicating growing risk averseness among investors.

Dagade said a ban on entry fees had worsened the situation with many distributors shying from recommending mutual funds.

“One, they are not selling funds, and second, they might be pulling out investors’ money and asking them to put in other products," Dagade said.

The ban threatens the incomes of over 87,000 distributors, agents who sell funds for a fee and bring in more than 90% of the business to money managers.

Beyond a handful of firms such as Reliance Capital Asset Management and UTI, Indian money managers have limited reach and rely heavily on distributors to build up their client base.