Local funds are no longer following the footsteps of foreign institutional investors (FIIs). They are, in fact, moving in the opposite direction. Between 19 September and 26 September, when the 30-stock Sensex did its fastest ever 1,000-point sprint, local fund managers were selling stocks while their foreign counterparts were pouring in money.

On Thursday, too, when the benchmark index for the first time closed over 17,000 points, gaining 229, the trend continued. Nifty, the broader market index, also took a big leap to cross the 5,000 mark. The trigger for the rally was the US Federal Reserve’s decision to reduce its policy rate by 0.50% to 4.75%. That brought relief to global stock markets, worried about the impact of the US subprime mortgage problems.

India play: FIIs bought equities worth Rs7,871 crore during 19-25 Sep.

Going by the website of capital market regulator Securities and Exchange Board of India, during 19-25 September, domestic funds sold stocks worth Rs1,087 crore while FIIs bought equities worth Rs7,871 crore, net of selling. Since January, FIIs have bought $11.63 billion (Rs48,732 crore) in the Indian market. Incidentally, during the Sensex’s previous 1,000-point rally from 15,000 to 16,000, local funds were the big driver. After hitting 15,000 for the first time on 6 July, the Sensex dipped to a low of 13,989 on 21 August as the fear over a credit crunch gripped global markets. It finally reached the 16,000 level on 19 September. After buying into Indian stocks heavily in July, FIIs sold Indian equities worth Rs7,770 crore in August, whereas local funds bought equities worth Rs4,093 crore.

Most fund managers are surprised by the “sudden" 1,000-point rally of the Sensex over the past week. “The sprint from 16,000 to 17,000 gave us little time to react," said Sanjay Dongre, senior fund manager at UTI Mutual Fund. “We have neither made significant purchases nor sales during the period and we continue to hold an average 3-5% cash exposure across our equity funds to meet the usual liquidity needs."

Equity mutual funds got fresh inflows of Rs6,858 crore during August, which was much higher than Rs1,100 crore of inflows in the previous month. “So they should have ideally deployed this money in the market," said an equity analyst with a foreign brokerage who does not wish to be named. “However, that doesn’t seem to be the case and this indicates that funds have been sitting on cash."

As per data provided by Value Research, a New Delhi-based mutual fund tracking firm, 43 of the 228 equity-oriented mutual funds had held more than 10% of their assets in cash. On aggregate basis, these schemes increased their cash holdings from Rs7,660 crore on 31 July to Rs8,802 crore on 31August. Another fund manager of a top mutual fund house, who didn’t wish to be quoted, asked, “Is it necessary for us to buy stocks in this madness? We have just made selective purchases in non-index stocks." Few of his funds had held cash exposure as high as 15% in the end of August.

“Cash levels in our fund range from 2% to 10%," said Sanjay Prakash, CEO of HSBC Asset Management (India) Pvt. Ltd. “We are keeping 5-7% exposure to cash. It’s important to take a cautious approach."

In August, mutual funds found value, said Ajay Bagga, CEO at Lotus India Asset Management Co Pvt. Ltd. “But this time, there is a big divergence in performance. The selling this month is probably on account of individual investors cashing out on the rally."