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Phoo: iStock
Phoo: iStock

Equity funds not under redemption pressure

  • Long-term investors should stay put and not redeem as markets are down by 29%
  • Fund houses say they are prepared to meet redemption requests, if any, in their equity mutual funds

The Reserve Bank of India’s (RBI) monetary policy announcements on 27 March, which aim to infuse liquidity into the system, are likely to address some of the concerns of debt mutual funds reeling under redemption pressure in the wake of the Covid-19 pandemic.

According to various reports, fund houses had approached RBI seeking a separate liquidity window to address the concern of rising redemption. The central bank had provided separate liquidity support to mutual funds during the global financial crisis of 2008, as well as during the 2013 liquidity crunch, when some categories of debt funds faced heavy redemption.

The debt as well as the equity markets are in a tizzy. Among debt fund categories, liquid funds are the worst affected. Some of them delivered negative returns over the past week as yields of debt papers in which they were invested in rose sharply. Meanwhile, the bellwether index, S&P BSE Sensex, corrected 38% from its peak on 14 January 2020 (over 32% in March itself) till 23 March. While it has recovered a bit, as on 27 March, it was still down by 29% from its peak.

The question now is whether investors in equity funds will also run to redeem their investments to restrict their losses, or show resilience like in the recent past. In February 2020, when the Sensex corrected around 6%, equity funds witnessed net inflows of 10,796 crore compared to 7,877 crore in January when the market corrected 1%, according to data from industry body Association of Mutual Funds in India.

Are equity MFs facing redemption pressure?

Though some experts said equity funds must be under redemption pressure already, the next set of Amfi data set to be released in April will shed some light on the numbers in March. Shyam Sekhar, chief ideator and founder, iThought, a Sebi-registered investment advisory firm, believes that fund houses are already facing redemption pressure, especially from investors who were dealing with the fund houses directly, without the help of an adviser. “Fund houses are capable of managing greed but not fear. Right now, investors are fearful as they don’t foresee any respite from the coronavirus, which is causing market correction. So investors who don’t have someone to tell them what they should do are redeeming," he added.

Fund houses deny there’s any redemption pressure on equity funds.

On 23 March, Radhika Gupta, CEO, Edelweiss Asset Management Co. Ltd, tweeted, “It is heart-breaking to see equity money switch to overnight funds, because there is usually nothing, but sheer fear behind that decision. Emotions are turning paper losses into real losses." However, she was referring to only some investors and not the category as a whole. In response to a query by Mint, she clarified, “I mentioned this because a few of the investors are doing this. They are switching from mid-caps or equities to overnight funds which are considered the safest funds." She reiterated that the fund house has not faced any significant redemption pressure so far.

Jinesh Gopani, head of equity, Axis Mutual Fund, also denied facing any redemption pressure. “Although the flows are not as encouraging as February, we, as a fund house, have received net positive flows in March so far," he added.

In fact, data provided by the Securities and Exchange Board of India of mutual funds’ investment in the stock market in March shows that funds have so far bought shares worth 21,119 crore against just 9,863 crore in February. If mutual funds were facing any redemption, they would have been rushing to sell their holdings. Mutual funds are actually net investors (they are buying more than selling) in the markets.

Are they prepared for high redemption?

It is difficult to predict how investors will behave in the current scenario but fund houses say they are prepared to meet redemption requests in their equity funds. “We are prepared to face the redemption pressure if there is any in the future," said Gopani.

When markets witness steep correction, fund managers would be expected to do some bargain hunting, but some of them are holding cash instead. “In the current situation, it is better not to catch the falling knife, but to invest slowly and steadily," said Gopani.

“We were holding 7-20% cash across different funds as per the February-end portfolio. We have only invested incremental flows during March and continue to hold cash around the same level as we were holding in February-end. We can meet redemption pressure equivalent to 5-10% of assets through our cash holding, while 20-30% can be met in a single day with some impact on cost, which, in turn, will depend on the performance of the stock market on that day," he added.

Gupta, however, doesn’t believe in taking excessive cash calls. “We always make a liquidity buffer by investing in highly liquid stocks so that we meet 5-10% redemption at any given point," said Gupta. “In fact, I can meet 100% redemption request in a month’s time in my funds. Even in our small-cap funds, we made sure there is high liquidity. We continuously check the liquidity stress statistics of our funds to ensure that the portfolio is liquid under all circumstances," she added.

While fund houses are prepared to face redemption pressure, it is not the right time for investors to redeem equity investments, especially when they are already down over 30%. So if you don’t need money urgently and are a long-term investor, stay invested. It doesn’t make sense to book losses and sit on cash, hoping to invest when the markets bottom out. That way you will be trying to time the market, which is not advisable.

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