Mutual funds play it safe, increase cash holdings

Sensex tanks on worries over euro, Korea.

Amid renewed global uncertainty, cash levels in the mutual fund industry are on the rise. While data will be available only next month, fund managers Business Standard spoke to said cash holdings were expected to go up.

This month, the benchmark CNX Nifty has fallen 8.94 per cent, or 472.65 points, to 4,806.75. The Bombay Stock Exchange Sensex has plunged 1,514 points, or 8.64 per cent. The lessons learnt at the height of the financial crisis in October 2008 are still fresh in the mind, say market experts. Then, fund houses had witnessed massive redemptions amid crashing global markets, prompting the Reserve Bank of India to come to the rescue.

In January 2009, the MF industry was holding 11.46 per cent of its average assets under management (AAUM), estimated at Rs 9,729 crore, in cash. This was the highest in over a year.

In April, according to Edelweiss Capital, total cash balance of asset management companies (AMCs) in equity schemes was 5.2 per cent of the total corpus — Rs 10,100 crore as against Rs 9,100 crore in March. At the end of March, AAUM of the MF industry were estimated at Rs 7,47,525 crore, which rose 2.89 per cent to Rs 7,69,165 crore at the end of April.

Uneasiness at stock movements

But, for some fund houses, cash levels are higher than in January 2009. For instance, a smaller-sized domestic fund house has a cash holding of around 13 per cent, against 10 per cent in the middle of April. “Once stocks moved beyond our comfortable zone, we decided to sell,” said the equity head of a fund house which holds 75 per cent of its assets in equity.

“It makes sense to increase cash levels, as it will provide a cushion in an event of a drastic fall in the markets. We have increased our cash holding by three-four per cent and it currently stands at nine per cent,” said the equity head of a mid-sized MF.

According to the Securities and Exchange Board of India (Sebi) data, available till May 21, fund houses were net sellers in the equity segment.

Redemption worries

Tarun Bhatia, director (capital markets) at Crisil Research, said, “Due to a significant correction and volatility in the markets, fund houses want to keep cash. AMCs would like to have cash in hand, as volatility and corrections put redemption pressure. So, a mix of global uncertainty and redemption pressure is likely to lead to higher cash levels in May.”

“During May, cash levels may have increased in the industry. In certain segments which have seen more volatility, such as mid-cap funds, there may be higher cash holdings. In our case, mid-cap funds’ cash levels are around 10 per cent from seven-eight per cent earlier,” added the chief investment officer of one of the largest fund houses.

N K Garg, chief executive officer of Sahara MF, said it was always a good strategy to increase cash levels in anticipation of volatility in the markets. “Cash levels will definitely go up in such a situation. In our case, the cash holding is in higher single-digits, higher in comparison to last month. However, we have also used the volatility as an opportunity to get into the market,” he added.

Equity heads maintained the crisis in the European and US markets was not over. “They are simply being postponed with packages. We need to be ready with substantial cash in our pockets,” they said.

Sweta Sinha, senior research analyst at Icra Online, said there was a possibility of rising cash holdings in May. “If the market turns stable, then only will investment come in,” she added.

“Relatively smaller and new fund houses may not have large cash but top players are likely to sit on high cash levels,” said Crisil’s Bhatia.

Source: http://www.business-standard.com/india/news/mutual-funds-play-it-safe-increase-cash-holdings/396057/

MFs oppose Sebi plan to tighten derivative investment norms

Sebi’s proposal to tighten the norms for investment in derivatives has run into opposition from mutual funds with the industry lobby arguing that fund managers need access to some of the products the regulator wants to ban.

The Association of Mutual Funds in India (Amfi), the industry lobby, has sent its detailed response to the mutual funds advisory committee of the Sebi, which will take up the proposal at its next meeting on May 31.

Amfi said funds should be allowed to sell index futures, and write option subject to some safeguards.

When contacted Amfi chairman A P Kurian said: “We are compiling views of all our members and will soon send them to Sebi”.

The investment management department of the stock market watchdog has proposed that mutual funds not be allowed to write options or purchase instruments with embedded written options while recommending limits on the gross exposure on equity, debt and derivative positions.

It said that any derivative instrument used to hedge a risk must have the same underlying security as the investment being hedged. Effectively, the proposal rules out index derivatives, used by fund managers to hedge their portfolio.

Amfi has said since covered options are returns-enhancement strategy with risk reduction, they should be permitted with some limits. For instance, option exposure in a particular stock could be limited to 10% of net asset value.

It also wants market regulator to allow mutual funds to sell index futures against a stock portfolio, as it is the most efficient and cost effective way of managing market risk of the underlying stock portfolio.

It has suggested that a limit could be defined for such a hedge position as a percentage to the total stock portfolio.

The association has also opposed disclosure by way of trade summary and instead suggested that fund houses be mandated to disclose the outstanding derivative positions on a given date in a defined format.

Source:http://economictimes.indiatimes.com/Market-News/articleshow/5974880.cms