MFs stay cash-ready for possible bottom fishing

The stock market is not showing any signs of fatigue yet, but mutual fund managers are not taking any chances. To seize the opportunity in case the market corrects sharply, and also as a safeguard against sudden redemptions, fund houses are maintaining cash levels as high as 20-25% (of their net corpus) in select schemes.

Monthly factsheets of mutual funds reveal that fund houses having focussed infrastructure funds are keeping more cash in their kitty than the rest. ICICI Prudential Infrastructure, AIG Infrastructure, SBI Infrastructure Fund, Birla Sunlife Infrastructure Fund and Reliance Infrastructure are sitting on a cash pile between 6-20% of their net corpus, according to mutual fund tracker Value Research. Brokers say one reason for this trend could be that most stocks in this segment appear over priced at current levels.

Baroda Pioneer Infrastructure Fund, which closed subscription recently, has about Rs 16 crore in cash waiting for deployment. At the fund-house level, Baroda Pioneer MF holds over 17% in cash as of July-end. If one takes a wider view, investors have not lost much as market has only risen around 1.5% over the past one month.

“Gains from investing at lower levels could be much more than the potential upsides from these levels. The market is currently in a trading range and we do not expect it to move in one direction. We’ll wait for good opportunities by sitting on cash,” said Rajan Krishnan, CEO, Baroda Pioneer Mutual Fund.

Mr Krishnan is of the belief that there are several good stocks that can be bought at current levels. Some infrastructure companies have become ‘good buys’ post the fall in prices due to extended gestation period and delays as a result of the monsoon, he added.

If one excludes the infrastructure pack, there are several equity funds as well that are holding high cash levels. Religare Equity (with 29% cash holding), UTI Banking Sector Fund (25%), Axis Equity Fund (21%), ICICI Prudential Advisor Fund (19%), Magnum FMCG Fund (18%) and JM Multistrategy Fund (14%) are amongst funds with significantly higher cash levels. Axis Mutual Fund (with 21% cash holding) and ICICI Prudential Mutual Fund (13%) lead the fund houses’ tally of holding large amounts of cash at July-end.

“In our case, we do not take cash calls; cash in our schemes could be related to our futures positions,” said Nilesh Shah, deputy managing director, ICICI Prudential Mutual Fund. “Market, for sure, is trading at a higher level. We are not very clear of the direction. But then, it surely has not become a bubble to short,” Mr Shah added.

According to institutional investors, domestic portfolio investors like mutual funds and insurance companies are not happy about the stretched valuations of Indian shares. At 17-18 times estimated one-year forward earnings, share prices appear expensive relative to historical valuations.

Several fund managers hold the view that market could slip into a correction mode at the slightest negative newsflow from western markets. If one goes by the recent BoA Merrill Lynch survey, fund managers eyeing Asia-Pacific are underweight on India, thanks to ‘pricey’ valuations.

Reflecting this sentiment, domestic institutional investors have sold shares worth Rs 13,000 crore since June this year. Of this, mutual funds have sold shares in excess of Rs 6,400 crore during the period.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/MFs-stay-cash-ready-for-possible-bottom-fishing/articleshow/6423537.cms

Banks gear up for tighter liquidity in September

Indian banks are likely to face further tightness in cash conditions next month as the second round of advance taxes are paid by companies, but the situation is expected to ease by the end of September on government spending, investors and analysts said.

Banks are already reeling under a cash crunch, following more than 1 trillion rupees of payments towards telecom spectrum, while higher rates amid rising inflation has led to expectations that the central bank may not act to ease it.

Short-term rates, which are driven by liquidity, are already rising on expectation of tightness coming up and are expected to extend their rise till mid-September, traders said. "Rates are already higher pricing in cash tightness and further incremental upside will happen but not big movements," said Murthy Nagarajan, head-fixed income, Tata Asset Management. The one-year overnight indexed swap rate may rise to 6.35-6.40 percent by end-September from 6.25 percent now, while the three-month treasury bills, which have already risen 53 basis points since July-end, may rise to 6.30-35 percent from 6.27 percent now, he added.

Currently, banks are borrowing around 100 billion rupees from the central bank's repo window in August which may go up to around 500 billion rupees in September following the advance tax payments. "The liquidity shortfall can go to about 400-500 billion rupees by mid-September, which is a large deficit for the market and that's why I feel rates are inching up faster," said Monan Shenoi, head of treasury at Kotak Mahindra Bank in Mumbai. Expectations of a mid-quarter rate increase by the central bank on Sept. 16, is also keeping up the upward pressure on short-term rates, said analysts.

EVERY QUARTER

However, dealers are not overtly concerned as they are aware that central bank intends to keep cash tight and banks can borrow from the repo window to bridge any liquidity mismatch.

"Every quarter whenever advance tax outflows happen you will see the money returning to the banking system with a week to 10 days time and that time you will obviously see banks borrowing from the RBI in the LAF window more often," said Kumar Rachapudi, a fixed income strategist at Barclays Capital, Singapore. "As long as banks have enough securities to borrow from the RBI from the LAF window, that will determine the amount of credit that can be disbursed to both public sector and to the government," he added. Mutual funds are also not too worried about the redemption pressure as these are anticipated outflows.

"Mutual funds are already having long term money... (they) anticipated this and have a lot of maturities coming up in September. So from a mutual fund perspective it can be managed," said K. Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund.

However, the pace of government spending will be the key to ease liquidity crunch given the onset of festive season in October. "The market is now at decent levels and higher rates, the currency in circulation will also return to the system," Nagarajan of Tata Asset Management said.

Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/Banks-gear-up-for-tighter-liquidity-in-September/articleshow/6421420.cms