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Mutuals lose out to company FDs in June

Aabhas Pandya

The sharp erosion in net asset values of equity funds and volatility in debt funds has led to a perceptible slowdown in investments from investors in mutual funds with a large dosage of investments now moving to company fixed deposits. Although the exact quantum of slowdown in collections is not available, fund houses say June has been a particularly bad month in attracting fresh investments.

In the last one-month, more investors are opting for the assured returns in company fixed deposits rather than putting money in mutual funds. Financial intermediaries say there has been a sharp jump in sales of fixed deposits. ''If a sales desk was getting 20 per cent investments in fixed deposits, it has gone up to 40 per cent now,'' says an official with a financial intermediary. ''Thousands of investors had earlier this year put money in technology funds but are yet to see any returns with NAVs of all, except one, below par. Naturally, retail interest in equity funds is not there. On the other hand, investors feel there money is safe even if it is earning around 11-11.5 per cent in FD of a AAA company,'' says the Delhi-head of a private sector AMC.

While equity markets did look up in June, sales heads say the retail investor is still waiting on the sidelines after losing heavily in the last three months. On the other hand, short-term investors are shying away from putting money in debt and gilt funds, given the volatility in debt markets.

''Some short-term investors are opting for cash funds while there is some retail interest in medium-term debt funds, after equity funds lost heavily. Though by and large, new investments are missing, fortunately there has not been much redemption pressure,'' points out the regional manager of a mutual fund. ''The average number of applications in our fund has dropped from 200 a day to around 50. It seems we are back to late 1998 when the fund industry was just beginning to look up,'' adds another area manager of a private sector mutual fund.

The last couple of months have seen returns from debt funds take a knock, as hardening of interest rates led to a fall in prices of debt instruments. The higher exposure to government securities in some debt funds has only added to the slowdown in growth of NAV as gilts have suffered the maximum price erosion. The growth in NAVs of 26 open-end debt funds has slackened by an average 1.24 per cent between April 30 and June 30, 2000.

For instance, Alliance Liquid Income had given a one-month return of 2 per cent in April when bond prices had rallied on the back of CRR and bank rate cuts. While the NAV of the fund is still growing, it is up only 0.54 per cent and 0.27 per cent in May and June, respectively. Sundaram Bond Saver, which was up 2.31 per cent in April, has moved up only 0.22 per cent in the one month ended June 30, 2000. While there is a clear slowdown in growth of NAVs in most debt funds, a couple of debt funds have also posted a negative return in June.

On the other hand, equity funds have lost an average 17.6 per cent in the last months ended June 30, 2000 while the balance category has seen average erosion of 11.34 per cent. In some funds, losses have been far more severe with the NAVs dropping by 35-40 per cent in the last three months.

''The retail interest is clearly missing in the market though some funds have got some investments from corporates on account of sale of assets or foreign investors picking up stake in companies. With equity markets in doldrums and interest rates likely to inch up further, even July does not seem to be a good month for collections,'' says the Delhi head of a private sector mutual fund. ''However, what we are telling investors is that it is good time to buy since bluechip portfolios are available at attractive NAVs,'' he adds. Clearly, it seems it will take some more time before the fund industry sees the euphoria in collections, as witnessed early this year.

Source: Value Research

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