Redemptions in Mutual fund

October, 2008 saw the redemption pressure on the Mutual Funds (MF) due to the dearth on capital from fund houses due to various reasons. The major change was observed in the Income funds and the Liquid & Money Market funds. This has lead to RBI step in. It has provided a special window for short term credit of Rs. 20.000 crores in order to meet the redemptions pressure. The scheme wise reasons for the redemptions are as follows
ELSS redemption
The redemption from the ELSS was the least due to the three year lock in period and tax advantage issues.
Equity redemption
The change in the total Asset Under Management (AUM) of equity funds (i.e. fund investing 65% of total AUM in equity funds) was only 0.5% of the AUM of equity fund of the total MF industry as a whole. The reason for such a small change was that there was active buying of the fund units by long term investors.
Income fund redemptions
The reasons for high redemption from income fund i.e. 21.9% of the total AUM in income fund was
1) Fear among investors about the portfolio quality. The probable reason for this fear maybe that they are of the view that the money that is been invested my them in purchase of MF units is being invested in to highly risky projects or firms which may lead to losing of money if these firms defaults. And thanks to the downfall of the investment banks in USA which made their assumption concrete.
2) Corporate redemptions for their own cash requirement
3) And more over in October some of the Fixed Maturity Plans had matured hence there redemption also led to rise in total redemptions.
4) Due to the slowdown in the economy it is sure that the companies will cut their production and there fore less generation of profit, hence less dividend distribution, also there was less capital appreciation possible as the stock prices have already fallen down. This may led to low returns. Hence the investor would have thought of investing in fixed income generating schemes.

Liquid & Money market fund redemptions

If we study the past performance of this fund they have show much volatility because the main investors in this type of funds are the corporate and institutions who park their money into this type of funds exclusively because they have less maturity period and for their day to day requirements. This time the redemptions were made to pay the tax, advanced taxes & also due to deteriorating quality of the credit have led them to invest in Fixed Deposits.
The industry MF in India is still at it’s nascent stage, India still preference is given to investing in the schemes like assets like fixed deposits, PPF, bank deposits etc. So the investors with low to medium risk ability can invest into the MF schemes depending on his requirement. To my view investing in MF is a secured way of lowering your risk from harsh fluctuations in returns obtained by investing directly into the stocks. However it is also necessary to now when to exit from a scheme in order to avoid from losing money, rather than losing money, one may not be able to harvest the profit generated from the schemes. People usually forget the basic principle that buy the stocks when they no one wants and sell them when every one wants. But most of the investors just do the opposite leading to financial erosion. It is necessary for every investor to keep his hunger for risk checked because of this he end up making unwise decision which leads to repercussions which may have to be faced by him his family and those dependent on him.

Kalpakant C. Pawar
(Mutual fund advisor)
PGPABM – II
MANAGE, Hyderabad