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Mutual funds plan return to equity

Charulata Vaswani

Mutual funds are shifting focus from debt to equity. Industry watchers say fund managers are inclined to pare their exposure to debt, and prefer to raise investment in equity in the next financial year. This will mark the end of their bullishness on debt.

Between April 1, 2001, and March 11, 2002, mutual funds were net sellers in the equity market to the tune of Rs 35.99 billion.

In contrast, they were net buyers in the debt market to the tune of Rs 109.93 billion. However, the figures for March reflect the changing trend. Although funds continued to remain net sellers in the equity market, notching up sales of Rs 2.74 billion up to March 11, 2002, they also turned net sellers in the debt market for the first time since September 2001, with net sales of Rs 411.7 million.

Fund managers appear to be bullish on the country's stock markets. Given a choice between allocating funds for equity and debt in the coming months, most said they would opt for equity.

Alok Vajpeyi, chief operating officer of DSP Merrill Lynch Investment Managers, said: "The difference between the return on debt instruments and the equity markets valuation makes us positive about the prospects of equity. Typically, lower interest rates and price-earnings multiples have an inverse relationship. While interest rates have nearly halved over the past decade, the price-earnings multiples on the Sensex have not changed. This is an anomaly that should be corrected."

Nikhil Johari, chief executive officer of Alliance Capital AMC, said: "We are more optimistic about the equity market. The budget has taken away several incentives from debt funds. While these funds gave double-digit returns last year, their returns were negative in February 2002." He added there was also a lot of volatility in the debt market.

On the contrary, equity valuations are attractive. "With the US economy showing signs of revival, and technology stock valuations linked to those on the Nasdaq, we see the sentiment improving for technology and other sectors dependent on the US economy," Johari pointed out.

In contrast to the equity indices, which have been largely stable after the budget, the gilts market is volatile and the inverted yield curve has made it a riskier investment option.

Shailendra Bhandari, managing director of Prudential-ICICI AMC, pointed out valuations were cheap and a global recovery appeared round the corner. Interest rates have come down and privatisation has also provided an impetus to the equity market.

"We are not negative about the debt market. But it has to be kept in mind that next year, debt will not yield the same kind of returns it has done during the current year," he said.

During the current financial year, most funds opted to park money in the debt market with the equity market having a bumpy ride and investment in debt instruments yielding handsome returns.

Alliance Capital AMC, which had 56.68 per cent of its corpus invested in debt in December 2000, saw this figure climb to 63.32 per cent in December 2001, while investments in equity fell from 37.43 per cent to 29.63 per cent over the same period.

Pioneer ITI's exposure to debt, which stood at 23.48 per cent of its corpus in December 2000, more than doubled to 56.27 per cent in December 2001. During this period, its exposure to the equity market fell from 63.76 per cent to 38.11 per cent.

It was the same with Prudential-ICICI. From an exposure of 46.51 per cent in December 2000, its exposure to debt rose to 51.52 per cent in December 2001 while its exposure to equity dipped from 35.13 per cent to 17.39 per cent.

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