Mutually exclusive

EDITORIAL

If the capital market regulator Securities and Exchange Board of India’s data on the buying and selling activity of institutional investors in equities since January 1 are any indication, it can be safely assumed that they have behaved exactly as they always did. In a way they have set their own norm, and have not deviated from it. This may not necessarily be bad news for Indian equity investors who have placed their hard-earned money in the hands of professional fund managers. Since the beginning of the New Year, domestic equity mutual fund managers have sold more than they have bought. While this is in contrast with what foreign institutional investors have done — that is, bought more than sold — it is not unusual. Their contrasting styles were witnessed more often than not in the past. The difference between net buying by foreign institutional investors (FIIs) and net selling by domestic equity mutual funds, or vice versa, in the equity market has generally varied by a factor of five to 12. In other words, FII activity is five to 12 times that of domestic equity mutual funds. This is understandable, as prices in the market react sharply to just the trading volume when fundamentals such as earnings and profitability of listed companies do not exhibit any major surprises and are along expected lines. It is, therefore, likely that even moderately large buying by FIIs tend to send share prices and indices shooting, as has been the case over the past few weeks. Similarly, in a market that has gone upbeat after a prolonged period of depression, domestic equity fund mangers do get an opportunity to book profits on stocks whose valuations rise beyond expectations; or they reduce losses on investments gone awry. The past few years have been by far among the most challenging for all professional fund managers, domestic or foreign. On the performance front, domestic equity funds have not done badly in these challenging times. A majority of them have either outperformed the benchmark market indices or at least kept pace with them. Other than timing the market optimally, professional equity fund managers face the additional task of managing sudden outflow or inflow pressures in funds they manage. But the very open-ended nature of equity funds, which allows these inflows and outflows to occur in the first place, affording immediate liquidity, are one of the very few major reasons that still draws investors in. The acumen for picking stocks, timing the market and managing inflows and outflows to their funds are responsibilities whose importance to fund managers cannot be overemphasised. Notwithstanding the overall decent performance of equity funds and the acumen (or lack of it) to pick the right stocks at the right time, there is a noticeable herd mentality in the domestic mutual fund industry. The concentration of large-cap stocks, and fancying sectors such as banking and real estate in recent years even when signs of problems signs were easily visible, are just a few of the disconcerting areas. There are also attendant issues such as diminishing distributor enthusiasm due to low transaction costs mandated by Sebi. The majority of retail investors will still like to put their trust in professionally managed equity funds. That trust has not really been impaired, but not enhanced either.