Mutual fund NAVs are eroding for equity and debt

With a 10 to 11 per cent fall in the equity market benchmarks, Sensex and Nifty and a much higher fall in the mid-cap indices which were accelerated by a fall in financials, banks in particular, the equity mutual fund NAVs have turned negative for the last one month period.

Most of the mid-cap funds have borne the brunt of the sharp fall in the mid-cap stocks. Further, the funds with heavy concentration of mid-cap and small-cap stocks have seen their net asset value erosion during year to date period.

On the debt side the yield of government securities have gone up sharply and bond prices have fallen as the 10-year G-Sec yield has climbed up from below 7 per cent at the time of Moody’s upgrade of India’s sovereign in late October-November to 7.80-7.95 per cent range.

Negative returns

The fall in bond prices have impacted the performance of the bond funds holding government of India securities and some of them are showing negative returns as on March 20 for year-to-date period.

Anita Gandhi, whole time director, Arihant Capital Markets said, “ One out of three mutual fund schemes are showing negative return due to sharp correction in the mid-cap stocks. Schemes having larger weightage to the mid-caps or pure mid-cap schemes are showing negative return.”

“The mutual funds are seeing NAVs turn negative but as of now I have not heard of redemption pressure set in as it’s just a month. The redemption pressure could set in if funds are needed elsewhere or if other asset classes start doing well. So far, real estate or any other asset class are not doing well,” Gandhi said.

According to her, if for the second and third month repeatedly returns are negative, that may lead to redemption pressure. This was not the case at present.

Sunil Sharma, CIO, Sanctum Wealth Management said, “January is often said to set the tone for markets for the year. It is clear that the worsening macro picture is starting to impact bonds and equities.”

The tenor of the market has changed, he said. The VIX event brought a recognition of the volatility of equity as an asset class. Unfortunately, many investors have never experienced volatility, with the majority of SIPs having been formed in the past two years.

“As losses have mounted, particularly in mid and small caps, it is the nature of investment that many investors will bail out with losses rather than staying the course,” Sharma said.

Analysts see the current fall in mutual fund NAVs as an opportunity to invest more in mutual funds as correction has been quite sharp.

Ravi Ranjan Prasad