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Dec 22, 2008

Mutual Funds Trimming Their Exposure

Mutual funds (MFs) are trimming their exposure to equity and are increasingly holding on to cash looking for the best opportunity to invest. Cash holdings of diversified equity MFs have almost doubled to 21% of the total net asset value (NAV) of funds since April. In all, funds have Rs 12,404.3 crore as cash holdings in November. Equity exposure peaked to 89.3% in April when the total NAV of funds hit a high of Rs 98,912 crore, data shows. Funds have increased their cash holdings by about 7% since August.

Escorts Tax Plan, Sundaram BNP Paribas Select Focus, Reliance diversified power fund and UTI long term infrastructure advantage fund are some of the funds sitting high on cash. They have more than 40% of their holdings in cash and cash equivalents. Some fund managers are waiting for the uncertainty to end before making any new investments. "We are looking for some improvement in the overall sentiment. Since there is a lack of clarity it is not possible to take a risk and invest," says R Srividhya who manages Sundaram Select Focus and Capex Opportunities funds. "We have been investing gradually.


There would be some clarity when results are out in January," she says. "Funds are waiting for an opportunity to buy good undervalued stocks. There has been a lot of volatility in the markets with a downward bias and so they are holding cash," says a senior official with a fund house. "This (higher cash) reflects the tendency to take advantage of the expected weakness in markets," HDFC Securities analyst Tiju K Samuel said in his research note.


Capital flows to emerging markets are hit by financial crisis in the US. But after the recent rate cuts and the dollar's weakness, fund managers expect things to improve slightly in the near term. Sensex and Nifty fell by 7.1% and 4.5% in November. Some funds, which are high on cash, have managed to escape the precipitous fall in markets. Reliance Equity Fund, Escorts Growth, IDFC Imperial Growth and UTI Infrastructure Advantage, which have a high exposure to cash, fared better than their peers in the past three months.


Equity MFs have also upped their exposure in public sector banks, pharmaceuticals and personal care product firms and power generation companies. Predictably, they have reduced their exposure in private sector bank, refineries, construction, auto, steel and entertainment scrips in the past month.Mid-cap funds have started investing in large-cap stocks in a highly volatile market. Now, 5 out of their 10 holdings are in the large-cap segment.

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