Every downturn in the market is a buying opportunity in an expanding economy. That?s the first reaction of fund managers and investment analysts after the initial disbelief over this week?s frenzy. Even as all attention has been focused on the unwinding of foreign institutional investor (FII) positions, the segment of mutual funds has been rather quiet of late. The funds have, in fact, enjoyed an interesting year on the markets. They started on a very sedate note and, instead, built up their cash balances. In fact, mutual funds had showed a lower return in their flagship funds as the pile-up of investor money found few attractive investment outlets. The situation altered in July, when many FIIs exited to cover up their losses in the subprime meltdown. When the FIIs re-entered the markets some time later, they found that domestic mutual funds had developed large positions in several stocks. The subsequent bull run has partly been a result of the competition between the two. Yet, mutual funds still have huge cash reserves that are just not melting away. In addition, the government has recently liberalised the rules for public sector companies to invest in the stock markets through the mutual funds. The reserves with the PSUs are over Rs 2,50,000 crore.
There is another set of investors whose managers also have a problem. These are portfolio management services (PMS). Again, hard numbers are difficult to come by but the top five PMS have a sum of over Rs 50,000 crore between them. So, the sound bytes emanating from domestic fund houses in Mumbai are enthusiastic. It would be interesting to observe at which point these sums actually enter the market. The funds are convinced that it makes more sense to invest in India than abroad. This assessment is based on a long-term, sanguine view of the economy. The fundamentals are seen to be strong. So, it makes sense for investors waiting in the wings to join the rally at a downturn. Only if they do not do so, there would be reason to believe that the euphoria in the market is over. Otherwise, the correction in the stock markets could be an interesting opportunity to do some bargain buying.
