As the Indian stock market fell 5.99% on Wednesday amidst fears of tight liquidity and a looming global recession, mutual funds, especially debt funds, continued to face redemption pressures. The 30-share Sensex closed 674.28 points down at 10,809.12, after having fallen 6.3% intra-day, with all sectorals in the red. The 50-share Nifty shed 5.32% to 3,331.40.

Despite the falling markets, only five liquid mutual funds have shown negative net asset values, implying that their capital is getting depleted. Since most liquid funds depend on corporate deposits to build up their portfolios, some corporate investors have asked the liquid and liquid plus funds to reveal their daily portfolios. Net sales of debt instruments by mutual funds, according to Sebi data, stood at Rs 7,718.40 crore in October so far, against a net buying of Rs 6,416.60 crore in September, as companies sold their units to meet advance tax outgo and tide over the liquidity crunch.

Liquid funds make up nearly 60% of the mutual fund industry?s assets under management, which dropped by 3% to Rs 5,29,121.76 crore by September end. But retail investors do not invest in liquid funds, preferring equity or debt funds with a long-term horizon.

Liquid plus funds typically invest in debt instruments of 1-3 months maturity, whereas liquid funds buy debt products of 1-7 days maturity.

Major redemptions on Wed-nesday came from Unilever, Sterlite, Hindalco, and two Delhi-based banks?PNB and OBC ?said the CEO of a fund house on condition of anonymity. Sterlite Industries India Ltd?s CFO Sushil Gupta, says his investments have been fully protected so far despite the liquidity crunch. ?As a policy we invest in debt mutual funds and fixed income. We have so far not faced any redemption problem. There are liquidity issues, but so far I have not come across any refusals by MFs. We invest in debt funds that are AAA rated and we are completely protected,? Gupta told FE.

Highlighting the essential strength of the Indian mutual funds, a Crisil survey stated that fund houses adhered to the basic investment principle of ?buying at low levels? in September 2008, and they were net buyers of equity, taking advantage of the market slump.

Mutual funds found value in equities by buying up to Rs 2,292 crore in September?the third highest in the year after January (Rs 7,700 crore) and June (Rs 3,179 crore) in 2008. Overall basis, mutual funds remained net buyers of equity in the first six months of FY2008, April-September, to the extent of Rs 12,712 crore.

Krishnan Sitaraman, head, Crisil Fund Services, said, ?A predominant portion of the fixed income portfolio of the mutual fund industry is still invested in high quality assets and there is no need to panic on this front. Moreover, the recent reduction in the CRR and repo facility extended to banks to meet the liquidity requirements of mutual funds is expected to improve the situation.??

But still the redemption pressure, triggered on Monday, persists. ?What is of concern is that the whole effort and time taken in the revival of liquidity is leading to further erosion of confidence due to the panic. Several corporate houses are apprehensive about the decline in value of their investments. Liquid funds and liquid plus funds are the worst sufferers,? Dhirendra Kumar, CEO, Value Research India Pvt Ltd, said. But here again, while instances of funds delaying payments have created concern, there has been no default so far, a fund manager said.