Investors shy away from foreign funds

The stock market's continuing love affair with the bears is making investors shy away from not only domestic mutual funds, but also India-dedicated foreign funds, which is evident from the redemption pressure on them.

According to the latest fortnightly report by Emerging Portfolio Funds Research, which tracks more than 15,000 international funds across the US and emerging markets, India-dedicated funds witnessed huge redemption pressure during the first two weeks of June.

The EPFR-tracked India dedicated funds witnessed redemptions aggregating to about $327.2 million (Rs 1,504 crore) during this period, the report added.

Sensex Rise and Fall: Complete Coverage

A plunge of nearly 27 per cent in the Bombay Stock Exchange's 30-share benchmark Sensex in just one month has seen domestic investors also joining the race to exit doors, EPFR said.

However, the data shows that the domestic investors are late in seeking fund withdrawals, as compared to the withdrawal from foreign funds.  Despite the sharp rise in both the Sensex and broader BRIC (Brazil, Russia, India and China) markets until early

May this year, EPFR-tracked funds were net buyers of only $672 million worth of Indian equity during the first quarter of 2006 compared to $1.62 billion for Brazil, $2.5 billion for Russia and $4.52 billion for China.

Moreover, these funds were net sellers of Indian equity during April, with global emerging market funds cutting their Indian holdings by 4.31 per cent and dedicated Indian funds turning net sellers for the first time since last June, the report added.

According to the report, the investors have been punished over the past few weeks for things that they had happily overlooked when the markets were soaring high.

The country's current account deficit, which has expanded as booming growth stimulated demand for increasingly expensive imported oil, is being reassessed in light of the role foreign portfolio capital plays in plugging the gap, it said.

A fresh scrutiny of the glacial pace of economic reforms and concerns related to infrastructure and inflation is on, the report said.

According to EPFR, the high level of scepticism has ironically come at a time when India's economic growth has accelerated to over 9 per cent and the government has raised fuel prices to curb the fiscal deficit, while RBI has taken an pre-emptive measure against inflation by raising the interest rates, it added.

While, the recent correction has led to a sharp decline in the valuations, bargain hunters are still holding back, the report said. The average price to earnings (P/E) ratio of the 30 Sensex-listed companies has dropped from nearly 20x in early May to below 16x currently.

Meanwhile, the fund managers are expecting further volatility until the US Federal Reserve's interest rate meeting late this month and the second-quarter corporate earnings results in the next month, EPFR said.