Mutual Funds’ Net Assets dwindled in June; Equity saw a marginal inflow

After seeing few positives in recent months, Equity saw a good dip in net inflow in the month of June. The net inflows in Equity Mutual Funds dwindled to Rs. 20 crore in June 2011 from Rs. 1,546 crore in May 2011. This is the massive fall in inflows in Equity in recent months.

The uncertain domestic equity market coupled with the bleak global factors predominantly emanating from Euro region also caused Indian investors to redeem their investments out of Equity Mutual Funds and allocate to fixed income products. The domestic equity market remained in bear mood in most of trading days in June before given a boost by FIIs in the last week; thus, letting the broader indices Sensex and Nifty 50 to end in positive.

In addition, the overall Mutual Fund assets fell to Rs. 673,176 crore in June 2011 from Rs. 731,448 crore in May 2011, a fall of Rs. 58,272 crore or 7.97 per cent. Also, the industry saw a total outflow of Rs. 62,442 crore which was mainly caused by outflows in short term debt category – Liquid Funds and Ultra Short Term Funds. In total, these two categories had an outflow of Rs. 62,378 crore. Other categories which saw a net outflow are Gilt (Rs. 88 crore), ELSS (Rs. 80 crore), FOF Investing Overseas (Rs. 42 crore) and Other ETFs (Rs. 210 Crore). Only Balanced Fund, Equity Fund and Gold ETF categories saw a net inflow of Rs. 84 crore, Rs. 20 crore and Rs. 252 crore respectively.

Banks continue to reduce their investments in Mutual Funds; as on June 17, 2011, the net investments stand at Rs. 84,034 crore from over Rs. 1 lakh crore on May 20, 2011. Recently, the RBI has instructed all banks to cap their investments in Mutual Funds up to 10 per cent of their net worth as on Mar 31, 2011. Earlier, the deadline had been as on Oct 2011 which has been extended by another six months. It is being expected that investments worth Rs. 50,000-55,000 crore would flow out of the system in next six months.

Net Outflows in June 2011

The outflows continued in June 2011; barring categories like Equity, Balanced and Gold ETFs, all other categories saw a net outflow. The equity category saw a net inflow of Rs. 20 crore on standalone basis; however, if we consolidate Equity with Balances and ELSS, there has been a net outflow in totality.

On net asset basis, the MF industry AUM also came down to Rs. 673,176 crore, a fall of 7.97 per cent. The other categories which saw a major fall in assets are Liquid/Money Market (-22.36 per cent), Other ETFs (-8.25 per cent), FOF Investing Overseas (-6.2 per cent), Income (-5.49 per cent), Balanced (-4.45 per cent) and others.

Gold ETF continues to see inflow and increase in AUM too. In last 26 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,000 crore in last 26 months. In June 2011, it saw a total inflow of Rs. 252 crore; also its net assets increased to Rs. 5,568 crore in June 2011 from Rs. 5,463 crore in May 2011. 

FMPs still rule the inflows

We continue seeing new FMPs in the street. A total of 74 FMPs has been launched collecting a total AUM of Rs. 7,747 crore. The new fund house Union KBC Mutual Fund launched its maiden Equity Fund, Union KBC Equity Fund which collected a total AUM of Rs. 167 crore. It also launched a liquid fund, Union KBC Liquid Fund.

Happy Reading!

- Amar Ranu

The glitter of Gold – its unprecedented hike

Old is Gold – the Gold shines more than its spark. In the current global financial breakdown, Gold emerged as the safest asset and its price headed northwards reaching a record $ 1,431.25 an ounce on Dec 07, 2010, the longest Bull Run in at least 90 years. What led to the unprecedented hike in its prices? India and China hoard a major portion of gold outputs in the world.

In the 19^th century, the Gold Standard took place and lasted until the First World War. It was partially reestablished during the interwar period. The Great Depression of the 1930s brought the gold standard to a final end.

In that era, the world subscribed to the Gold Standard which implied specific rules for the system of international payments. International payments lead to gold transfers between countries. Banque De France explains in its Focus (authored by Gong Cheng, Laurent Ferrara, Yannick K and Pascal T)

When a country runs a balance of payments deficit (surplus), it has to make (receive) a payment in gold. Domestic gold holdings decrease (increase) and domestic money supply contracts (expands). Domestic money supply is thus determined by the balance of payments. This provides an adjustment mechanism to external imbalances. Suppose for instance that a country runs a trade deficit. This leads to a decrease in gold holdings and a monetary contraction. This contraction generates a decrease in domestic prices. With lower relative prices, the country becomes more competitive and its current account is brought back to balance. This adjustment mechanism was described by David Hume in his famous 1752 essay.

The more can be read here…

However, the Gold Standard met its ending with the major economies moving away and after the Second World War, the Bretton Woods system replaced the gold standard. Instead of a gold parity, countries announced a fixed but adjustable parity to the dollar, which in turn was initially fully convertible into gold.

While there were many advantages but it got several drawbacks, which would probably turn out to be very dangerous and a source of instability for the world economy.

What led to Gold roaring a high of $ 1,431.25?

No doubt the financial crisis prompted investors in lapping up gold in big denominations; the back end analysis shows that the assets soared of Gold ETFs accumulating the major portion of world gold output. Globally, the 10 biggest such funds now hold a combined 2,113 metric tons of gold, more than the official reserves accumulated by every country in the world save four: the U.S., Germany, Italy and France. India and China hoard of major portion of gold outputs. Recently, the Central Bank of India, RBI bought a major portion of gold which also helped in showing investors’ interest in gold.

The story goes as below:

James Burton, the then Chief Executive Officer of California Public Employees’ Retirement System (CALIPERS) didn’t invest a penny in Gold of the total assets of $ 142.8 billion managed in 2002. The quiet obvious reason – the yellow metal had been in a bear market for two decades.

Christopher Thompson, the Chairman, World Gold Council convinced him to help in allowing investors to buy a previous metal they had shunned for generation. The key was dividing bars of gold into securities tradable on the New York Stock Exchange. And thus, the SPDR Gold Trust got its way and found the cheapest way of holding gold which now holds around 1,299 metric tons of gold valued at $ 57 billion, more than Swiss central bank. Their popularity (number of other Gold ETFs) helped driving unprecedented gains for the precious metal which can go even higher, as per analysts.

Read more on the parabolic rise of Gold.

Should we continue subscribing to it?

Gold’s worth is determined by fears of inflation or financial collapse. Unlike other eatable assets which are determined based on economic factors, gold’s true value is hard to judge for retail investors. In India, the demand will be factored by its sparkle coupled with the ETF demand.

Happy Reading!

Amar Ranu