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FIIs vs MFs: Who's smarter? - Views on News from Equitymaster
 
 
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  • May 9, 2001

    FIIs vs MFs: Who's smarter?

    Since the start of the year 2001 the two key market movers have chosen contrasting paths to invest in India. While the FIIs have made net investments to the tune of Rs 98 bn till date, the mutual funds have chosen to be aggressive on the debt side, investing nearly Rs 30 bn in the segment.

    The FIIs invested nearly half of their total equity investments by January itself. That month the BSE Sensex gained around 9.4%. However, the mutual funds wanted no share of this and sold off Rs 9 bn worth of equity and invested nearly the same amount in the debt market. Why so?

    FIIs net investments
    (Rs bn) equity debt Total
    Jan-01 40.5 2.3 42.7
    Feb-01 18.2 0.4 18.6
    Mar-01 19.7 -2.1 17.7
    Apr-01 17.7 2.1 19.8
    May-01 2.1 0.4 2.5
    Grand total 98.2 3.1 101.3
    *May-01 signifies investments till May 7, 2001
    Mutual Funds net investments
    (Rs bn) equity debt Total
    Jan-01 (9.0) 8.9 (0.2)
    Feb-01 (12.4) 6.6 (5.8)
    Mar-01 (3.6) 3.8 0.2
    Apr-01 (2.9) 7.4 4.5
    May-01 (5.3) 3.0 (2.2)
    Grand total (33.1) 29.7 (3.4)
    *May-01 signifies investments till May 7, 2001

    This was probably because the FIIs had fresh allocations and India looked a much better bet as compared to many south-east Asian countries. Therefore, even when the bourses kept falling the FII investments kept coming in steadily. So much so that till date the FIIs have invested nearly Rs 98 bn in Indian equities, their highest investment by far till May in any year.

    The mutual funds however, continued to sell off equities and invested in debt. Till date the mutual funds have taken out nearly Rs 33 bn from the Indian bourses and invested Rs 30 bn in debt instead. For mutual funds it could be a case of once bitten twice shy. Many of these mutual funds had come out with sector specific funds during the tech boom in early 2000. However, with the tech bubble bursting many were left holding tech stocks bought at extremely high valuations. So they seem to have exited at every rise in stock prices.

    BSE Sensex % gain/loss
    Jan-01 9.4%
    Feb-01 -0.9%
    Mar-01 -15.6%
    Apr-01 -1.3%
    May-01 1.2%
    Change since Jan 1, 2001 -9.5%

    *May-01 signifies BSE Sensex change till May 8, 2001

    Meanwhile, the volatile environment at the Indian bourses made debt instruments an attractive option. Added to that, the interest rates have gone down. Even the RBI governor has hinted at a softer interest regime. So mutual funds seem to have made the correct choice by investing in debt.

    However, who is smarter among the two, only time will determine. Despite all the problems the Indian bourses face, a good rainfall forecast and Sebi's initiatives to curb scams may result in the bourses heading northwards. In such a scenario the FII bet may well stand them in good stead. However, in a contrasting scenario mutual funds may have the last laugh.

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