Market Volatility: Recites a new story!!

DIIs come to rescue

August volatility in the markets has come out with a new story. Investors and Market observers feel that the key risks in the Indian stock market is its overdependence on foreign fund flows. But that may not be the case for long, judging by the institutional inflows so far in August, which has been a very volatile month for equity investors across the world.

FIIs have sold Rs 8,841 crore worth of stocks so far in August as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 8,247 crore in a single month.

Large inflow or outflow of foreign money continues to influence sentiment, but domestic institutional investors — mutual funds, banks, insurance companies — are now beginning to emerge as a strong counterbalancing force.

In the current month, according to the Securities and Exchange Board of India (Sebi), MFs have been net buyers at Rs 2,869.2 crore (till 27 August 2007), which is the highest-ever since May 2006 (Rs 7893.36). In fact, August 2007 will feature among the top 10 months in terms of net inflows ever since January 2000. In the previous month, fund houses were net sellers at Rs 900.60 crore. Inflows are a result of money mobilised through new fund offerings and also because many of the asset management companies were sitting on cash.

It seems that the investors and the fund houses have changed their investment style. They have started looking current volatility in the market as an opportunity to invest. While Indian investors have become more resilient to volatility, the inflows in the mutual fund industry have also been good. There was a 21.41% rise in AUM of mutual fund industry in the month of July 2007 when it recoded an AUM of Rs 4.87 lakh crore highest since April 2006 (a rise of 89%). Most fund houses were sitting on 15-20% cash in July month, which seems to be flowing in the market now. Further, around 30% of the new fund money was also lying idle that seems to have made to the bourses now.

Meanwhile, it is not only the fund houses that have upped the ante in the recent past. Insurance companies and some of the public sector banks (PSBs) are also believed to be using the current volatility as a good buying opportunity. Incidentally, LIC is believed to have mobilised a few thousand crore in its recently-closed unit-linked plan (ULIP) — Money Plus. According to market buzz, agents were pushed into overdrive to garner money in the ULIPs as it came to a close in mid-August.

Recent instances of the Sensex shedding 400-500 points in one single day could have been much worse, if LIC and SBI had not come to the rescue. However, this can’t be corroborated with figures as there is no data available for insurance companies and banks separately.

BSE provides data under the heading ‘domestic institutional investors (DII)’ that includes banks, domestic financial institutions, insurance companies and MFs. In August, according to BSE, this group is said to have invested Rs 8,518 crore (BSE and NSE), which is only marginally lower than what FIIs have pulled out.

However India’s growth story remains intact. The strong fundamentals will continue to attract foreign investments in the economy along with domestic investors.