MFs have Rs 250,000 crore of firepower to take advantage of falling stocks: Nilesh Shah

Nilesh Shah, CEO of Kotak Mutual Fund

While local funds have been a significant counter-force in negating the continuous selling by foreign portfolio investors over the past few months, they have enough dry powder to exploit any opportunity arising out of an unreasonable fall in stock prices, and support markets in case headwinds from the Middle East get stronger, Nilesh Shah, CEO of Kotak Mutual Fund, said in an exclusive interview with Moneycontrol.

The amount of dry power available with local mutual funds that could come in handy is as much as Rs 2, 50,000 crore, according to him.

Here's the math: The total equity mutual fund corpus stands at Rs 25 lakh crore with about 5 percent cash, which means a cashpile of Rs 125,000 crore. While fund managers will continue to hold cash to be ready for any redemptions, they could draw on this to make use of any exceptional opportunity. Second, dynamic asset allocation funds that straddle across equity, debt and cash based on market outlook, and balanced funds that can move 25 percent to 75 percent in equities, manage assets worth Rs 2 lakh crore.  The money that can move in and out of equities is roughly around 40 percent, or Rs 80,000 crore.

Besides this, Shah said that on a three-month basis, mutual funds draw in a minimum of Rs 45,000 crore through SIP flows. Put together, this adds up to Rs 250,000 crore of dry power than can be used to exploit situations when stock prices fall sharply because of technical reasons like a foreign investor wanting an urgent exit. “Unlike in the past where we were lacking domestic depths in the market, today the mutual fund industry alone has Rs 2,50,000 crore of firepower to deploy,” he said.

Several fund managers have already been selling and converting to cash because of high valuations. “In our Balance Advantage fund, we can go up to 20 to 80 percent in cash. We are at 42 percent and already booking profits,” Shah said.

For the industry as a whole, the equity allocation is at the middle of the band, and not aggressive. “Everyone is somewhere in the middle to second quartile rather than third or fourth quarter in terms of deployment.”

Shah clarified that domestic fund managers are very much cognizant of fair value and will buy only when stock prices fall below the fair value. “We will support the market only if we believe fundamentally that somebody's selling for reasons specific to them. If somebody is selling for external factors, that will be absorbed by mutual funds and other domestic investors,” he said.

“Now, if oil prices go higher and earnings get impacted and my fair value gets revised, I will start buying around fair value and below, not above.”

Expert advise

Foreign investors often sell off their equities because of MSCI rebalancing, or simply to move from India to other markets. "These create good opportunities. If they are offering attractive prices, then there is enough depth in the market to take that.” Shah said.

The market veteran's advice to retail investors is simple: This is not the market where you run a leveraged position. Traders must follow their stop loss or hedge their risk.

“If you are an investor, maintain your asset allocation discipline, this is not the market to be overweight on equity as an asset class, it's a fairly valued markets with some dark clouds gathering. Just be marginally overweight on largecaps and marginally underweight on smallcaps and midcaps and overall equal weight allocation,” suggested Shah.