The Hindu Business Line : Overheated equity market — Mutual funds keen to restrict inflows

Fund managers say the launch of several mid cap and flexible cap funds resulted in too much money chasing too few "good quality" mid cap stocks in the market.

Mumbai , July 20

WITH overheated equity markets providing for slim pickings and continued inflows into long standing equity funds, asset management companies are looking at ways to restrict the sizes of their large growth funds. Funds that exceed Rs 1,500 crore are viewed as being unwieldy and inflexible.

Reliance Capital Mutual Fund on Wednesday announced that it will stop accepting fresh applications in the Reliance Growth Fund after August 14, 2005 or when the corpus touches Rs 1,700 crore, whichever is earlier. Subsequently, the fund would be closed for three months. Reliance Mutual Fund said that this was being done in the interest of the unit holders.

While this is the first fund to close fresh inflows in the country, managers of other large funds are also struggling to find a solution to maintain their corpus sizes. Franklin Templeton, for instance, has announced a dividend of 55 per cent for the unit holders of Franklin India Prima Fund. The corpus of this fund stood at Rs 1,617 crore as on June 30, 2005. Mr Ravi Mehrotra, President, Franklin Templeton India, said that the fund house was considering various methods to prevent fund sizes from getting unmanageable.

"The dividend was one move, we are considering various possibilities now. No decision to stop fresh inflows has been made, so far," he said.

The fund house also manages the Franklin India Bluechip Fund, which also has a sizeable a corpus of Rs 1,609.6 crore.

In April this year, HSBC had launched its mid-cap fund with a size limit of Rs 700 crore.

Fund managers say that the launch of several mid cap and flexible cap funds resulted in too much money chasing too few "good quality" mid cap stocks in the market. This led to artificial inflation of prices and stretching of valuations of the scrip as the run up in these mid cap scrips became one led purely by liquidity.

With the markets teasing the 7400-level and the significant appreciation that most stocks have witnessed in the last three months, good `value' buys are hard to come by now.

Under these circumstances, restricting fund inflows seems to be the best way to manage these funds, said a fund manager.

As the cash limit of mutual funds is pre-specified in the offer document, fund houses are also not in a position to ride out the current market conditions by not investing in the market.

Financial advisors say that with an example that is now set, they are anticipating more funds to shut down inflows for short periods of time.

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