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Aarati Krishnan

RECENTLY released data on mutual fund flows show that fresh investments into equity funds picked up sharply in June 2003. Gross inflows into equity funds during the month totalled Rs 920 crore, much higher than inflows of Rs 555 crore notched up the previous month.

In fact, this is the highest level of inflows recorded by equity funds in any month over the past couple of years. It does not appear to be a mere coincidence that fresh investments into equity funds picked up just after the market registered a sharp rally. There are at least a couple of other instances where equity inflows have picked up after a brief market rally.

In contrast, inflows into equity funds have been rather anaemic during particularly bearish phases in the equity market. Fewer investors appear to have invested in equity funds during the sharp meltdown of equities post-9/11. Fresh inflows into funds totalled just Rs 179 crore in that month.

This suggests that investors appear to take a pessimistic view of equities when the market is languishing at low levels. But during a sharp rally, investors wake up to see stocks generating spectacular returns and are tempted to participate.

But this is exactly the opposite of what it should be. Investors should actually see a bearish market as an opportunity to enter equity funds. True, you can never be sure when the market will bounce back from a particularly bearish phase.

However, waiting for the market to rally, and then buying into it mid-way may expose investors to the downside risk that may arise from a correction. Investors may also end up foregoing a substantial portion of the returns that would have been made through an early entry.

But there is also a positive side to the recent trends in MF fund flows. As fresh investments in equity funds picked up in June, so have the redemptions from equity funds. Total redemptions from equity funds, at Rs 1,007 crore, were also at the highest levels in recent times.

This suggests that while some investors are rushing into equity funds in the midst of a rally, many more, who already own funds are cautious enough to use the recent rally to book profits.

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