Markets plunge by over six percent; Is this a beginning ?

Maybe not. A few weeks ago I had pointed to the fact that domestic mutual funds are sitting on mountains of cash. The amount was of the order of Rs.25,000 crore. So have things changed since then? Lets re-visit those numbers. Between Jan-Mar 2006, domestic MFs had raised Rs.29,735 crore. They raised another Rs.5,471 crore in April. This takes the tally to a phenomenal Rs.35,206 crore, raised in just four months. Phew !!

Now lets look at their net investments so far. As per the data available from SEBI, following are the net investments for MFs during Jan-May 2006.

Jan: -1,172
Feb: - 246
Mar: 4,483
Apr: 3,121
May: 2,626 (so far)

Total net investments so far: Rs.8,812 crore.

Cash lying with the MFs (net of investments): 35,206 - 8,812 = Rs.26,394 crore.

Thus, even after investing over Rs.8.8k crore in the last three months, domestic MFs seem to be still sitting on mountains of cash. What does this mean for our markets ?

I think MFs are actively buying shares and taking advantage (?) of the FII offloading. I think they will remain net buyers for another 2-3 months. FIIs have been the culprits in the declines recorded in the last few days. Will this continue for long ? I think NOT.

MFs will increase their support, and FIIs (some hedge funds, is the market grapevine) are likely to turn positive numbers, or so I believe.

Moral of the story: If you've been smart enough (or rather lucky) to convert some of your holdings into cash recently, then start nibbling. And, if you are fully invested, remain so. Do not let a 7-8 per cent crash go bonkers. Instead, stay calm and remain invested. Markets will soon stabilise.

Happy Investing.