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of 2010, mutual funds have started nibbling into shares over the past four months. Beaten-down stock valuations and a gradual rise in inflows are prompting fund houses to increase exposure to the stock market. Under pressure from massive redemption and low inflows into equity schemes, fund houses redeemed Rs 27,550 crore in 2010.

Counting out May 2010, when mutual funds netbought shares worth . 98 crore, mutual fund were net-sellers in the market on all months since September 2009. The 15-month-long trend reversed only in December 2010, when funds net-bought shares worth Rs 1,377 crore. "Mutual funds were witnessing redemption and low inflows the whole of last year. Things have just started looking up now," said Neelesh Surana, senior fund manager, Mirae Asset Global Investments . The 11% fall in the market since January this year has made stock valuations attractive, fund managers said.

While a section of the fund industry is still sceptical about the future course of the market and corporate earnings, the rise in equity allocation is being attributed to genuine value buying, short trading strategies adopted by funds and deployment of new fund offer (NFO) money. "The market correction (post- huge Diwali rally) has brought frontline stocks at attractive price levels. Our mandate now is to accumulate good stocks and stay invested in them," said Mr Surana.

According to institutional brokers, fund houses are concentrating on large caps and frontline mid-cap stocks currently. Political unrest in some West Asian countries, rising crude prices and inflation are forcing fund managers to take refuge in large-cap stocks, which are known to be more resilient in the event of a deep market correction. Fund houses are maintaining 6-8 % cash to chance upon further buying opportunities.

"We expect funds to continue buying in the coming months," said Hiren Dhakan, associate fund manager (fund-of-funds ), Bonanza Portfolio. "Funds have been increasing exposure to banking, FMCG and auto stocks over the past two months. Telecom and oil & gas stocks are seeing a weightage reduction in fund portfolios," Mr Dhakan said. Among individual stocks, ICICI Bank has replaced Reliance Industries as the most-owned stock in fund portfolios. About 293 schemes have ICICI Bank in their portfolios while Reliance Inds , Infosys and ONGC appear in 280, 278 and 255 equity fund portfolios.

Another reason for the rise in mutual fund investments could be the large line of NFOs that mobilised money over the past few months. Mid-and small-sized fund houses, like Pramerica Mutual Fund, Peerless, Axis Mutual Fund , IDFC , Fidelity, Kotak Mutual , Principal Mutual Fund and Motilal Oswal Asset Management, among others, have launched new funds over the past two months. Equity funds, as a category, have been logging inflows over the past three months.

The average assets under management (AUM) of the fund industry surged 2.3% in February to Rs 7.07-lakh crore. According to data compiled by Association of Mutual Funds in India , the MF industry witnessed inflows of Rs 25,757 crore in all schemes, with equity and money market schemes seeing inflows of Rs 2,495 crore and Rs 8,770 crore, respectively , in February.

Source : ET Bureau