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Exit of I-T rebate on STT makes it tough for MFs too
March, 05th 2008

It is not just high net worth individuals and day traders who will be hit by the Budget proposal to scrap the IT-rebate on securities transaction tax (STT) and treat it as any other normal business expenditure.

If broking circles are to be believed, it could also affect the ability of fund houses to churn their portfolios effectively.

The proposals relating to STT are expected to push up the tax liability of a day trader and thus squeeze his returns. This could lead to a drop in trading volumes, say brokers.

This lack of liquidity could in turn push up the impact cost for fund managers, thus affecting their net asset value (NAV). Most fund managers will claim that the best approach to stock market is taking a long-term view.

But the pressure of maintaining NAVs in volatile market conditions means they have to adopt short-term measures as often as they take long-term calls.

In normal corrective phases, fund managers steer their portfolios away from taking big hits by investing in a mix of shares of diverse sectors. This helps them to compensate any loss of value with appreciation in the other shares.

But this time round, the correction has been so flat-out that fund managers are not left with many choices, but to time the market in order to improve their returns, says a institutional broker.

A look into MFs trading pattern over the past two months show that invariably on most market falls, MFs have purchased and on most upswings, they have sold.

For instance, when the market shed 1,408 and 1,175 points on January 21 and 22, MFs net bought shares worth Rs 2,000 crore and Rs 1,175 crore respectively.

Likewise, picking out the major sell-offs by MFs, when the broader market rose 245 points on January 11, funds sold shares worth Rs 274 crore. On February 19, when the Sensex closed marginally up, domestic institutional investors (DII) sold shares worth Rs 327 crore.

DIIs sold shares worth Rs 141 crore, when the market closed above 300 points on February 25.

It cannot be termed as breach of investment ideals as fund managers are adopting short-term hold strategies to make money for unitholders. Taking a cash call in active fund management is perfectly fine, said Dhirendra Kumar of Value Research, a mutual fund research and advisory firm. Positively, there are risks with regards to timing the market; a wrong call can be embarrassing for fund managers, Mr Kumar added.

Investment managers often point that given the volatile trends in Indian market and extensive availability of quality stocks, equities portfolio churning is indispensable.

Another factor not to be ignored is market sentiments, which often force fund managers to include momentum picks in their portfolio.

This is a short-term strategy, but nonetheless, it adds to the churning rate. Unexpected redemptions also influence fund managers to off load securities.

As far as I know, fund managers are definitely not taking a negative view on the market. MFs reflect the sentiment of stock market. If the market is trading in 15-20% range, MFs will also give lower returns in and around that range, said ABN Amro Asset Managements MD Nikhil Johri.

One should also understand the fact that NAVs cannot be managed. It is plainly a reflection of the closing price of market on a given day, Mr Johri added.

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