Wires

Redemptions from Indian equity funds hit 2-year high

By Himank Sharma

MUMBAI, Oct 8 (Reuters) - Redemptions from Indian equityfunds surged to a two-year high in September as retail investorscashed in after a strong rally in stock markets, a move thatwill put further pressure on asset managers' profits.

Net redemptions from equity mutual funds jumped to 33.06billion rupees ($637.18 million) in September, for a fourthmonth in a row, according to data released by industry bodyAssociation of Mutual Funds in India (AMFI.

Redemptions surged even after equity funds in India lastmonth posted their best returns since January, benefitting froma rally sparked by government fiscal and economic reforms andmonetary stimulus from global central banks.

The bulk of fund sales came from retail investors who hadplowed money into equity plans in 2007-2008, often for the firsttime, but who went on to stomach a volatile period in Indianstock markets that pressured fund returns.

"These are primarily the last leg of redemptions from theNFOs (new fund offers) that hit the market in 2007-08," saidDhirendra Kumar, CEO of mutual fund tracker Value Research.

"They were first-time investors who came into the market onthe hype then, but have been greatly disappointed and are nowjust beginning to recover some of their losses."

India's benchmark BSE index has gained around 22percent this year, making it one of the top performing marketsin the region. On Monday, the index slipped 0.9 percent headingfor a second session of losses.

The rally has been driven by foreign institutionalinvestors, who have bought a net 857.1 billion rupees ($16.52billion) in Indian equities, after being sellers last year.

By contrast, asset managers in India are facing fallingdomestic equity investments during a time when they are alreadyreeling from stiff competition in a crowded marketplace.

The majority of India's 44 fund houses are unprofitableaccording to their annual financial reports.

The industry is also constrained by heavy regulations andburdensome 'know your customer' rules that make opening fundsfor retail investors complicated in India.

Indian stock markets have also been volatile. After surgingin 47.2 percent in 2007, the BSE index has posted big annualswings, and is still nearly 11 percent below a record high hitin January 2008.

"Market is beginning to go up in a sustained way but it hasto stick for a while to get the new fund investors' attention... investors chase past performance," Kumar said.

September's outflows bring equity withdrawals so far thisyear to 96.73 billion rupees, the second time in three yearswhen redemptions could outpace new investments.

Though equity funds make up less than a quarter of overallassets under management in India, they provide asset managerswith higher management fees, making them key for profitability.($1 = 51.8850 Indian rupees)

(Editng by Rafael Nam and Sanjeev Miglani)

((Himank.Sharma@thomsonreuters.com)(+91 22 6180 7417)(ReutersMessaging: himank.sharma.thomsonreuters.com@reuters.net))

Keywords: INDIA FUNDS/REDEMPTIONS