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Cash-rich funds await correction

Since Tuesday, when the government unveiled its annual budget, Sensex has risen a further 2.8 per cent to record highs above 10,500 points.

india Updated: Mar 03, 2006 01:42 IST

Fund managers are facing a dilemma in India's booming stock market: should they risk buying pricey shares, or sit on cash and wait for a correction and possibly be left behind as shares keep climbing?

The BSE Sensex rose 9.4 per cent between the start of the year and Monday, pricing the market at a stiff 17 times forward earnings, higher than 10.2 for Korea’s KOSPI and 12 for Taiwan’s TAIEX.

Since Tuesday, when the government unveiled its annual budget, Sensex has risen a further 2.8 per cent to record highs above 10,500 points.

"We are trying to be pragmatic and invest bit by bit," said N Sethuram, chief investment officer of SBI Mutual Fund, who has only invested 40 per cent of $645 million raised in December.

"If we don’t invest, we will become underperformers in relation to the market," said Sethuram, whose fund manages $2.9 billion in assets. Domestic funds have collected about $2 billion in the past three months, but they have invested only part of it because of concerns that valuations are too stretched.

Investors eager to bet on equities are expected to pour in another $1 billion in the next two months into local funds because returns on bank deposits are not attractive.

"In the absence of anything negative in the budget for a correction, I think by default some surplus liquidity will be deployed," said Anup Maheshwari, chief investment officer at HSBC. Shares in cement and construction firms have jumped between 4.4 per cent and 14.5 per cent in two sessions after the budget.

Maruti Udyog Ltd, raced up 12.2 per cent after the government cut excise duty on small cars to 16 per cent from 24 per cent. Tata Motors Ltd, has rallied 7.6 per cent. "In three to four years, if the economy is going to grow at seven to eight per cent, which will keep the corporate earnings momentum of 15 to 18 per cent, valuations are taken care of," said S Naganath, chief investment officer at DSP Merrill Lynch Fund Managers.

Naganath, who manages assets worth about $2.2 billion, is fully invested in his equities funds. Foreign funds have also been bullish on India, pouring in more than $2.4 billion this year after a record $10.7 billion inflow in 2005.

First Published: Mar 03, 2006 01:42 IST