Stock Market Rout: Mutual Funds Circular Likely To Have Impacted Market Activity, Say Market Participants

A new circular on mutual funds has raised concerns in the market, though opinions on its impact remain mixed. That’s according to a chief investment officer of a mutual fund, who spoke on condition of anonymity and said, "Too early to have a firm view." Another industry expert stated, "It was more regulatory but not that difficult."

The comments came after investors on Monday lost nearly Rs 6 lakh crore of wealth as Indian equity benchmarks NSE Nifty 50 and BSE Sensex closed at their lowest levels in over a month on Monday.

The Nifty 50 settled 309.00 points, or 1.27%, lower at 23,995.35, and the Sensex fell 941.88 points, or 1.18%, to end at 78,782.24. The Nifty fell as much as 2.01% during the day to 23,816.15—a first since Aug. 6. The Sensex declined 1.87% during the day to 78,232—its first since Aug. 14.

Overseas investors remained net sellers of Indian equities for the 26th consecutive session on Monday, while domestic institutional investors turned net buyers after a session of selling.

Foreign portfolio investors offloaded stocks with an approximate value of Rs 4,329.8 crore, according to provisional data from the National Stock Exchange. The DIIs bought stocks worth Rs 2,936.1 crore.

The circular, titled "Standard Practice on Institutional Mechanisms for Identification and Deterrence of Market Abuse," came into effect today. Some believe this regulation may have contributed to a decline in market activity, as domestic mutual funds appeared less aggressive in their participation compared to usual.

The circular outlines that traders at asset management companies must adhere to a system that flags deviations from the volume-weighted average price and market participation. This mechanism can generate alerts, potentially implicating traders for suspicious trading activities. Additionally, the regulation includes alerts related to price movements before and after negotiated block deals.

A representative from a sell-side equity firm told NDTV Profit under anonymity, "We refused a block deal this morning as we were not sure of the extent of buying that may happen at domestic fund houses due to this rule."

Market participants suggest that, at least in the short term, aggressive buying by domestic mutual funds may be limited until there is more clarity. However, whether Monday's market decline can be directly attributed to the new circular remains uncertain.