ET INTELLIGENCE GROUP: Finally, domestic mutual funds seem to have stolen a march over their bigger counterparts: foreign institutional investors (FIIs).According to data available with Bloomberg, domestic mutual funds have invested more than FIIs in Indian equities in August this year — the first occasion where they have bought more than FIIs since August last year.Domestic funds have deployed nearly $1.14 billion (nearly Rs 6,900 crore) in August this year against $1.05 billion (nearly Rs 6,300 crore) invested by the FIIs. Experts believe that domestic mutual funds will be dominant buyers in the medium term till clarity emerges on the way interest rates are going to head in the US."In the last few months, markets have rallied due to heavy buying by the FIIs. However, in August, markets have been range-bound, providing domestic funds the opportunity to invest as inflows have been increasing.With reasonable valuations, domestic mutual funds have invested heavily in equities," said Rajesh Cheruvu, chief investment officer at RBS -private banking. FII flow has been moderating as most funds are keenly watching the interest rate situation of the US Federal Reserve. The Street is expecting the Fed to provide a clear indication on the rate movement either in the next week’s Federal Open Market Committee FOMC ) policy, or probably in its October policy statement," he added.The difference between the domestic funds’ deployments in equities against the FIIs has been narrowing rapidly in the past three months. Mutual funds’ investment in equities was 30 per cent of FII investment in equities during June this year; it reached 44 per cent in July and during August, it reached 108 per cent of the FII investment.The reducing gap between mutual funds and FIIs can be attributed to three factors. One, Indian markets have a high correlation between market performance and equity inflows in mutual funds. As markets have gained phenomenally in the past nine months, equity inflows have increased considerably. According to Amfi , equity inflows by domestic funds have reached Rs 26,000 crore since the beginning of the year.The second reason for the narrowing gap is the rising cash position of domestic funds. This is because MF equity investment has been lower than equity inflows in the past three months.In the past three months, equity inflows have reached Rs 23,000 crore to the domestic MF, but they have invested only Rs 15,000 crore in the market. In August, domestic funds found stocks at reasonable valuations and invested more in equities.The third reason is the uncertainty among FIIs about interest rate movement in the US, prompting foreign funds to cut down on their allocation to equities.This has helped domestic funds to play a more dominant role as buyers. The gravity of moderation in FIIs’ flow can be gauged from the fact that in August, the average daily FII flow was $48 million compared with $88 million in July.Niranjan Risbood, director fund research at Morningstar India , said, "Inflows have been good in the last three months. These inflows are slowly translating into buying by fund managers.At present, fund managers are buying into domestic-oriented cyclical themes such as automobiles and public sector banks. Besides, they are also buying into themes completely unrelated to the economy such as IT and pharmaceuticals.Better revenue guidance and improving sales growth are the chief factors for sustained interest in these sectors."