The steep sell-off in the previous three market sessions has made experts wonder if the robust inflows into equity mutual funds will continue.
Domestic investors might not be able to cushion the fall in the markets if the selling led by global investors intensified, they said. “Domestic institutions have been supporting the market for the last two years and things will be fine only as long as this liquidity support continues,” said U R Bhat, managing director, Dalton Capital Advisors (India).
Indian equities have seen a sharp sell-off amid weakness in global equities. Foreign portfolio investors (FPIs) have historically been the dominant player in Indian equities, given their size and trading patterns. However, that has changed in the past couple of years with domestic institutional investors (DIIs), particularly mutual funds (MFs), stepping up purchases, and giving much needed support to the markets. The rise in the share of domestic investors reduces dependence on the more volatile foreign inflow.
“There might be a 20 per cent reduction in overall equity inflows coming through mutual funds,” said a senior fund manager. While there was no widespread panic, several investors were anxious. “Investors are asking: What should we do? Is it time to take money out? New investors that came in last year and have not seen much volatility are particularly nervous.”
Most mutual fund investors are not used to the kind of volatility seen in the previous three trading sessions. Last year was one of the least volatile ones for the domestic markets.
Experts were not sure if the strong inflows into equity schemes would persist if the stock market remained volatile. Besides, the long-term capital gains (LTCG) tax on equities, announced in the Budget, could divert some flows towards other asset classes. If the inflows slow, so will the quantum of MF investment flowing into Indian shares.
In the past two calendar years, equity schemes have seen monthly inflows of Rs 40-60 billion via systematic investment plans (SIPs). MFs have pumped Rs 1.6 trillion into Indian equities over the period, more than twice the Rs 714 billion put in by FPIs.
“There might be a marginal slowdown in inflows due to the LTCG tax and dividend distribution tax,” said Mahesh Patil, co-chief investment officer, equities, at Aditya Birla Sun Life Mutual Fund. However, Patil said a major sell-off was unlikely. “The fundamentals of the Indian economy remain intact and earnings growth is likely to pick up. Investors should not panic but see this as a healthy correction.”
The past few years also saw a shift from physical assets, like real estate and gold, to financial assets.
“The equity investment culture rising and is taking a more formal form. Most new-age investors are professionals earning a livelihood in other industries; stock markets are simply a vehicle for their savings. Given the lack of expertise, resources and time, these investors are investing through insurance schemes and MFs,” Jefferies said in a note.
FPIs have not been major market participants for more than a year. But Bhat said he was hopeful the correction would give them an opportunity to enter. “It’s not a 2008-like situation. Global economies are on the mend, with both the US and Europe recovering. Back home, while fiscal deficit remains a concern, better compliance on the GST front, proceeds from disinvestment, resolution of the bank non-performing assets issue and the push for rural growth are positives,” said Bhat.
US equities have lost more than 6 per cent since Friday, as better-than-expected farm data stoked inflationary fears and concerns that the US Federal Reserve might raise interest rates faster than expected.