Inflows into Indian equity funds slowest in March as shares tumble globally

Inflows into Indian equity funds in March were the smallest in 13 months as some investors sold before a tax on stock holdings took effect from April 1 and volatility returned to markets worldwide.

Equity funds took in a net Rs 66.57 billion ($1 billion), the least since last February, data from the Association of Mutual Funds in India show.

Shares tumbled globally toward end of March as trade skirmishes between the US and China cooled demand for riskier assets. India’s S&P BSE Sensex gauge entered its first correction in more than 15 months as the selloff hit investor sentiment already weakened by the government’s decision to bring back a tax on equity gains after 14 years to boost revenue.

“Global volatility spooked some investors into redeeming funds as our market fell 10 per cent in little over a month from its January high,” said Vidya Bala, head of research at FundsIndia. Exits by institutional investors looking to avoid the tax by selling before March 31 contributed to the reduced inflows, she said.
 

While Modi’s government had initially wanted to borrow a near-record Rs 6.06 trillion in the fiscal year that started April, it reduced the target by Rs 500 billion last month in an effort to calm the bond market. It was forced to cancel or cut back on debt sales earlier this year.

The central bank’s Friday announcement follows a 2015 review when policy makers said the cap will be raised to 5 per cent of outstanding debt by March 2018, from an estimated 3.8 per cent then.

Foreign investors bought  Rs 1.4 trillion of bonds in 2017, the highest since 2014. While they still purchased Rs 95.24 billion in January, they became net sellers in the last two months.

The RBI also announced that the limit for foreign portfolio investment in state development loans would remain unchanged at 2 per cent of outstanding securities. It will discontinue existing sub-categories in corporate bonds and there will now be a single limit for such debt.

Even so, flows should recover in the coming months as AMFI data suggests that mom-and-pop investors are buying the dip. Equity funds posted total sales of Rs 436.4 billion last month, compared with Rs 346.41 billion in February, the data show.

“Inflows into equity funds at a gross level in March have been higher those in February, which means retail are buying on declines,” Bala said.

There was concern that a move to end the tax break on equities would affect flows from individual investors, who’ve flocked to funds since Prime Minister Narendra Modi took office in 2014. Continued local flows support of $2 to $2.5 billion a month is needed to support the equity paper supply expected in the year that began April 1, CLSA India Pvt. said in a note.

Some takeaways:

Local stock funds received Rs 1.71 trillion of net inflows in fiscal year ended March, more than double those of the year-earlier period: AMFI.

Inflows into balanced funds, which buy stocks and bonds, jumped 34 per cent over February to Rs 67.5 billion, the data show.