MFs shrug off valuation concerns, step up buying as FPIs press sell button

Have pumped in over Rs 10,500 cr this month-the most since in 16 months

Domestic mutual funds (MFs) have stepped up buying of stocks this month amid a pushback by foreign portfolio investors (FPIs).

Shrugging off concerns around lofty valuations, money managers have purchased stocks worth more than Rs 10,500 crore until July 23, as data provided on Sebi website. Unless there is a huge drawdown in the remaining few sessions of the month, the buying tally for the month of July is set to be highest since March 2020.

MFs poured in a record Rs 30,285 crore into domestic stocks in March 2020, taking advantage of the sharp drop in the markets. However, after the huge investments, equity fund managers had to pull out money from the markets over the next several months due to the sharp outflows from equity schemes. Between July 2020 and February 2021, equity funds saw net outflows of around Rs 46,800 crore. However, since March equity MFs have once again been able to attract flows. In the past four months till June, equity funds have seen net inflows of around Rs 28,600 crore. Industry players say net inflows are expected to remain positive in July as well.

“If we look at last year, there were redemptions from equity funds. Equity fund managers were also uncertain on how India will recover from the pandemic and due to these factors, they had taken a slightly conservative position. The confidence of domestic fund managers around the economy is now renewed and that is why fund managers have been deploying money. This is also supported by the fact that investors have reduced the redemptions and increased inflows into equity funds,” said Sunil Subramaniam, Managing Director, Sundaram MF.

Meanwhile, FPIs have sold shares worth close to Rs 10,000 crore ($1.34 billion)—most in three months—amid a global risk off sentiment triggered by the spread of the delta variant and concerns around economic revival.

“The FPI selling is more to do with the fact that the growth in Asia generally and in emerging markets is slower because of the increasing Covid cases and the slow rollout of vaccinations. There is better growth from the developed market that we saw with significant earnings in the US. Also, outflows are being seen due to the crackdown in China, and the emerging market outflows could be because of the weightage of China. The markets are still doing well as the selling is absorbed locally; domestic investors have offset it," said Andrew Holland, CEO Avendus Capital Public Markets Alternate Strategies.

On several occasions in the past, MFs have helped offset FPI outflows, cushioning the market fall.

Rashesh Shah, chairman, Edelweiss said this shows the true diversity of the domestic markets.

“Indian markets are truly diversified. We have retail who are as powerful as institutional investors. We have domestic institutions, who are as powerful as global investors. Our markets are very heterogeneous. There is a lot of balancing that is there. As a result of that we are seeing a lot of depth and breadth,” he said on Wednesday at an event organized by Ficci.