MFs likely to be the most dominant investor by 2020: Deutsche Bank

Says these could, by current rends, pip FIIs' flow in domestic markets

Mutual funds (MFs) could emerge as the biggest investors in domestic markets, says Deutsche Bank.

It says domestic investors' flow into equities-mostly through MFs-could average Rs 140,000 crore ($20 billion) a year from 2018 to 2020. At their peak (between 2012 and 2014), foreign institutional investors (FIIs) invested an average of $20 bn a year in domestic equities. If the improvement seen in financial savings and equity preference continue, MFs' investments into equities could be higher than peak FII investments in the next few calendar years, say their analysts.

At present, financial assets are around 40 per cent of household savings; equities account for less than eight per cent of financial assets. This is a considerable change from 2012, when financial assets were 32 per cent of household savings, while around one per cent of financial savings went into equities.

"The architecture of financial savings of Indian households is undergoing a structural shift," say Deutsche Bank analysts Abhay Laijawala and Abhishek Saraf. "We believe this is set to intensify and, in an optimistic scenario, average annual household flows into equities over FY18-20 could be twice the past three years' average of total flows into equity MFs."

In the past three years, equity MFs have seen an average annual inflow of around Rs 60,000 crore. This has helped the domestic market during bouts of FII outflow. FII inflows in 2015 and 2016 saw substantial decline over the preceding three years. Foreign flows are projected to further lessen, due to higher inflation and growth projections in the US.

Currently, FIIs are the largest institutional investors in the Indian market, by virtue of their high ownership. In BSE 200 companies, FIIs own about 25 per cent. In comparison, MF holding in the top 200 listed companies is less than five per cent.

Equity MFs have seen record inflow in the past three years and Deutsche Bank believes the trend could continue. The reasons are changing demographics; greater participation of a younger workforce in the equity market; distribution expansion of MFs into tier-2 and tier-3 towns; significant under-penetration of equities in household savings; fading allure of physical assets; and the prospect of real interest rates sustaining in positive territory.