Mutual funds set to turn net sellers of equities after 6 years of buying

On a year-to-date basis, domestic funds have offloaded equities worth more than Rs 20,000 crore On a year-to-date basis, domestic funds have offloaded equities worth more than Rs 20,000 crore

Mutual funds (MFs), for the first time in seven calendar years, are set to be net sellers of Indian equities. They sold equities worth over Rs 22,000 crore in November — the sixth straight month of net selling. 

On a year-to-date basis, domestic funds are now net-sellers to the tune of more than Rs 20,000 crore.

MFs had been net buyers in the previous six calendar years, including purchases of over Rs 1 trillion in 2017 and 2018. The last time they were net sellers was in 2013 when they sold stocks worth Rs 21,082 crore.

Domestic institutional investors (DIIs), which include MFs, insurance firms, and other domestic financial institutions, have offloaded shares worth over Rs 43,000 crore in November but remain net buyers this year to the tune of Rs 5,127 crore.

In contrast, foreign portfolio investors (FPIs) have ramped up their buying this year, purchasing more than Rs 1 trillion worth of shares year to date. In the past few years, MFs have emerged as significant institutional buyers, often offsetting the selling by FPIs.

“Net flows in mutual funds have been negative in the last few months and the selling in the market is a reflection of that,” said G Pradeepkumar, CEO, Union MF. He added there was a possibility that a few equity funds would have also taken tactical cash calls in the last few months amid rich valuations.

Equity funds posted their fourth straight month of outflows as investors continued to book profits in October. Total outflows in equity-oriented schemes stood at Rs 3,991 crore (including close-ended schemes), taking the total outflows since 

July to over Rs 10,000 crore. Industry players said that November might see outflows as well on profit-taking as the markets climbed new highs.

"Investors seemed to have moved a portion of their equity corpus from equities to debt, especially short-term funds," said Pradeepkumar, adding that inflows are likely only if there is a significant correction in the market.

There is a belief that the Indian markets have run ahead of fundamentals, which is why India’s prospects look less attractive compared to other emerging markets, according to brokerages.

UBS, for instance, is neutral on India, and has estimated earnings per share (EPS) growth of 25 per cent for 2021 and 15 per cent for 2022.

“Although growth and earnings should rebound in 2021, recent performance has pushed (India’s) valuations into less attractive territory, unlike Asean,” said UBS, adding that the progress on the reforms front, the size of the Budget deficit and easing of Covid restrictions were factors to watch out for.

Credit Suisse, on the other hand, has an underperform rating on the Indian markets. “The Indian economy appears to be recovering from the virus-induced recession despite Covid-19 being not completely under control. However, we remain underperform on the market due to its expensive valuation, relative to other Asian markets,” it said in a recent note.