Rocky start for equities in H2FY25 puts focus on mutual fund flows

Charting course to calm: With record equity inflows of Rs 2.8 trillion in FY25, they provide the ballast that steadies the ship amid choppy FPI exits

With the domestic market off to a turbulent start in the second half of the financial year (2024-25/FY25), the trajectory of the market is expected to be determined by domestic institutional inflows, particularly from mutual funds (MFs).

In recent years, MFs have been a major support for the market, more than offsetting sharp bouts of foreign portfolio investor (FPI) selloffs. Benchmark indices have declined nearly 5 per cent in the past week amid a pullout of over Rs 30,000 crore by global funds. Experts suggest that the decline could have been worse without domestic liquidity support.

“The consistent increase in systematic investment plan flows and the spread of these flows across the capitalisation curve, as well as across sectors and themes, has enabled domestic MFs to act as effective shock absorbers in the stock market. This cushions the market from the vagaries of FPI flows, providing a high degree of resilience,” said Sunil Subramaniam, a market expert and former senior MF executive.

MF deployment in the equity market has strengthened over time. Investments in the first half of the ongoing financial year (FY25) have already matched the total deployment of Rs 2 trillion during the last financial year. On a calendar year-to-date basis, net equity buying has reached a record Rs 2.8 trillion.

MFs have been net buyers for 17 consecutive months, with deployment exceeding Rs 10,000 crore for the past 14 months. This has largely supported the six consecutive quarterly gains recorded by the market in September.

“MFs’ equity buying is directly linked to the inflows they receive in their equity and hybrid schemes. These inflows have risen over the past few years due to strong performances across categories, growing penetration, and a positive long-term outlook for equities,” said Jimmy Patel, chief executive officer of Quantum MF.

Net MF inflows for active equity schemes totalled Rs 1.7 trillion in the first five months of FY25, only 8 per cent short of the Rs 1.8 trillion inflow for the entire 2023-24 (FY24) period.

In addition to incremental inflows, MFs also maintain elevated cash levels and capacity in hybrid funds to invest more in equities. As of August 31, equity and hybrid schemes from the top 20 fund houses had set aside 6 per cent of their corpus in cash, according to a report by Motilal Oswal Financial Services.

Meanwhile, the next equity exposure of most balanced advantage funds is close to its all-time low, leaving fund managers with enough dry powder to deploy during market corrections.

The inflows into equity schemes have remained strong despite valuations being in the expensive range, particularly in the midcap and smallcap sectors. A recent report from Kotak Institutional Equities highlighted that MF investors have remained unfazed by valuations and other risks.

“High conviction at all price points among retail investors with limited investment experience, due to high returns over the past three to four years, has led to high levels of confidence (and greed) among investors of all kinds,” the report stated.

“The market has brushed aside all negative news so far, including the Bharatiya Janata Party losing its majority in the Lower House of Parliament in the 2024 national elections, the government raising capital gains tax on equities in the July 2024 Budget, first-quarter FY25 earnings missing estimates, several themes disappointing, and the West Asia situation deteriorating rapidly,” it added.