MFs can generate Rs 3 trn arsenal every year to counter FPI flows: Kotak MF

Given the predictability of flows through systematic investment plan (SIP) and the Employees' Provident Fund Organisation (EPFO) routes, domestic funds are now in a position to pump in as much as Rs 3 trillion a year into equities and offset the sharp selloffs from overseas funds, Kotak Mutual Fund (MF) said on Thursday.

The Rs 3-trillion estimate includes monthly SIP inflows of close to Rs 17,000 crore, about Rs 90,000 crore cash balance of actively-managed equity schemes, and another Rs 40,000 crore of EPFO investment in equity exchange-traded funds (ETFs).

Another close to Rs 64,000 crore can be deployed into equities by balanced advantage funds (BAF) in case the valuations turn attractive vis-à-vis the fixed income market.

BAFs are hybrid funds that dynamically invest in equity and debt based on market conditions. At present, the net equity allocation is close to 50 per cent. At the end of November, BAFs were managing over Rs 2.2 trillion.

“Since, BAFs as a category has grown, there is now another layer of cushion for the market. Even if flows from investors dry up, these funds can generate capital for equity deployment by selling their debt assets, if they find the valuations attractive," said Harsha Upadhyaya, chief investment officer of Kotak MF.

MFs emerged as a key support for the market in the calendar year 2022 amid a sharp pullout by foreign investors.

MFs invested a record Rs 1.8 trillion in 2022 and have deployed Rs 1.6 trillion in 2023 (till December 8). The surge in MFs' equity buying is underpinned by strong inflows, mostly through the SIP route.

On the equity market, the fund house said that the performance will depend on the outcome of key events like the general elections and factors such as US interest rates, energy prices, and consumption patterns.

The equity outlook listed global recession, interest rates remaining at a higher level, and other risks to earnings trajectory as the possible drags.

The positive factors could be softening in yields, softer oil prices, and election results coming on expected lines, said the fund house.

Upadhyaya believes that at present opportunities lie in themes related to the domestic economy like revival in capital expenditure, real estate, and home improvement, growing penetration of financial services, rural recovery, healthcare opportunities, and sectors like defence and railway which are key focus areas for the government.