As FIIs flee, MFs turn Big Boys of Dalal Street

Nazim Khanmoneycontrol.comOne of the most interesting data points that has emerged in the rally that set in post the formation of the new government is the strength of the flows data into mutual funds.Indian masses that brought the Narendra Modi government into power in a landslide victory seem to be doubling down on their historic mandate by putting their monies in the Indian stock market -- the hope clearly being the government would turn around the economy, which would boost corporate earnings and equity returns.Once a symbol of fickleness, inflows into local equity mutual funds began with a trickle in May 2014 but soon developed into a steady stream, holding steady even in the face of intense volatility that has been witnessed in markets recently.As the chart below shows, equity mutual funds were in an almost continuous state of outflows since at least 2012 while markets were supported by inflows from foreign institutional investors (FII).

MF flows turned upward in May 2014 and have been strong ever since even as FIIs, of late, seem to be rushing for the exits.The trend is clear: Indian investors are buying shares on every drop in the markets -- in fact, Sebi data shows mutual funds net bought shares worth Rs 2,045 crore even on August 25, when the Sensex tanked 1624 points in a single day.“Despite such a sharp correction, our fund house didn’t see redemptions," Dinesh Kumar Khara, CMD of SBI AMC told Financial Express recently. He added that he believed retail investors would continue to plow in capital into Indian equities. There are a few reasons for the turn in sentiment. A lot of investors have turned to mutual funds as returns in traditionally-loved asset classes such as gold and real estate seem to have come off in the past few years.Credit also has to go to the fund industry, which seems to have learned from its 2008 act when it launched virtual copies of funds, with the only aim being garnering as much assets as possible.After the 2008 downturn, the industry realized a better route -- both for itself as well as the investor -- would be seek assets through the systematic investment plan (SIP) route.The monthly nature of SIPs not just instils discipline into the investor and prevent her from falling action to market's greed-and-fear swings, it also makes for sticky asset for fund companies.A recent Economic Times article, quoting fund company officials and distributors, said flows into equity schemes through the SIP route, which were close to Rs 1,200 crore per month in early 2014, have jumped to Rs 2,100 crore per month recently.Government efforts to shift savings from real assets to financial assets, by providing greater tax incentives to equity investments, also seem to be working.But even as the market has found an unlikely saviour in the Indian retail investor, any worsening of sentiment could result into that major tap of liquidity fleeing. Were that to happen, and with FIIs already pulling out capital globally to put into safe-haven assets, one wonders what would ensue.