FII inflows do not seem to be foundational in nature any longer so far as Indian equities are concerned, says Rajiv Shastri, Director and CEO at NJ AMC. The equity market today is underpinned by domestic flows that come from retail investors, he points out in an interview to Moneycontrol.
NJ AMC is a new entrant to the mutual funds space. It promotes rule-based active investing or smart beta strategies that rely on a different kind of expert - Financial Data Scientists, the company says in its website.
Shastri's opinion stems from some basic figures. Foreign Institutional Investors (FIIs) have net sold nearly Rs 3.9 lakh crore worth of Indian equities since October 2021, but Domestic Institutional Investors (DIIs) have managed to balance the loss to a major extent by pumping more than Rs 3 lakh crore into the system during the same period.
Sharing his views with Moneycontrol, Shastri talks about macroeconomic fundamentals and market dynamics and offers his views on the investment roadmap for retail investors. Excerpts from the interview:
Do you think the market is preparing the ground for a record high rally or do you see one more round of deep correction?
The Indian economy has been growing at a high and steady nominal rate (real GDP growth rate plus inflation) for quite a few years now and this is expected to continue for at least for a couple of decades. In this environment, corporate profits which are also nominal in nature (volume growth plus price increases) will grow at a similar pace on average.
As a consequence, stock prices which respond to corporate profits over long periods of time will also rise. This means that the Indian equity markets will continue to achieve one record high after another in the coming years.
Obviously, this rise will not be linear and will be interspersed with corrections and periods of stagnation. As such, whether or not there is another deep correction, the market will achieve another record high in the future.
Considering the slowdown in heavy FII selling in the last few days, do you expect the FIIs will be back with significant inflow in the next six months?
FII flows are not foundational in nature anymore as far as the Indian equity markets are concerned. There was a time when FII flows dictated whether the markets would rise or fall and FIIs controlled the manner in which the market behaved, especially over short periods of time.
Today, the equity markets are underpinned by domestic flows that come from retail investors ploughing in their hard-earned savings into mutual fund SIPs on one hand and the accumulated retiral savings of millions of contributors to provident funds on the other. The consistency of these two flows has its pros and cons.
While they have reduced the impact of FII flows considerably helping medium term volatility, they have ensured that valuations in the Indian equity markets remain elevated. As a result of these elevated valuations, which compare unfavourably to other "emerging" markets, which has led to these entities exiting the Indian market over recent months. This may also prevent their return till corporate profits rise enough for the evaluations to appear reasonable again.
The flow into equity schemes remained very strong in June 2022 with SIP inflow above Rs 12,000 crore for the second consecutive month. Do you expect the flow to remain strong for the rest of FY23 or will there be an outflow if FIIs return to India?
Inflows into equity schemes are robust and are expected to remain so due to a combination of factors. Firstly, Indian investors have internalised the benefit of investing systematically in equities as a means to generate wealth over long periods of time. It has been over two decades now that the MF industry has been communicating these benefits consistently and repeatedly to existing and new investors. This has led to investor behaviour maturing to a point that market movements do not change it dramatically.
Secondly, the MF industry still reaches just over 3.5 crore unique investors. While this has grown by just under 50 percent over the last year, it is still just about 2.5 percent of our population which leaves lots of room for future growth. And lastly, as the Indian population stabilises while GDP continues to grow, per capita income will grow at a much faster pace than earlier resulting in larger household surpluses. All these add up to a scenario of sustained large inflows into the equity markets in the coming years.
Do you think the US will not see any recession, though there is a fear on streets globally after faster policy tightening to tame inflation?
Recent and expected interest rate hikes in the US will definitely have an impact on its GDP growth rate. A recession is a technical term that follows two quarters of negative growth. Whether that will happen or not is a guess that we are not willing to make. But the US economy is going to slow down for sure.
During volatile markets, is it advisable to invest in mutual funds equity schemes or direct equity?
Investing in equities with a long term perspective is a good idea, especially in a high growth economy like India. Even if investors have the time, bandwidth and knowledge to invest directly in stocks it makes immense sense to diversify away from the risk of their own abilities. But for the vast majority of investors who do not have the time or bandwidth to invest in equities directly, mutual funds are a logical choice.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
