Equity flows, IPO supply and valuations: Fund managers weigh market risks and opportunities

wealth summit

As Indian equity markets grapple with volatility and muted returns, two factors are increasingly shaping investor sentiment: the sustainability of equity inflows and the growing supply of shares through IPOs and stake sales. At Moneycontrol Dezerv Wealth Summit, fund managers assessed how these forces could influence market direction over the coming year.

The panel featured Chirag Setalvad of HDFC AMC, Harsha Upadhyaya of Kotak Mutual Fund, Ashish Gupta of Axis Mutual Fund, and Niket Shah of Motilal Oswal AMC.

SIP flows: Strong base, but vulnerable to sentiment shifts

Harsha Upadhyaya said systematic investment plan (SIP) inflows — currently around Rs 25,000 to 30,000 crore per month — remain a key pillar supporting equity markets. However, he cautioned that these levels should not be viewed as permanent.

He noted that SIP inflows stood at roughly Rs 5,000 crore five years ago, and a moderation from current levels is possible. More importantly, he pointed to the size of the accumulated SIP book, saying that even a 10–15 percent redemption could offset several months of fresh inflows.

According to Upadhyaya, markets do not require a sharp collapse in flows to feel pressure. A gradual decline — from Rs 30,000 crore to Rs 25,000 crore, followed by a downward trend — could be enough to create unease. He added that a significant portion of recent inflows has come from younger investors with shorter market experience, increasing the probability of flow volatility.

Axis MF: SIPs hold firm, lump sums drive volatility

Ashish Gupta offered a more reassuring view on SIPs, noting that despite volatility over the past 12–18 months, SIP inflows have remained steady and have even increased.

He said markets have gone through multiple drawdowns and recoveries during this period, including a nearly 16 percent correction followed by further declines. Despite this, SIP flows have risen from about Rs 21,000 crore to Rs 29,000 crore, indicating a more structural allocation trend.

Gupta said volatility has been far more visible in lump-sum investments, with net equity mutual fund inflows fluctuating between Rs 25,000 crore and Rs 45,000 crore. He added that while deep market corrections could lead to lump-sum redemptions, steady SIP flows provide a degree of stability.

IPO supply: A persistent overhang

Niket Shah said the supply of equity through IPOs and stake sales remains elevated. He noted that IPO issuance has already reached close to Rs 2 lakh crore, with the total supply — when secondary stake sales are included — being significantly higher.

He pointed out that nearly 70 percent of IPOs listed over the past 18 months are trading below their issue price, underscoring the difficulty of generating returns in the primary market. Shah added that around 60 percent of IPO issuance has been through offer-for-sale (OFS), meaning proceeds largely flow back to private equity investors rather than into corporate growth or capital expenditure.

According to Shah, supply is unlikely to slow unless demand weakens. Promoters and investors remain willing sellers, and the market will eventually adjust by becoming more selective or demanding lower valuations.

Primary markets and secondary market performance

Chirag Setalvad said the scale of capital absorbed by IPOs does put a cap on secondary market performance, as significant amounts of money are diverted into the primary market. At the same time, he said this also helps prevent excess froth in secondary markets.

He added that IPO investing has become increasingly challenging. High-quality issues are often fully priced, while weaker issues attract attention due to strong narratives. Setalvad said supply should be viewed as a factor influencing return expectations, rather than as a trigger for a market crisis. When markets correct sharply, IPO supply tends to decline naturally.

Navigating IPOs: Discipline over excitement

Setalvad said navigating IPOs requires the same discipline as secondary market investing, with a focus on valuations, business models, and management quality. He cautioned against relying on hype, grey market premiums, or oversubscription figures.

He added that mutual funds typically receive limited allocations at IPO prices, making the listing price as important as the issue price. Large listing-day gains often make it difficult to build meaningful positions, reducing the relevance of anchor allocations.

Ashish Gupta said mutual funds prefer evaluating new-age companies after listing, particularly once lock-in periods expire and liquidity improves. He noted that meaningful positions are typically built 30–90 days post-listing, when prices reflect fundamentals rather than initial enthusiasm. He attributed divergence in IPO performance partly to retail-driven hype and grey market activity.

Valuations, sector views and market breadth

Looking ahead, Setalvad said valuations remain elevated across the market, limiting broad-based value opportunities. He said portfolios are holding higher cash levels and that technology is one of the few sectors where valuations appear reasonable.

Gupta said opportunities exist in financials, NBFCs, insurance, and consumer discretionary, supported by improving growth prospects and easing asset-quality concerns. However, he acknowledged that median market valuations remain well above historical averages, requiring caution.

Upadhyaya said market breadth continues to weaken even as headline indices remain stable. While stock-specific opportunities exist, constructing diversified portfolios in an elevated market remains challenging.

Preference for secondary markets

When asked to choose between IPO-only and secondary-market-only portfolios through 2026, the panel expressed a preference for secondary markets, citing better data availability, longer performance history, and greater comfort in evaluating businesses. Setalvad said the key challenge is not the absence of new-age companies, but the lack of reasonable valuations across both primary and secondary markets.