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Retail investors overlook valuations, trust past returns, to pump Rs 97,500 crore into markets

Domestic mutual funds have net bought stocks worth Rs 77,634 crore, while retail investors have directly invested 97,500 crore in the market since October, while foreign portfolio investors sell off equities worth Rs 1.5 lakh crore

New Delhi / March 30, 2022 / 12:35 PM IST

Despite incessant selling from foreign portfolio investors over the past six months, the Indian equity market has fallen merely 6 percent from its record highs hit in October. The resistance of the domestic stock market can be credited solely to the strong inflows from retail investors through direct investing and mutual funds.

Foreign investors net sold close Rs 1.5 lakh crore worth of domestic stocks between October and February. Domestic mutual funds net bought stocks worth Rs 77,634 crore, while retail investors directly invested 97,500 crore during the same period, data compiled by Moneycontrol showed.

Brokerage firm Kotak Institutional Equities believes that the flows from FPIs and retail investors reflect their divergent views on the Indian market.

“FPIs perhaps expect low returns from the market and are acting on their negative ‘expectations’ by selling aggressively,” the brokerage firm said in a note on March 30. The turn in sentiment on Indian equities for FPIs was driven by expensive valuations of the so-called growth stocks, and surging global bond yields.

India’s Nifty 50 index is priced at nearly 18 times one-year forward earnings, which makes it the most expensive major equity market in the world after the US. In terms of trailing earnings, the Nifty 50 index’s valuation of nearly 20 times is still more than one standard deviation away from its long-term average.

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In addition to that, given India’s status as a growth market, investors have been unimpressed by the valuations of various growth stocks. While the so-called growth stocks have undergone steep correction in the past six months, driven by FPIs, their forward valuations are still above historical averages, Kotak Equities noted.

“FPIs have decent ownership of Indian stocks and their future action in terms of buying and selling will be largely determined by return expectations, linked to valuations of the market and stocks,” it said.

At the opposite end of the table sit the retail investors, who have been consistently pumping billions of dollars into the market. Kotak Equities, however, is of the view that rather than being driven by future return expectations based on fundamentals, inflows from retail investors could be a function of the strong 1-2-year gains in the market.

“In our view, their expectations of high returns stem from past returns of the market. We would assume they are looking at the same earnings and valuations as FPIs,” Kotak Equities said. The Nifty 50 index is up nearly 18 percent from a year ago, even though the index has remained largely flat in the past six months.

Kotak Equities believes that if the market’s current consolidation phase continues into August-September, then the response of retail investors could change, given that the market’s 12-month rolling returns would largely become flat.

“It would be interesting to see the investment behaviour of retail investors after a ‘long’ period of low returns from equity markets, especially, if return expectations from other asset classes were to increase from current low levels,” the brokerage firm said.

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.



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Chiranjivi Chakraborty
first published: Mar 30, 2022 11:37 am
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