Moneycontrol Bureau
The majority view on the street is that market could fall 4-5 percent in the short term. Surprisingly, equity benchmarks have held up well despite sustained FII selling, mediocre economic data, and dire projections by technical analysts at reputed foreign brokerages.
The US Federal Reserve’s decision to defer a rate hike is a relief, but other concerns like Greece, sub-par monsoon, likely food inflation, weak corporate earnings growth and a slower-than-expected capex cycle revival, persist.What then explains the market’s resilience? Heavy buying by domestic mutual funds clearly is a factor.
According to Sebi data, mutual funds have net bought Rs 3167 crore of stocks this month, largely neutralizing the Rs 3670 crore worth of selling by foreign institutional investors.
So far this fiscal, domestic mutual funds have net bought close to Rs 12,000 crore of shares, compared to net purchases of around Rs 4200 crore by FIIs.
Over the last one year too, the gap between FII net purchases (Rs 92,000 crore) and MF net purchases (Rs 55,000 crore) appears to be narrowing.
This could indicate two things: One, retail investors are bullish on equities. Two, and more importantly, they are beginning to realize the benefits of long term investments through mutual funds.
Most fund houses and financial planners say an increasing number of retail investors have started systematic investment plans with mutual funds
It is too early to say if strong domestic inflows will help reduce dependence on the more volatile foreign capital flows.
Between November 2007 and March 2009, when insurance companies were aggressively selling (or rather, mis-selling) Unit Linked Insurance Plans, domestic inflows helped soften the blow of FII outflows.
According to provisional figures on the stock exchange websites, domestic institutional institutions(MFs + insurance companies) net bought around Rs 97,000 crore of shares during that period, compared to Rs 1.31 lakh crore of net sales by FIIs.
Many felt FIIs would soon be marginalized as domestic institutions became the main source of liquidity. But that was not to be.
A clampdown on ULIPs by the insurance regulator, and an abrupt scrapping of distributors’ commissions by Sebi choked the two main pipelines of domestic flows.
For all their enthusiasm for mutual funds in a bull market, retail investors have proved to be fair-weather friends in the past.
Remains to be seen if their new found love for equities will endure this time.
Brokerage house Morgan Stanley is among those who believe that the stage is set for a gush of domestic money into the stock market.
Excerpts from its report last month:
“A new generation is looking at equities. With regulations and demographics now more favorable for investors, investor education having increased, and a less risk averse population, the qualitative environment favors equity investing.
Our estimate (using simple linear models) is for a domestic flow of US $300 bnover the coming 10 years versus the US$ 50 bn and US$ 134 bn that households and FIIs invested over the previous 10 years.”
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