Curious case of record inflows in equity mutual funds

Nikhil WalavalkarMoneycontrol.com

Individual equity investors worldwide have a dubious distinction – they invest the most when the market is at the peak. But this year the situation is forcing analysts to use the most dangerous sentence in the stock market – ‘this time it is different’. For the month ended June 30, equity mutual funds have seen net inflows of INR 12,273 crore, say monthly data released by Association of Mutual Funds in India. The numbers are seen as an indicator of rising participation of domestic investors in equities. While speaking to CNBC TV18 in an interview, Navneet Munot, CIO, SBI Mutual Funds said, “Last couple of years, we were extremely vulnerable to global flows, because the domestic investors were selling. I think it is changing in a bigger way. I think structurally for the next 3-5 years, the participation of domestic investors will keep increasing. And to that extent, we will be able to cushion the impact which is induced by the volatility in the global markets and the actions that we see from the foreign investors”

A report issued by Deutsche Bank points out that the number for the June month is the second-highest net monthly inflows into equity mutual funds ever, second only to INR 13,700 crore of inflows seen in January 2008 when Nifty hit the peak in the past up-cycle. The only difference this time is that the inflows are coming when the Nifty is off the recent peak and in the downward trajectory. Nifty is 7% down from its peak of 8996 recorded on 3 March 2015. The report further points out that, inflows in equity mutual funds have ensured that Nifty does not fall in line with all emerging markets, especially China.

Why inflows?

Last couple of years has seen poor performance by physical assets. “Investors are moving away from physical assets such as real estate and gold due to poor returns. Also falling interest rates on fixed deposits have made investors switch to mutual funds,” says Himanshu Vyapak, deputy CEO, Reliance Capital Asset Management. Asset allocation skewed against equities too cannot be overlooked. “Over past four years, most investors were under-invested in equities. Falling prices of gold and real estate over last two years have made investors change their asset allocation to equities,” says Surajit Mishra, national head – mutual funds, Bajaj Capital. While domestic gold prices corrected 7.4% in CY 2014, Nifty appreciated by 31.4%. To make equities even more attractive, the small and mid cap oriented funds have rewarded investors with more than 100% returns in CY2014. Prices of stocks have been doing well over last 18 months and investors want to have a bite of this opportunity.

“Tailwinds such as change in political scenario, expectation of an upturn in economy and favourble macro picture have made many investors consider equities. In the past up-cycle some investors have burnt their fingers while investing in equities on their own, which has made many route their investments through less risky vehicle of mutual fund,” says Srikanth Meenakshi, co-founder and COO, fundsindia.com, a mutual fund distribution entity.

SEBI initiatives such as statutory spending on investor education, has led to increased awareness in the investors. All these factors have ensured that retail money makes strong come back to the equity mutual funds.

Will the inflows continue?

“In 2007, the bank deposits stood at about Rs 30 lakh crore as against the assets of equity mutual funds which stood at Rs 2 lakh crore. Currently, bank deposits are at Rs 90 lakh crore while assets in equity mutual fund schemes are merely Rs 4 lakh crore. We should witness more inflows into equity schemes to align with the previous proportion,” says Nimesh Shah, MD &CEO, ICICI Prudential AMC.

Going forward equity mutual funds are expected to remain in the limelight if the Nifty manages to scrape through the volatile times worldwide. If the Nifty manages to remain above the psychological levels of 8000, there is a very high possibility that the flows may continue as investors will see their money grow, says a wealth manager. However, increased primary market activity and corporate earnings may spoil the party.There is a pipeline of Rs 40000 crore worth of fresh issuance of tax free bonds by government backed institutions. High networth individuals have shown keen interest in these long term tax efficient bonds in the past and if the yields remain strong, there is a fair chance that money may flow into these bonds leading to some pressure on domestic retail inflows in mutual funds. However, not all are worried about tax free bond issuances given rising pie of financial savings and shift from physical assets to financial assets.

With a resilient equity market, there is an expectation of companies coming to stock markets with initial public offers (IPO) to raise fresh money. Government too wants to cash on the sentiment and may push some follow on public offers to achieve its divestment targets for the FY2015-2016. This too will have an overhang on domestic equity inflows in mutual funds as investors may want to participate in the primary market with hopes of listing gains. Though mutual funds do compete with such other investment alternatives the key issue in the sustenance of the equity inflows is the earnings growth. “If corporate earnings growth does not pick up by end of the year, the incremental inflows in equity mutual funds may taper,” says Srikanth Meenakshi. Most analysts are betting on corporate earnings to record healthy growth from September quarter.