Moneycontrol Pro Panorama | Contrasting tale of foreign & domestic investors

Why this divergence between FIIs and domestic retail investors?

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Indian equity markets are presenting a contrasting tale between domestic and foreign investors. Gone are the days when Indian equity indices shuddered on selling by foreign institutional investors (FII). Today, the Indian retail investor is an active participant in capital markets as seen in the assets under management of mutual funds swelling month after month.

Check the September data on equity flows. In September, FIIs sold around $2.19 billion (Rs 18,200 crore) in local equities. This is reportedly the highest in six months. In sharp contrast, September equity inflows through the mutual fund systematic investment plan (SIP) route were Rs 13,857 crore. This marked the 31^st month of continuous net inflows into Indian equity markets.

In fact, the SIP flows data released every month by the Association of Mutual Funds (AMFI) shows unfettered confidence of domestic retail investors in the systematic investing tool that enables a disciplined approach to benefiting from equity markets. Overall SIP flows into mutual funds -- equity and debt -- scaled an all-time high of Rs 16,042 crore in September!

Why this divergence between FIIs and domestic retail investors?

Some brokerage reports -- both domestic and foreign -- state that the adverse impact of El-Nino on consumption and spending, rising crude prices due to global geopolitical risks and war, India’s general elections and the consequent political uncertainty are triggers for the recent FII sell-off.

This is not to say that Indian investors are infinitely optimistic. In fact, although equity SIP flows were positive in September, the drop compared to the SIP flows seen in August does reflect a moderation in investor sentiment. Analysts are wary of risks from slowing global macros and the impact on India’s growth from exports. Such factors may keep Indian equity markets range-bound until elections.

Canara Robeco's Shridatta Bhandwaldar, in this interview, says the Nifty is trading at 19x FY25, which is not very expensive. “However, there is a lot of enthusiasm or froth, particularly in the smallcap category because of the kind of liquidity that category has witnessed for the last six to eight months,” he adds.

One must also remember that India’s provident fund and insurance companies too are active participants in India’s capital markets. Often, they counter the FII-induced volatility. In any case, history proves that FIIs do not take long to make a U-turn in their investment approach. Recent upgrades in India allocations relative to other economies, by foreign brokerages such as CLSA and Nomura (read here) underscore their faith in India’s long-term fundamentals.

As for the domestic investor, the mutual fund industry is all set to scale up to 20 crore unique investors, five times the current level of four crore investors. Read this article that summarises views and opinions of leaders who participated in the Moneycontrol Mutual Fund Summit held in Mumbai on October 11.

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