Samvat 2074: Will retail investors, MFs put more money into stocks? Here's what ETMarkets.com poll say
Over Rs 90,000 cr worth of mutual fund money entered into stock market during Samvat 2073.
It was massive retail flows that made mutual funds buy Rs 18,277.03 crore worth of equities in November 2016, the month that saw Prime Minister Narendra Modi announcing a ban on high-denomination currency notes that accounted for 86 per cent of currency in circulation (in value terms).
Everyone was unsure what will happen on July 1, when the new tax regime GST kicked off. But retail-backed Rs 4,000-6,000 crore worth of mutual fund flows were working like lifeline for domestic benchmarks that kept hitting fresh highs.
To be precise, over Rs 90,000 crore worth of mutual fund money entered into stock market during Samvat 2073.
Now whether this structural-looking trend of consistent retail flows into mutual fund is the result of the cash ban (more money into financial instruments) is debatable, but brokerages do believe retail investors will have to pass many tests and the biggest would be the fear of falling. A 10-15 per cent plunge on Sensex from here on could be a good test, 12 brokerages polled by ETMarkets.com say.
Inflows follow returns, not the other way round
But first a key observation: Local inflows depend on how markets perform.
"Flows follow returns, not the other way round," says Deepak Jasani, Head - Retail Research at HDFC Securities.
Domestic flows typically chase returns and herein outperformance by equities in the past 2-3 years, has captured investor interest, Sanjeev Zarbade, Vice-president - PCG Research at Kotak Securities said.
Cash ban fuelled DII flows?
"There have been many catalysts as well, demonetisation being one. Volatility in the market has also been lower than in the past, which has also given the investors a sense of comfort. Given the demand for quality IPOs among investors, we do expect that flows would sustain. A significant slowdown in fund flows is not anticipated given sustained flows through SIP route, which are by design not sensitive to market movements," Zarbade said.
Market correction to test investor nerves
Some experts argue that the trend is changing and more structural money is entering the domestic market.
But they confess, any strong correction of say 10-15 per cent from here could test investor nerves.
"After demonetisaton, we saw a big structural change in investment habit. Equity as an asset class is getting familiar with retail investors, mutual funds are the preferred avenue, where the risk appetite is equally managed. Unless, there is any fear in the mind of retailers, which usually comes when market corrects more than 10 per cent, we expect this trend to sustain for the long term," said Vinod Nair, Head of Research at Geojit Financial Services.
One cannot expect same DIIs flow if market were to fall by 10-15 per cent as retail investors may become risk averse and look for safe havens in such a situation, Rakesh Tarway - Research Head - Reliance Securities said.
Tarway said such a situation may result in redemption pressure in mutual funds too. We are not foreseeing any big correction though, he said.
Jasani says he will track the progress of the flows when markets don't provide any meaningful return over 3-4 quarters.
TINA factor too at play
The problem of there is no alternative (TINA) too makes equities the only investable opportunity.
In a reply to the survey, Axis Direct said the relatively low returns offered by other asset class viz., single-digit returns on fixed deposits in the dropping yield curve scenario, stagnated real estate prices amid oversupplied, illiquid real estate market and regulatory curbs in gold purchases, investors flocked towards the stock market.
"The participation of investors has been increasing in tier-III and tier-IV cities with rising awareness about investment opportunities beyond traditional investment avenues and tax benefits in equity linked instruments. We are of the opinion that this flow would be unabated irrespective of the near term market conditions," Axis Direct said.
Pankaj Pandey of ICICI Securities believes the domestic market is witnessing a structural shift in terms of financialisation of domestic savings.
"Average monthly inflow into equity schemes in YtD FY18 is at Rs 22,500 compared with the monthly average of Rs 11,000 crore in FY17. Demonetisation acted as a catalyst channellising financial savings, which coupled with diminishing returns across other asset classes is likely to keep Indian markets buoyant," Pandey said.
Anand Rathi Financial Services is gung ho on DII flows as it feels that money will flow even if the market corrects in near future, as domestic intuitions are sitting on surplus cash and also continuous flow through SIP route.
Low inflation, high DII flows?
As long as interest rates remain lower, domestic inflows will remain strong, says Vaibhav Agrawal, Head of Research & ARQ, Angel Broking.
"If the inflation remains between 3-4 per cent for long, we are looking at a period of sustained strong inflows from domestic investors in the equities, Agrawal said, noting that domestic inflows have been strong since FY14.