Mutual funds' flow into equities crosses Rs 1 trillion mark in CY18

Even though mutual funds have been net buyers in the equity segment during calendar year 2018 (CY18) with an investment breaching the Rs 1 trillion mark for the second consecutive year, their flows on a monthly basis have been wavering.

Experts attribute this to the market volatility over the past few months on account of a sliding rupee, rising oil prices, liquidity crisis in non-bank finance companies (NBFCs) and other global factors. The overall investment climate, they say, will not turn around and stabilise in a hurry. 

Upcoming state elections that are being seen as a popularity barometer of the existing government ahead of the general elections scheduled in 2019 is also keeping investors at bay. All this in turn, experts say, will keep markets choppy going ahead.

“MF’s investment into equities is a function of how much money they get from investors. Systematic investment plans (SIPs), at the margin, are showing some concerns. Some investors have adopted a wait-and-watch approach. The overall investment climate has got a little roiled due to the liquidity issues in the bank and NBFC segments. That apart, investors are also holding back investment plans due to the upcoming elections. Based on past experience, I do not see this turning around very quickly,” says Lalit Nambiar, executive vice-president and fund manager (equity) at UTI Mutual Fund.

The S&P BSE Sensex and the Nifty 50 have slipped 13 per cent each from their respective highs recorded on August 28, 2018.

Meanwhile, foreign portfolio investors (FPIs) have sold equity worth Rs 341 billion so far in CY18, recording their highest outflow in rupee terms since CY08, NSDL data show. In October alone, they withdrew Rs 209 billion ($2.8 billion) from the equity segment. In comparison, they had pumped in Rs 513 billion in the equity segment during entire CY17. 

Rising oil prices and weakening emerging market currencies, including the rupee, are the two key reasons, experts say, are making foreign investors nervous. 

“FII / FPI flows into equities will continue despite lack of triggers. However, stability will only return in case the rupee’s fall stems. That apart, there are headwinds at the global level as well that are impacting flows into the emerging markets (EMs), including India. What works for India is its relative macro stability and benign inflation. I would wait for currency trend as a guiding factor for flows to return in a meaningful way,” says Tirthankar Patnaik, India Strategist, Mizuho Bank.

Jigar Shah, chief executive officer at Maybank Kim Eng Securities, too, believes that FII / FPI outflows could continue in case the rupee slides further. Any surprise outcome of the elections scheduled over the next six months, he says, is another reason that could flush some money out.

“FPIs have their own reasons for exiting. A possible rate hike by the US Federal Reserve (US Fed) could lead to some reversal of flows from EM to developed markets (DMs). Moreover, a sharp depreciation in the rupee is hurting their returns and forcing them to withdraw. They can come back once the currency stabilises. I do not view it as their rejection of India as a high potential market for the medium-to-long term,” Shah says.

Calendar Year Net flow in Rs billion
2008 -529.9 141.1
2009 834.2 -53.0
2010 1332.7 -278.5
2011 -27.1 62.7
2012 1283.6 -208.6
2013 1131.4 -210.8
2014 970.5 239.4
2015 178.1 722.0
2016 205.7 481.7
2017 512.5 1187.8
2018 -341.3 1022.5
October 23, 2018

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