Despite headwinds, MFs keep faith in Indian markets

Domestic mutual funds (MFs) have kept their faith in the Indian stock market despite multiple headwinds all through 2022-23 (FY23), with their net flows into equities crossing the Rs 1.5-trillion mark for the second consecutive financial year.

MFs pumped a net Rs 1.53 trillion into equities till March 1, 2023, the Securities and Exchange Board of India (Sebi) data shows, as compared to Rs 1.72 trillion in FY22.

Since FY15, MFs have been net buyers of equities, except in FY21, when they sold a net Rs 1.21 trillion.

In the nine financial years between FY15 and FY23, they have pumped in a massive Rs 6.90 trillion in the Indian equity market, the data shows.

Swarup Mohanty, chief executive officer and director, Mirae Asset Investment Managers (India), believes this optimism is stemming from the strong economic growth in India, which in turn is driving flows into the equity markets.

“Another strong reason for the continued strong flows is the change in behaviour of Indian retail investors, who have been continuously pumping money into MFs via the systematic investment plan (SPI) route over the years.

"That has changed the structure of the Indian equity market. All this is giving some comfort to the markets on every downside,” Mohanty added.

Foreign portfolio investors (FPIs), on the other hand, have recorded a net outflow of Rs 36,538 crore in the equity segment so far in FY23.

This comes after a dismal FY22, when they pulled out Rs 1.42 trillion from the Indian equity market, the NSDL data shows.

On a comparative basis, while MFs pumped in Rs 3.25 trillion in domestic equities in the past two years (since March 2021) despite market volatility, foreign investors have pulled out Rs 1.78 trillion during this period.

Thus far in the current fiscal year, the S&P BSE Sensex has gained 2.12 per cent, while the BSE Midcap index and the BSE Small-cap index have risen 2 and 2.3 per cent, respectively.

Mohanty of Mirae believes FY24 could be a little different.

The Indian economy, he said, could see a slowdown towards the end of FY24, which would impact flows into the equity market.

“The first-time investors who started investing in the last two years have not made money.

"The data points coming from the rest of the major global economies are also not too strong.

"All this will start to play on investor’s minds and may lead to a slowdown in investor flows into the equity market as well,” Mohanty said.

As regards the foreign flows, analysts at BNP Paribas remain cautious and see the risk of flight of capital from Indian shores to more lucrative destinations continuing in 2023.

China’s reopening and an increase in term deposit rates, they said, were likely to impact the flows into Indian equities.

“FII holdings in the Indian market are close to the lowest in a decade.

"With China reopening and India’s elevated valuation premium, we see a risk of FII outflows continuing in 2023,” said Kunal Vora, head of India equity research at BNP Paribas.