The Sensex’s worst quarterly performance since December 2011 was driven in part by the reluctance of domestic investors to bet on local equities. Domestic institutional investors pulled out Rs.34,232 crore out of Indian stocks in the March quarter, the highest since the North Atlantic financial crisis started.
Overall, in fiscal 2013, local mutual funds and insurance companies withdrew a record Rs.69,058 crore, dampening the effects of a $25.6 billion dollar infusion by foreign institutional investors.
The domestic institutional investor simply does not have the money to invest. Take the case of equity mutual funds, which saw the ninth straight month of net outflows in February, the longest such streak in at least the last five years. In fiscal 2013 (till February), retail investors have pulled out Rs.15,355 crore from equities, data from the association of mutual funds in India show.
For insurance companies, the share of money coming from unit-linked insurance plans (ulips) is falling. First-year premia from these schemes used to contribute as much as four-fifths of the total for insurers once; but with new rules, the share of ulips has dwindled to less than one-fifth. Moreover, as Citigroup data show, redemptions or withdrawals as a proportion of ulip income reached as high as 80% in fiscal 2012.
One reason why retail and even wealthy individual investors are moving away from local financial products is because they aren’t being pushed due to rule changes in both mutual funds and insurance such as abolishing entry loads, capping expenses and introducing lock-in periods.
The second and the more important reason is that not only are Indian households saving less, they are shovelling less of their money into financial assets. Even within this category, equity is the least preferred mode. That is not without logic. Since the peak of the last bull run, the Sensex is down nearly 10% and the BSE 500 index double that. In comparison, gold has gained 82%. Real estate and even fixed deposits would have given higher nominal returns than equities.
Will this situation change? Citigroup, for one, believes that outflows have peaked. The brokerage says the strong inflows seen till the market peak of January 2008 should be “materially off” break-even net asset values. For insurance companies, the unwinding of three-year equity-heavy term products sold till September 2010 (before the rule change) should ease over the next six months.
But for domestic investors to come back, equities have to rise consistently—around 15-25%, according to Citigroup. That seems a long shot.