Mumbai: Domestic liquidity that has fuelled the Indian markets’ phenomenal rise during the year is likely to hit a roadblock. According to UBS Securities India Pvt. Ltd, local retail flows into Indian equity could be vulnerable. The ‘sticky’ trend so far in systematic investment plans (SIPs) could be vulnerable if returns turn negative and the market risk reward was not attractive, the financial services firm said in the UBS Evidence Lab survey report dated 29 August .

The survey indicates some resilience in mutual fund investments even in a potentially negative returns scenario. “The survey indicates SIPs are also vulnerable to redemptions, contrary to the widely-held market belief. Household savings rate has been declining sharply over the past seven years to the lows of the 1990s. A reversal in this may not be sufficiently sharp and imminent to aid retail flows into the Indian equity markets," according to UBS analysts Gautam Chhaochharia and Sanjena Dadawala.

A a moderation in local retail flows was beginning to play out, but Nifty and small and midcap valuations suggest strong sustained support from local flows was being priced in, the survey warned.

Inflows into equity mutual funds have also been slowing and while SIP inflows have sustained, they are not necessarily growing every month or quarter as earlier. As monthly data shows, most equity MF inflows were from SIPs in recent months, suggesting that non-SIP inflow was quite muted. Even if SIPs remain popular and settle around the recent number for the remainder of the year, the 2018 annual inflow could be much lower than in 2017, cautioned UBS.

Domestic institutional investors (DIIs), including insurance and mutual fund companies, have pumped in around 70,164.97 crore so far in 2018. In contrast, foreign institutional investors (FIIs) were net sellers of Indian equities worth $ 311.72 million in this year so far.

According to the Association of Mutual Funds in India (Amfi), SIPs have been gaining popularity among Indian MF investors, as it helps in rupee cost averaging and also in investing in a disciplined manner without worrying about market volatility and timing the market. According to AMFI, the amount collected through SIPs during July 2018 was 7,554 crore.

SIP is an investment plan (methodology) offered by mutual funds wherein one could invest a fixed amount in a mutual fund scheme periodically at fixed intervals.

UBS estimates current equity asset under management of mutual funds to grow to 32 trillion by the end of FY25 (assuming an annual market return CAGR of 9% to 2025), in line with the CAGR since FY07. “Of course, the above presumes steady market returns—a period of sharp correction when the one-year trailing returns turns negative may lead to periods of smaller inflows or even redemptions, which will imply lower AUMs by 2025," UBS said.

Domestic retail money flow into Indian equities has been intact so far this year and is expected to cushion the outflow of foreign investors’ money by most analysts. Any dent in the domestic liquidity is likely to dent the rally, as FIIs are likely to further sell Indian shares, with the US Federal Reserve on course to hike global interest rates at a gradual pace.

Close