RRR exit, hmmm. Brexit, meh. Shrugging off plenty of bad news, the Sensex hit an 11-month high this week. What’s going on? The story for India is the thickening of the retail equity pipeline, not directly in stocks, but through institutions such as pension funds and mutual funds. Sustained flows of retail money is coming in. And it is coming in a staggered manner. Indian household money has traditionally been in real assets such as gold and real estate, in bank fixed deposits (FDs) and to some extent in life insurance policies. The organised sector contributed to their provident fund, which again went into bonds and other fixed return paper. Think about the change in our own investing behaviour—we swore by FDs and Life Insurance Corporation of India policies, but are now die-hard SIPpers (investors into systematic investment plans of mutual funds). What changed?
The Indian equity market used to be beholden to two large sources of money—foreign institutional investors (FIIs) and the machinations of some big bull who was scamming the market. Indian stocks would rise and fall as hot money entered and exited the market. Various scams led to regular blow-outs and loss of investor confidence. But there is a fundamental shift in the Indian stock market now. Three changes over the past decade have changed the nature of inflows into the market. The first has been a movement away from direct investing by individuals into the stock market towards institutional investing. Investing in initial public offerings (IPOs) was a high stakes game that otherwise very conservative investors would play. I remember an uncle who invested money in a power project IPO that had no plans of turning a profit for many years to come but was coming to the market at a hefty premium. I remember asking him why he was investing in it. His sales talk to me was coming from the high decibel advertising push that the company had done. His money sank post-IPO and he swore off markets for good. Such manic-depressive events were common with direct investing in stocks.
Second, a decade of investor outreach, regulatory reform and sheer performance of funds has shifted a chunk of the money from ‘playing’ the stock market to ‘investing’ and new money from the Indian young sees the logic of systematic safe investing over gambling. The SIP flows are now at about ₹ 3,000 crore a month at the end of June 2016, up from around ₹ 2,500 crore a month in January this year. Look at this in the context of FII inflows. The total net inflows till June end this calendar year were about ₹ 22,000 crore, down from about ₹ 60,000 crore over the same period in 2014. In many months when FIIs are net sellers, the SIP pipeline continues calmly. I’m not including the unit-linked insurance plan money here simply because of insurers’ poor persistency numbers. If a company cannot hold more than two-thirds of its 15-year money for more than five years, it’s not going to be taken seriously.
Third, investor sentiment has been helped by pension money gradually beginning to come into the equity market. In 2004, central government employees shifted from a formula-based pension system to a market-based one through the National Pension System (NPS). In 2009, non-government individuals were allowed to open NPS accounts. The cumulative NPS contribution to equity is small due to government employees being able to invest just 15% of their contribution in equity (though that is about to change). As on March 31 2016, NPS has just over ₹ 12,000 crore in equity. The big change has been in the slowly modernising sluggish behemoth, the Employees’ Provident Fund (EPF), that opened doors to index-based equity investing in August 2015. Five percent of the additional EPF contributions are now going into stocks. Though still tiny, it has added about ₹ 9,000 crore to the equity bucket till now. A mutual fund chief executive I spoke to said that though small, the presence of EPF in the market is good since it gives courage to other long-term money to begin coming in.
With these three pipelines feeding the equity market, the ability of hot money, both foreign and domestic, to swing markets to its tune is falling. Hence, no market crash post the various exits.
Note to investors: As the Indian markets begin depending on our long-term money rather than hot flows, both foreign and domestic, as investors we need to manage expectations. Hype on a particular market segment doing well or a sector outperforming must not be allowed to colour your judgment. If you swim in deep waters, you remember the basic rules of staying afloat. In equity investing, they are simple. So simple that you can forget and get carried away by irrational exuberance. Equity takes 5-7 years to cook. For those who began investing in the past 12 months, do not get attached to the super returns you see now. Supernormal returns get ironed out by market dips. But if you are with the right funds in a portfolio that is not too concentrated, you will do well over the 5-7-year period. Do not put money you need in the next two years into equity. Use a debt fund or an arbitrage fund. If you don’t understand these, get help, or stay with an FD. Don’t move from hating the market to loving it too much. Keep the balance.
Monika Halan works in the area of consumer protection in finance. She is consulting editor, Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com
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