Local funds key to shielding India from China swings: Tata Asset Management

Domestic stock funds took in a net Rs9,200 crore in August, 50% more than July even as global investors sold the most shares since October 2008

Foreign investors’ sway over Indian stocks is set to wane as local mutual funds take a bigger slice of the $1.4 trillion market, providing a buffer against price swings sparked by events like China’s yuan devaluation last month, according to Tata Asset Management Co.

Even as the worst emerging-markets rout in four years rubbed off on India’s benchmark S&P BSE Sensex, domestic stock funds took in a net 9,200 crore in August, 50% more than July, data from the Association of Mutual Funds in India showed last week. Global investors, on the other hand, sold the most shares since October 2008.

Foreign funds hold 22% of the nation’s top 100 companies, more than the 13% owned by domestic ones, leaving India’s stocks prone to the global risk perceptions of overseas investors. When the US Federal Reserve first signalled in 2013 that it would withdraw stimulus, outflows pushed the rupee to a record low. Now, the gap between the two is narrowing, mitigating such risks, said Ritesh Jain, chief investment officer at Tata Asset.

“Within three years, whatever foreign investors do will not impact us," Jain, who oversees $4.2 billion in assets, said in an interview in Mumbai. “I have started getting money at every fall." Tata Mutual’s assets have increased 28% in the 12 months ended June, data compiled by Bloomberg show.

Domestic inflows have gathered force since Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) swept to power in May 2014. Stock funds attracted flows of as much as 1.14 trillion in the past 16 months, exceeding the 93,400 crore that Deutsche Bank AG estimates they received between January 2002 and April 2014. They bought $2.4 billion of shares in August.

Optimism that lower interest rates and tumbling oil prices will help revive company earnings growth is luring investors toward equities, which have traditionally been shunned in a nation known for its penchant for gold. A 4% drop in bullion prices in the past year and sluggish property demand have dulled the investment appeal of alternative assets, Tata’s Jain said.

“The good thing is domestic money is not panicking," Sunil Subramaniam, chief executive officer at Sundaram Asset Management Co., which has $3.2 billion, said in a phone interview from Chennai. “India will benefit from lower oil and commodity prices at a time when China is slowing."

While purchases by local institutions have helped restrict this year’s fall in the Sensex to 6.9%, versus a 16% decline in the MSCI Emerging Markets Index, mutual funds may not be able to sustain their support to equities if the global turmoil continues, according to Anil Ahuja, the Singapore-based chief executive officer of hedge fund IPEPlus Advisors.

“The domestic institutional investor is not yet a credible counter to a potential foreign investor selling because the size of the two is very different," Ahuja said.

Indian mutual funds managed $186 billion in stocks and bonds at the end of June, while global investors’ equity holdings alone are worth $166 billion.

Even so, Tata’s Jain sees the shift toward financial assets accelerating as the government opens more than 170 million new bank accounts and the central bank keeps rates high enough to keep inflation within a government-approved target. Indian households have about $400 billion in stocks, compared with $1.1 trillion in bank fixed deposits, Morgan Stanley said in a May report.

“The money will first come to the banking system and then to mutual funds," he said. “If you know inflation won’t go above 4%, then you would prefer the banking system, and once that happens real estate is finished." Bloomberg