BackMutual funds invest in equities for 13 months in a row
Money managers are betting that the streak will continue, as gold and real estate deliver lower returns
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Mumbai: Indian mutual funds have invested in equities for the 13th month in a row in May—the longest spell of net mutual fund inflows into the stock market in at least 15 years—and money managers are betting that the streak will continue, as gold and real estate deliver lower returns.
Mutual funds have invested a net of ₹ 53,831.1 crore in Indian shares since last May—when the National Democratic Alliance (NDA) won the 16th general election—until 21 May this year, according to data from the Securities and Exchange Board of India (Sebi).
It is the longest period of net investments by mutual funds since January 2000, when records began to be maintained. Since the election results, the BSE’s benchmark Sensex has risen 15.64%, and for the year to date it is up 0.5%, at 27,643.88 points.
To be sure, the Sensex has dipped 6.87% from its record closing high of 29,681.77 points on 29 January on a combination of factors, including concerns about the slow pace of corporate earnings growth and worries about tax claims made against foreign portfolio investors on past capital gains.
On Thursday, Citigroup cut its December 2015 target for the Sensex to 32,200 points from 33,000 earlier, saying investors’ faith in India is a little fickle. HSBC Holdings Plc. cut India’s ratings to underweight from overweight on 13 May.
Even so, retail investors are expected to stay invested in stocks as they seek to reap potentially higher gains from the stock markets.
In India, around $10 trillion is invested in real estate, $1-2 trillion in gold, and fixed income exposure through debt and fixed deposits is $2.5 trillion, according to Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd. Equity holdings of retail investors, directly and through mutual funds, roughly stands at a far lower $300 billion, he estimates.
“Retail investors have limited exposure to equities. Now, they are realizing that equity is delivering better returns, and by not investing much in equity they have made a mistake," said Shah.
“They (retail investors) are in a slow train of debt and gold and the world is now in the fast train of equities," Shah said, adding that around 7.8 million systematic investment plans were continuing irrespective of market conditions.
That seems to be the popular view, with real estate and gold offering diminished returns in recent times.
For real estate, taking the example of Mumbai property prices, realty services firm Jones Lang LaSalle’s India unit expects the city’s real estate to see a mere 6% price appreciation in 2015.
“Don’t expect a major appreciation on your property in the next two years; returns on property are likely only from the third year," Ramesh Nair, chief operating officer, business, and international director, JLL India, said in a 20 May note.
“Given that average property prices across Mumbai have plateaued and sales remain sluggish, many home buyers are speculating if a correction will take place in 2015," added Nair.
From its peak on 29 August 2013, when MCX gold was at a record high of ₹ 32,943 per 10g, it has declined 17.71%. On Monday, it was trading 0.08% higher at ₹ 27,105 per 10g.
“Indian household savings have been very poorly invested in financial assets like equities and debt instruments, while they are heavily over-invested in physical assets such as gold and real estate. A mere 2.3% of Indian household savings are allocated to equity," said S. Naren, chief investment officer at ICICI Prudential Asset Management Co. Ltd.
“Due to underperformance of physical assets, we are seeing signs of domestic investors returning to financial assets. Over the longer term, financial assets have the potential to outperform all asset classes and therefore, we are likely to see more and more domestic investors allocating to long-term debt and equity," added Naren
The Indian mutual fund industry’s assets under management (AUMs) swelled around 10% in April from the previous month, riding on inflows into liquid, equity and balanced funds, the latest numbers from the Association of Mutual Funds in India show.
The tally at the close of the month was ₹ 11.86 trillion, up 1.04 trillion over the previous month, Crisil Research said in a report on 7 May.
“Going forward, more investment will come into mutual funds, as provident fund money will also come in," Shah of Kotak added.
On 31 March, the labour ministry decided to invest a portion of the Employees’ Provident Fund corpus in the equity market, ending years of doubt and scepticism.
The Employees’ Provident Fund Organisation will invest 5% of its incremental corpus, or a little over ₹ 8,000 crore, in exchange-traded funds (ETFs). An ETF comprises a clutch of stocks that reflect the composition of an index, like the S&P CNX Nifty, or BSE Sensex, and are traded on stock exchanges like company stocks.
A closer look at the investing pattern of mutual funds in equities shows that their preference has shifted away from oil and gas companies, which were once among their favourite bets.
Data for sectoral deployments by mutual funds show that since October 2009, when the break-up of such investments was made available, there has been a shift away from oil and gas stocks towards banks, auto, pharmaceuticals and software stocks
This shift captures both mutual funds’ change of preference and stock price changes.
In October 2009, mutual funds held 13.18% of their total equity AUMs in oil and gas stocks, while as of April 2015, this stands at 7.65%.
Mutual funds held 26.89% and 10.24% of their total equity AUMs in banking and financial services and auto and auto ancillaries, respectively, in April 2015, compared with 17.55% and 4.59% in October 2009.
Since the start of October 2009, the Sensex has risen 63.24%.
In the same period, the BSE Oil and Gas Index shed 9.34%, while the BSE Bankex and BSE Auto Index logged gains of 115.03% and 187.79%, respectively.
“We believe that a cyclical revival will eventually happen. Consequently, cyclical sectors like infrastructure and financials could do well in the long term," said Naren.
“Also, given the fact that the rupee has appreciated substantially, the technology sector, which has been hurt by this rupee movement, is likely to benefit, since we believe that the rupee is not likely to continuously appreciate against the euro," added Naren.
Mutual funds’ exposure to software services companies has risen to 9.43% of equity AUMs in April from 6.71% in October 2009, and it currently ranks third in asset managers’ exposure, in terms of percentage of AUMs.
Madhurima Nandy in Bengaluru contributed to this story.
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