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(Photo: iStock)
(Photo: iStock)

Mutual funds’ steady SIP flows face their biggest ever test yet

  • Convincing investors to continue with SIPs is becoming increasingly difficult, said an investment adviser
  • Unlike during the global financial crisis, mutual funds have been absorbing of the selling by FPIs in the past month

Domestic institutional investors (DIIs) have traditionally acted as a backstop whenever there is heavy selling by foreign portfolio investors (FPIs). When the market fell by 60% between January and October 2008, DII net purchases worth $15 billion helped absorb FPI selling worth $13.1 billion, data collated by UBS Securities India Pvt. Ltd shows.

However, the role of mutual funds was relatively small back then, accounting for less than 20% of net purchases by DIIs.

With the surge in inflows into mutual funds in recent years, their role in the markets has increased considerably. Between 24 February and 23 March this year, while FPIs sold equities worth 65,371 crore ($8.73 billion), purchases by mutual funds stood at 32,448 crore ($4.33 billion), accounting for more than half of total purchases worth $8.18 billion by all domestic institutions.

A moot question is if the optimism will continue. Fund managers and investment advisers say that the ideal thing for investors to do is to stay with the systematic investment plans (SIPs), especially now that they are getting to buy stocks at much lower prices. “The whole premise of rupee cost averaging would come undone if investors were to stall or halt their SIPs when valuations are cheaper. SIPs invest through the entire valuation cycle, buying more units when valuations are cheaper and less when valuations are rich," said Vetri Subramaniam, group president and head of equity at UTI Asset Management Co. Ltd.

Indeed, the high amount of purchases by mutual funds thus far suggests that investors are staying the course and there isn’t much redemption pressure.

The moot question is whether their sanguine view of the future will continue if markets remain weak or fall from current levels. “Local mutual funds have been bigger buyers during this correction than the global financial crisis (GFC). This could reflect maturing retail investors or an overhang if markets do not recover soon," analysts at UBS India said in a note to clients.

(Graphic: Paras Jain/Mint)
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(Graphic: Paras Jain/Mint)

After all, with the lockdown across the country resulting in job losses and salary adjustments, SIP flows are likely to take a hit. If markets head further south, it could be another trigger for redemptions.

Besides, returns on equity mutual fund investments have been poor for some time now, and the recent correction is making returns look weak even from a five-year perspective. Convincing investors to continue with SIPs is becoming increasingly difficult, said an investment adviser, requesting anonymity. Such has been the intensity of the market correction in the past month that one investment adviser tweeted an extreme suggestion of shutting down equity markets, so that investors are somehow protected from the bloodbath and don’t get disillusioned with equity investing.

Of course, the buying by mutual funds in March suggests SIP flows have been steady so far. An impact, if any, will be seen only in later months. Also, much of this depends on how things progress with regard to the lockdown and estimates of how this will impact the economy.

“GDP growth estimates will be impacted and the severity will depend on how long the lockdown continues. But there are broader issues such as job losses that will impact the economy even more. Many companies that have been operating on the border, with regard to the indebtedness and operating leverage, will get wiped out. All these will take a very long time to recover from," pointed out Upasna Bhardwaj, a senior economist at Kotak Institutional Equities.

India is one of the few countries that has imposed a complete lockdown. Most major economies have imposed partial lockdowns and the possible impact of a countrywide lockdown is worrying, especially for an economy that was already reeling under a slowdown before the virus surfaced.

The silver lining from an investors’ perspective is that the heavy selling by foreign investors has abated after a mega stimulus package worth $2 trillion from the US. In the past two trading sessions, FPI flows were positive after 22 successive days of selling, provisional data published by stock exchanges show.

Another heartening factor is that valuations are reasonable. “The markets have corrected in terms of valuations and are now in an attractive zone relative to history. For long-term investors the risk-reward is favourable," said Subramaniam.

However, this path to decent returns in the long-term can be arduous. “Valuations are not as low as they were at the depths of the GFC in 2008-09 but there is no guarantee that they will not go there," he said.

The assumption that risk-reward is favourable depends on how long the impact of Covid-19 lasts. “From a market perspective risk-reward appears attractive for India, but only if we presume the negative impact of Covid-19 is short-lived and not crippling," UBS’s analysts said. In sum, the triple whammy of lower incomes, poor returns, and an uncertain future may well take a toll on India’s steady SIP growth story.

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