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Flows to India stock funds tumble as furious rally spurs caution

  • Capital flow into Indian stocks is descending due to the raging pandemic that is having adversarial effect on stocks
  • Investors have started taking money out, probably to meet their own needs apart from booking profit from the rally, said Vidya Bala head of an investment firm

MUMBAI : Flows into Indian stock funds slumped in June as investors pocketed gains from a strong rebound in equities as the pandemic showed no signs of slowing in Asia’s third-largest economy.

Equity plans got 2.4 billion rupees ($32 million), according to data from the Association of Mutual Funds in India. That’s down 95% from 52.6 billion rupees received in May, and marks the third straight monthly drop. Demand for safe-haven assets is intact, with gold ETFs posting net inflows for a third month.

India’s main equity gauge has rebounded more than 40% from its March low, prompting savers to reduce their holdings because of worries that the worst effects of the coronavirus on the economy have not passed. Some investors have also been left behind by the recovery and are waiting to buy on dips.

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“Investors have started taking money out, probably to meet their own needs apart from booking profit from the rally," said Vidya Bala, head of research and co-founder at Chennai-based Primeinvestor.in. “Whatever investments are happening are in gold and exchange-traded funds."

Plans that invest in large- and multi-cap stocks saw the first ever outflow last month since AMFI began releasing granular data in April last year. But small- and mid-cap funds posted modest gains in net flows.

“Equity inflows have slowed as many investors are waiting for clarity on their own cash flows before investing further," said Arun Kumar, head of research at FundsIndia.com. “A portion of investors have also been taken by surprise by the sharp rally and are waiting for lower levels to enter."

Robust liquidity from institutional investors has helped cushion India’s stock market against large outflows sparked by global shocks in recent years. For instance, mutual funds and insurance firms together invested 555.95 billion rupees ($7.3 billion) into equities in March even as global funds yanked out a record $8.4 billion.

Liquid Funds

Flows to fixed-income products also declined. Investors added 28.6 billion rupees to this category in June, versus 636.6 billion in May, the AMFI data show. The reduction is largely because of outflows from liquid funds typically seen at the end of every quarter.

Gold ETFs took in 4.94 billion rupees, adding to the 8.2 billion rupees received in May, data from AMFI show. The product is likely to draw flows for remainder of the year, said Chirag Mehta, senior fund manager at Quantum Mutual Fund.

“Given the uncertainty and the disconnect we’re seeing on the economic reality and what stock markets are portraying, people are incrementally allocating to gold unlike before," he said.

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