Equity MF Paradox

Why equity MFs continue to see inflows despite FPI selling?

Two pieces of data stood out in stark contrast in the month of October 2018. On the one hand FPIs were compulsive sellers in the Indian markets. The FPIs sold equity to the tune of Rs.29,000 crore and debt to the tune of Rs.10,000 crore taking the total FPI selling for the month of October to Rs.39,000 crore. Over the last 10 months since the beginning of 2018, FPIs have sold more than Rs.1 trillion worth of equity and debt in India. This trend is not restricted to India alone. FPIs had sold emerging market equities to the tune of $17 billion in October alone. But, on the other hand, mutual fund inflows went on unabated. Inflows into equity funds were to the tune of Rs.12,622 crore in the month of October with SIPs making up nearly Rs.7,965 crore during the month, which is a record. What explains this dichotomy?

It is essentially a dollar trade

FPI selling in most EMs is predicated on the view that dollar strength will keep the pressure on the EM currencies. Higher growth and a more hawkish view by the US Fed are likely to keep the dollar stronger and that would logically make the EM currencies weaker. It is this long dollar trade that most FPIs have been betting on. We have already seen the rupee dipping from Rs.64/$ to Rs.74/$ in just one quarter and that has surely spooked the FPIs. They have been selling out of India so as to at least protect the dollar returns possible.

FPIs also have valuation worries

FPIs have also worries about more structural factors in India. For example, the trade deficit has been widening and there are expectations of a global slowdown if the trade war worsens. FPIs have also expressed worries over two major issues. Firstly, they are worried about the NBFC liquidity crisis in the aftermath of the IL&FS fiasco. Secondly, they are also worried about corporate governance issues after specific cases like ICICI Bank, PC Jewelers, Infibeam and Dewan Housing came up. That has kept them wary of Indian equities.

SIPs are still working

Sustained flows to the tune of $1.2 billion per month are not a one-off act. It is a clear signal that Indian retail investors are starting to believe in the power of SIPs and rupee cost averaging. That has worked consistently for most retail investors in India.

TINA factor is at work

For a lot of retail investors, there is also the TINA factor at work. RERA and note ban have crimped the demand for gold and real estate. Bonds and FDs are becoming less attractive due to falling yields in India. Equity funds (especially via SIPs) appear to be the answer. It may not give  instant gratification but it is a surer way to move ahead. For MFs it is certainly a reason to celebrate!