Is the Tide Receding?

Money chases growth during good times and safety during bad times. Last decade we have seen all this repeatedly. In 2006-2008 the whole world saw a chase towards growth and post the crisis it was a flight towards safety. Money flow changed its course accordingly; from equity, it quickly shifted to other asset classes like fixed income, real estate and gold.

Economies constantly generate money, which also has a multiplier effect. With money comes savings and that is invested in growth or safety depending on the market condition. November 2016, in India was a historic time as we embarked on the journey for demonetization. As we know lot of money moved from cash to bank accounts (we will not get into the dark side of what happened). A large part of this money was looking for investment opportunities. Mutual funds and specially equity schemes offered growth, which was the flavor that time; also, it offered tax benefit. Owing to that, equity schemes of Mutual Funds witnessed unprecedented flows.

Monthly SIP flow in Mutual Funds moved up from Inr 35bn in October 2016 to Inr 65bn in February 2018. Net inflows in pure equity funds have been near Inr 2,400bn since then and the total equity AUM has soared from Inr 5,000bn to Inr 8,500bn. During this time, the net buying of Mutual funds in secondary market has been close to Inr 1700bn, while FII buying has been just Inr 250bn.

However, this happy journey hit a roadblock on 1^st of February 2018, when LTCG was made applicable to all equity investments starting this financial year. A small relief was given in the form of grand fathering date being 31^st Jan 2018. Still somewhere it did not seem to have gone very well. Add to it markets have been in trouble since then. With trade war issue between US – China intensifying, political upheavals locally, influence of GST subsiding slowly, banking issues/frauds and more keeping investors uncomfortable.

The mean and median Nifty level for Nifty during financial year 2018 until February, was 10k. Thus, largely all the SIPs and investments have happened around 10k levels. As we started falling around those levels, mostly all the gains for the year are lost. As per a study, 25% of the mutual fund investors currently are first time investors. Probably, they have never seen a down cycle, which makes such a move stressful for them.

All this have shown up in the March Mutual fund inflows. Mar’18 gross inflows in equity funds (incl. ELSS) is Rs436.4bn second highest ever while redemption of Rs 369.8bn is the highest ever, net inflow lower by 59% month on month and by 19% year on year. SIP contribution declined to Rs64.2bn in Feb’18 vs Rs66.4bn.Equity Schemes saw inflows of INR 117bn vs. INR 172bn in Feb-18.

Of this 11700crores; 3000 crores were in Pure equity schemes (where average flows for last 12 months was 13500 crores); 3700 crores in ELSS (which was bound to happen in March month) and 5000 crores were in ETF (which is largely EPFO money). Thus, net – net inflows are down by more than 75%. While one may be lured to think this would be a one off data point, a consistent reduction in the inflows would mean a bad time for Indian markets.

Happy Trading.

Cheers!!