Deluge of a different kind

Nothing beats the lure of lucre and a rising stock market never fails to get the adrenalin high. Foreign institutional investors (FIIs) have pumped in about $10 billion into equities in 2014 so far and that rocket fuel has powered the Sensex to a new high. Now, everyone wants to get on the gravy train. How does one otherwise explain the net inflow of #9,969 crore into equity mutual funds in the first quarter of FY15? To put that number in context, the cumulative net inflow of May and June (#9,761 crore) exceeds the net outflow of #7,627 crore in FY14. So, a couple of month’s inflow is more than an entire year’s outflow.

This turnaround seems even more remarkable as during the initial phase of the rally, investors redeemed money from equity funds; in fact, there was redemption to the tune of over #5,000 crore in both May and June. “Retail investors invest based on past performance. When the rally began, past performance was unattractive. Investor risk appetite was low and when prices started shooting up, they booked profit. Then, there were concerns over whether a stable government would come to power. Hence, retail investors were net sellers initially,” explains Nilesh Shah, MD, Axis Capital. 

The overwhelming mandate for the BJP and the associated growth hype seems to be hitting the right spots, as retail investors have again started flocking to the market. “Apart from a stable government, people started seeing equities doing better than gold and real estate and so they started changing their allocation,” adds Shah.

The whopping net inflows notwithstanding, Dhirendra Kumar, founder, Value Research, isn’t yet convinced. “While people have stopped selling, I believe they are not buying in a significant manner yet. The market has actually gone up in a short period of time, whereas it is a steady rise in the market that attracts investors in a big way. New investors have been unable to build a conviction as the rise has happened too quickly.”

For retail investors buying at the current valuation, then, is there a high risk of being left holding the can? Shah disagrees. “Investors entering the market now are seasoned campaigners who exited earlier and are re-entering. Besides, over a one-year time horizon, equities have outperformed other asset classes such as debt, gold or real estate. We are likely to see more net inflows into equity mutual funds at an accelerated pace over the next six months to one year.”

Irrespective of whether animal spirits or mindless herd-following is at play, funds will make merry and good times may be in store for their respective AMCs. The monsoon or the Budget have not turned out as they were expected to be but Kumar grudgingly agrees, “If the markets continue to rise in a steady manner without knee-jerk volatility, then there could be more net inflows.”