6 Reasons Why Mutual Funds Participation Is Outshining FIIs   May 24, 2017

The confidence you have in your potential often decides how much confidence and trust others will have in you. If you are not confident about your knowledge, expertise and competence, then you would rarely find others showing faith in your ideas and abilities. However for a very long time, this proved wrong in the case of Indian equity markets.

For decades, Indians didn’t show much trust in their own market, but Foreign Institutional Investors (FIIs) trusted Indian equities unequivocally and earned huge profits in India. Barring the success stories of a handful savvy investors, Indian Investors have seen their markets going up despite their half-hearted participation. Less than 10% of domestic household savings are invested in equity markets even after two decades of liberalisation. However, we have now started witnessing the trend weakening.

This came to fore one more time in April 2017 when domestic institutional investors saved Indian markets from the shocks of a heavy FII selling. Perhaps to your surprise, net inflows by Indian mutual fund industry exceeded those of FIIs in April by over 2½ times. Interestingly, August 2016 onwards, mutual fund inflows haven’t turned negative even once on a monthly basis. After the Modi-led-NDA Government coming to power in May 2014, FIIs invested Rs 1,53,894 crores on cumulative basis whereas mutual funds poured in Rs 1,78,452 crores over the same time period.

Net inflows in equity markets…

Data as on May 23, 2017
(Source: ACE MF, PersonalFN Research)

6 reasons why the reliance on FIIs is falling…

  1. Domestic investors have been bullish about the economic recovery and thus have been hiking their exposure to stock markets through mutual fund SIPs (Systematic Investment Plans).
  2. Interest rates on fixed deposits have dropped substantially over last 12-18 months, compelling investors to find alternatives.
  3. The passage of some crucial Bills such as Goods and Services Tax (GST) has given rise to market optimism.
  4. Consumer confidence in India has been one of the highest among the major economies of the world. This has kept Indian investors optimistic about the growth potential of Indian industry/companies since the domestic growth story is still strong.
  5. Indian markets have sustained a rally for over 3 years now. During the same timeframe, other asset classes such as gold, real estate haven’t generated attractive returns. As a result, Indian investors have started to believe that, equity markets in India have a bright future and are committing more money to them.
  6. Market awareness campaigns run on various platforms have also started showing results.

But’s don’t overlook this…

On the basis of free-float methodology market capitalisation, FIIs hold around 40% stake in listed Indian companies although this proportion has gone down from 41% recorded in 2014. However, Domestic Institutional Investors (DIIs) have increased their stake to 10% in listed companies on free-float market capitalisation index, which from up 8% in 2014. Notwithstanding, FIIs still remain dominant investors in Indian markets and any selling done in haste or panic can detract Indian markets, as the domestic participation can increase only gradually, despite having an enormous potential.

Past experience suggests that markets reward disciplined long-term investors. Now it remains to be seen who benefits the most from Indian equity markets—domestic investors.

If you are unsure about how to profit from the exciting market opportunities, no need to worry. If you have a high-risk appetite and the 5-year plus time horizon, you should take exposure to Indian equity markets through mutual funds.

To generate competent risk-adjusted returns, you may subscribe to PersonalFN's equity mutual fund research service: FundSelect. We will show you The 6 Ultimate Secrets to Beating the Market By A Whopping 70%!

Besides don’t forget your investments should be in accordance with your personalised financial plan and asset allocation.

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