Should you exit your mutual funds as soon as FIIs start offloading?
Nov 27, 2013

Author: PersonalFN Content & Research Team

Impact

Indian equity markets heavily rely on Foreign Institutional Investors (FII). FII holding in Nifty companies stood at 18.1% in July-September quarter. As per data published by the Securities and Exchange Board of India (SEBI), FIIs raised their ownership in about 30 of 50 companies comprising CNX Nifty index. FIIs have poured in close to Rs 41,000 crore (net) in India during the current fiscal. While equity markets recently scaled to a new high; FII flows have still remained positive although have become less robust in November. Indian mutual funds have rarely turned net buyers in the market this fiscal. Retail investors have lost confidence in the market. Whenever markets rise, investors exit. About 5,50,000 accounts from equity oriented mutual funds were closed in October. Under such a scenario market looks vulnerable to a fall should FIIs start pulling out money.

FIIs vs. Mutual Funds

# Figures for the current month are till November 25, 2013
(Source: ACE MF, PersonalFN Research)
As depicted in the graph above, FII flows have been erratic. In the first two months of the Financial Year (FY) 14, the flow of foreign capital was strong but thereafter FIIs started exiting Indian markets for variety of reasons. Cooling growth, widening current account deficit and elevated retail inflation were some of the most obvious fundamental factors that triggered a selloff in the market. However, there has been one more crucial factor that affects the flow of foreign capital in Indian equity markets – global liquidity. Indian markets have witnessed sharp selloffs whenever the global liquidity situation has turned even slightly negative. Just few months ago there were speculations that Federal Reserve (Fed), the central bank of the United States, would roll-back the stimulus measures. The rally that has happened over last 2 months has largely been a relief rally happened due to decision of Fed to continue with its bond buying programme.

What future holds?

The speculation of Fed tapering has resurfaced in last few days. Based on comments made by key officials of the Fed, there has been a growing sense that Stimulus programme may come to an end sooner rather than later. Markets may react negatively to winding down of stimulus programme. Rupee may again take a hit as dollar would strengthen. The FII flows may quickly turn negative. Market may again see sporadic movements and would be subject to excess volatility. Although the deadlock over Iran’s nuclear programme has been broken and crude oil prices are expected to fall, India may not benefit if rupee falls again.

PersonalFN is of the view that, as markets have already rallied sharply over last few months; valuations may start looking stretched if corporate profitability continues to decrease. The core operating margins of Indian companies have declined by about 300bps (3%) in the September quarter form their peak reached in December quarter of FY2009-10. But, PersonalFN also believes that rather than exiting from equity mutual funds looking at the market level; one should look at one’s own asset allocation. Unless there is a need to re-align asset mix, you shouldn’t exit promising mutual funds thinking that markets won’t rise further and vice-a-versa. PersonalFN believes you would be better off following your personalised financial plan than just following trends in FII flows.