"Rats abandon a sinking ship." If emerging markets are considered a sinking ship; they are the Foreign Institutional Investors (FIIs) who have been stampeding to exit Indian equity markets. International investors are not just bearish on India but also on major markets across the globe. Please look around and this is how world equity markets may look like;

Chinese equity markets are smashed, European and U.S. markets are distressed, and those in the Japan and elsewhere in Asia are rocked. It is very obvious, equity markets in India can’t run up in isolation. That decoupling hasn’t happened yet. In such a scenario U.S. Dollar is being considered very safe and has been attracting investors. This is why investors are encashing profits in equities and preferring to stay in USD for a moment; at least unless picture becomes clears.

Speaking about India, last week of August was a devastating one. Overvalued Indian market fell like a house of cards as contagion of Chinese gloom spread everywhere; after Asia’s largest economy pegged its currency down. While FIIs exited India; mutual funds came to the rescue. Only time will prove, who’s dumb and who’s smart. Having said this it is important for you to stay calm and not allow any mutual fund advisor to fool you. It has been observed that, mutual fund advisors often make investors churn unnecessarily when markets are volatile only with an aim of earning higher commissions.
 

Investment Trends in August 2015

Data as on August 31, 2015
Data considers daily net investments of mutual funds and FIIs in Indian stock markets for the month of August 2015
Source: SEBI, PersonalFN Research  

FIIs might be exiting India for reasons given below
 

• China has been facing serious structural problems. As slowdown fears in China appear to be more serious and well-accepted now, FIIs are believed to have become risk-averse all of a sudden and thus have been withdrawing from all major emerging markets
   
• What looked certain till now, as far as action of Federal Reserve (Fed) on policy rates in the U.S. is concerned, has started looking uncertain after China devalued its currency
   
• With 7 odd percent of GDP growth, India still remains one of the most rapidly growing economies. However, despite of showing noticeable improvements, Indian economy is well-short of meeting expectations of global investors.
   
• It seems lacklustre performance of corporate Inc., quarter after quarter, has finally made FIIs believe that India may take a long to recover in true sense. Valuations appear extremely expensive.
   
• Logjams in Parliament are obstructing the passage of some key bills which gives a feeling that there is no consensus within India on the reform agenda
   

In simple words, FIIs had invested heavily in India on expectations that it will be a rewarding investment destination. However, they appear to be worried about prospects of Indian markets now under fast changing environment.

Let’s now see how mutual funds are reacting to the changing situation

Taking a contra view, mutual funds aggressively invested in equity markets in August. Net investments by mutual funds amounted to over Rs 10,500 crore in August while the total in first 8 months of 2015 was about 47,000 crore as quoted by Business Standard dated September 02, 2015.

What makes mutual funds bullish on India when FIIs are selling in India and global brokerage houses are reducing targets of leading Indian Indices?

Here are the factors…
 

• Mutual funds have been witnessing huge inflows from the retail segment which is why they still remain net buyers
   
• Taking advantage of downbeat sentiment, fund houses might have done some value buying
   
• Although, by and large, mutual fund houses held low cash in their portfolios under diversified schemes, there is a possibility that, money they collected through New Fund Offers (NFOs) launched recently, may have found ways in the market
   
• Retail investors look upon recent market fall as an opportunity rather than a threat and may have invested aggressively
   

PersonalFN is of the view that, concerns about the prospects of Indian economy might be genuine to an extent but it would be inappropriate to conclude that one should exit from equity. PersonalFN believes, markets are driven by sentiments in the short term and by fundamentals in the long term. Therefore, whenever, sentiment is low and markets are stuttering; you shouldn’t get panic and sell; on the contrary you should buy selectively.

In case you are investing through mutual funds, you should stay with funds that follow sound risk management processes and invest with a long term view. Consistency across performance parameters is important while you select a fund to invest in. It is noteworthy that, you should keep your expectations realistic and give relatively longer time horizon to your investments. Volatility in the market provides you opportunity to do rupee-cost averaging. Systematic Investment Plans (SIPs) may help you do that.

You may take advantage of unbiased mutual fund research services provided by PersonalFN. PersonalFN has handpicked a few funds which look promising for next 5 years. Current market fall provides you an opportunity to invest in these funds.

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sumamura15@bsnl.in Sep 02, 2015 who said MFs are buying ? DIIs are buying and 80 % could be LIC ... who knows .... any comments .....

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