The Indian equity markets (i.e. the S&P BSE Sensex) encountered turbulence in the month of July 2013, but ended the month thus far (i.e. as on July 30, 2013) with a diminutive loss of -0.2%.

It is noteworthy that, host of macroeconomic variables traced the movement of the Indian equity markets. The month began on a fretful mood with HSBC's Purchasing Managers' Index (PMI) data for India's manufacturing coming in at 50.3 in June 2013 (data released in July 2013); barely above the 50-month low of 50.1 made in the previous month (i.e. May 2013) and a tad above the mark of 50.0 which separates contraction from expansion. Likewise the HSBC PMI data for services was also quite disappointing, as it fell to 51.7 in June 2013 (data released in July 2013) from three-month high of 53.6 in May 2013. Thus the economic growth slowing down and gripping was rather evident. The Indian rupee also sent shivers down the spine of the Government and the central bank as the rupee fell against the U.S. dollar hitting an all-time low of Rs 61.2 (on July 8, 2013), which in turn forced the Reserve Bank of India (RBI) to step in and take measures to control the movement of the rupee vide a hike in short-term rate and contraction in liquidity. In the intermediate while there were positives as well, such as statement from Federal Reserve Chairman, Mr Ben Bernanke saying that the U.S. central bank might not roll back its stimulus programme earlier than expected, India's trade deficit data for June 2013 falling to U.S. $12.2 billion from U.S. $20.1 billion in May 2013 and moderation in WPI inflation; it did not enthuse the Indian equity markets. In fact it encouraged Moody's bring back downgrade concerns as falling rupee would raise prices and impact Government's expenditure budget. Moreover, country's Current Account Deficit (CAD) remained a concern in times where weakness in the Indian rupee persisted. RBI too due to this reason, in its 1st quarter review of monetary policy 2013-14 kept policy rates unchanged, which again has not gone too well with the markets.

S&P BSE Sensex vs. FII inflows

Data as on July 30, 2013
(Source: ACE MF, PersonalFN Research)

And in the aforesaid backdrop, Foreign Institutional Investors (FIIs)continued to be net seller in the Indian equity markets to the tune of Rs 6,313 crore. Cumulatively in the June and July 2013, they have net sold in equities to the tune of Rs 17,340 crore - a five-year high!

Apart from the aforementioned macroeconomic variables, FIIs seemed to be concerned about the following factors which are in play in the domestic economy:

• Reform measures not translating very well (although the economy has been opened up with increase in Foreign Direct Investment (FDI) limit);
• Lack of consensus on policies;
• Deteriorating state of governance;
• Scam stories unveiling; and
• Structural bottlenecks
  
  

While the Securities and Exchange Board of India (SEBI) brought in reforms (towards June-end) aimed at including creation of an umbrella class of investors that will do away with the separate category for FIIs and approving doing away with the current practice of FIIs and their sub-accounts requiring a prior direct registration to operate in Indian markets; it did not turn them to be net buyers in July 2013.

And how are Indian equities and FII participation likely to be in the future?
Well, the Indian equity markets are likely to be turbulent in the near futurebecause of downbeat factors in play such as:

• Lull in industrial activity
• CPI inflation has moved up
• Intermediate pressures being evident
• Weak Indian rupee
• Pressure on CAD
• Tainted political canvas
• Scam stories unveiling
• Deteriorating state of governance
• Reform measures not translating too well
• Relatively high interest rate regime
• Risk of rating downgrade
• Global economic headwinds
  
  

Thus given the aforesaid factors, FII participation is likely to submissive. Moreover, with India heading for general elections next year, money seems to waiting on the side line.

So, what strategy should equity investors adopt?
In the background of the above and the risk emanating therefrom, PersonalFN is of the view that investor sshould stagger their investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommend s one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio, prefer the diversified equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years. Also PersonalFN believes that your investment discipline and asset allocation would decide your success in investing.

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