How Steady Mutual Fund Inflows are Shaping India’s Market Outlook?
Mutual funds have emerged as one of the favourite investments for retail investors in India, reflecting increasing interest in the financial markets of the country. This trend inspires growth in the Indian economy – providing opportunities for tapping into the power of its dynamic growth. This inflow of retail capital into mutual funds has been consistent since 2020, with inflows building month after month. This constant flow has been instrumental in supporting the Indian stock market at its elevated levels against setbacks such as the uptick in global geopolitical tensions and foreign market volatility. It has helped overcome the blues related to inflation.
Most of the growth is from millennials, who are reaching the stock market much faster than any other previous generation. While some people like direct investment in Demat Accounts, most of the flows come under SIPs, which is a more systematic form of investment.
But this altered investment pattern is compelling Indian banks to walk on eggshells. The shift away from deposits in banks and into a slightly different form of investment in the stock market in the form of mutual funds is taking away some of the predictability in the household savings generation for Indian banks. The divergence between credit growth and deposit growth is critical as more and more household savings have been going into mutual funds. As a result, banks are facing a problem in sustaining their deposit base.
Even some mutual fund managers have stopped or slowed down SIP investments because they did not have many viable allocation options. With fewer attractive opportunities available in the market, such managers have, instead, decided to hold onto their cash reserves and wait for a more favourable investment condition to be realized.
Just a decade back, equity mutual funds had only Rs 1.9 trillion in AUMs. Equity mutual funds have now crossed the mark of Rs 30 trillion AUMs. Association of Mutual Funds in India relies on inflows from equity funds due to which it could maintain the momentum in August 2024 as well. It was the 42nd successive month of positive inflows. Inflows for the month stood at Rs 38,239 crore with an increase of 3.3% compared to Rs 37,113 crore in July.
SIPs also breached a new high in August, touching Rs.2,354.7 crore highest on record by registering a steady inflow into the channels. That kept the AUM of equity schemes crossing Rs.30 trillion for the first time. The industry’s assets are now 45% equity. The AUM for the entire mutual fund industry has tripled over the past five years to Rs.66.7 trillion, as confidence among investors finds reflection there.
Industry experts said that the growth trajectory is impressive. The Indian mutual fund industry took 50 years to reach Rs.10 trillion in assets under management but has since the last five years increased to Rs.66.70 trillion. The popularity of mutual funds comes from being cost-effective and transparent, and the chance they afford to participate in India’s growth narrative.
Moreover, there was a shift in ownership dynamics within the Indian stock market. Pandemic-level shifts in retail investments have altered the market so gravely that DIIs hold a record high of 16.9% ownership in the companies of Nifty 500 in June 2024, while FPI’s shareholding has further dipped below the 24.5% mark for Nifty 50. Since March 2021, FPI ownership has declined in correlation with progressively stepped-in domestic investors seeking to stabilize markets during global economic downturns.
