Cash-rich mutual funds light up D-street with record buys

The previous record of monthly MF investment was Rs 13,611 crore infused in November 2016.

Domestic mutual funds bought stocks worth close to Rs 16,500 crore in August, the highest ever equity investments in a single month, as households moved from physical assets to financial assets, driven by positive real rates, improving equity returns and better growth prospects.

The previous record of monthly MF investment was Rs 13,611 crore infused in November 2016. Foreign institutional investors sold Indian stocks worth Rs 13,100 crore during this period.

Equity mutual funds have seen inflows 17 months. The funds witnessed a pull-out from equities last time in March 2016 with Rs 1,370 crore. The key driver for such a massive inflow is a focus on systematic investment plans (SIP).

Flows via SIPs have grown at a 33 per cent CAGR over the past five years and at a 50 per cent CAGR over the trailing three years due to the attractive double-digit returns in this period.

Fund managers who were sitting on cash for finding a good opportunity to buy stocks at reasonable valuations, finally invested large sums in August. Despite peak valuations, there are enough stocks to buy at a current market price for a decent single digit return with lowered investor’s expectations due to falling interest rates, said fund managers.

«Today, at lower interest rates, investor expectation on equity returns has come down and as a result we are finding enough opportunities in the stock market for moderate return,» said Nilesh Shah, MD & CEO, Kotak Mutual Fund. «Most of our investments have gone into benchmark heavyweight sectors like banks, NBFCs, Oil & Gas, infrastructure and consumer goods.»

Historically, MFs have had close to 4050 per cent of their equity allocation towards mid and small-cap stocks. This strategy has worked and has helped them earn excess returns over the benchmarks, reflecting the underlying performance of midand small-cap stocks. Since 2001, India’s midand small-cap indices have risen at respective CAGRs of 18 per cent and 16 per cent, while the Nifty has appreciated at a 13 per cent CAGR.

However going forward, it’s difficult funds to outperform merely by investing in midand small-cap stocks due to their huge size, said analysts. «The scale has already reached a point where making the right mega cap call will become crucial to differentiating performance,» said Ridham Desai, equity strategist, Morgan Stanley India.

The strong inflows have pushed the asset base of equity mutual funds by more than 6 per cent to Rs 6.3 lakh crore at the end of July from Rs 5.91 lakh crore in the preceding month. Data from the Association of Mutual Funds in India (Amfi), show equity funds, which also include equity-linked saving schemes (ELSS), saw net inflows of Rs 12,727 crore in July, higher than Rs 8,164 crore in the preceding month. Amfi is yet to make public data for August 2017.

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