Mutual funds data show market is running out of fuel

Shishir Asthana

One of the main reasons the Indian equity markets had a strong run was the inflows into domestic mutual funds. The theory was the Indian markets were no longer dependent on foreign inflows as domestic investors were increasingly investing their savings into equities, through mutual funds. But this theory will appear a bit flawed if one were to look at the mutual fund inflows for the month of December 2018.

December 2018 saw mutual fund investments in equity fall by 21 percent to a net Rs 6,606 crore (equity plus ELSS investments), the lowest level in 2018. Net inflows into equity funds alone were at Rs 5,615 crore, well below the net inflows of Rs 11,422 crore as recently as last October.

Is the retail investor turning risk-averse? If so, it could get scary. For 2018 as a whole, foreign institutional investors (FIIs) were sellers to the tune of Rs 73,212 crore, but the market did not feel the pinch of their exit as domestic institutions pumped in nearly Rs 109,661.71 crore. During this period, mutual funds saw an investment of Rs 88,822 crore, an average of Rs 7,401.83 crore per month. That’s lower than 2017, which saw an investment of Rs 106,482 crore in equity mutual funds, an average monthly rate of Rs 8,873 crore.

Mutual funds account for the lion’s share of domestic investment in the market. In 2018, higher investments by these funds resulted in the market closing the year with nearly 4 percent gains. In 2017, FIIs withdrew Rs 44,108.85 crore but the domestic investment was Rs 90,738.31 crore (netting out mutual fund investment of Rs 106,482 crore while other domestic institutions were sellers). But in 2017, mutual fund investments were able to carry the market with the benchmark indices closing 27.6 percent up for the year.

While the December 2018 inflow is much lower than the average inflow, the market was able to maintain its level because of low year-end activity. The last time MF inflows were so low during the year was in March 2018 when inflows were only marginally higher than the December level. However, March 2018 saw the market falling by nearly 3.3 percent. The current level of MF investment is therefore clearly not enough to sustain the market.

In short, the numbers released by AMFI show if the inflows in mutual funds continue to remain at the same level as in December, the market may be in for trouble. The rally may be running out of fuel.

To be sure, the systematic investment plan (SIP) inflows which touched a level of Rs 8,022.33 crore in December 2018 are a silver lining. But taking the numbers along with the equity flows for the month, it is clear there was redemption from other equity funds and a part of SIPs are going into debt funds.

SIP investments have managed to hold the market up during a low volume period, but the data indicates they will find it tough to hold the fort if FIIs withdraw aggressively. The sharp fall in net equity mutual fund inflows is cause for worry.