What steady mutual fund inflows mean for Indian market—Is the bull run here to stay?

Mutual funds have become the preferred investment choice for Indian retail investors in recent years, offering a way to tap into the growth of the country’s financial markets. This surge in popularity is largely driven by the rapid expansion of the Indian economy, offering investors the opportunity to benefit from the country’s dynamic economic landscape.

Retail inflows into mutual funds have been on a consistent upward trajectory since 2020, growing stronger with each passing month. This steady influx of capital from individual investors has played a pivotal role in supporting the Indian stock market, helping it remain at elevated levels despite multiple challenges, including global geopolitical tensions, heightened volatility in international markets, and concerns over inflation and economic uncertainty.

A significant portion of these inflows comes from millennials, who are embracing stock market investments much faster than previous generations. While some prefer direct investments through demat accounts, many still favour the steady approach of systematic investment plans (SIPs).

Notably, the consistent inflows into mutual funds have become a growing concern for Indian banks, as this shift has disrupted their deposit base. 

With more investors opting to diversify away from traditional bank deposits in favour of stock market investments, particularly through mutual funds, banks are facing a significant challenge in attracting household savings.

Reserve Bank of India Governor Shaktikanta Das recently flagged the widening gap between credit and deposit growth as more savings flow into mutual funds. 

He pointed out that an increasing portion of household savings is moving away from conventional savings instruments like fixed deposits and into more lucrative investment options such as mutual funds.

Even mutual fund managers have, at times, paused or slowed down SIP investments as they found themselves running out of viable options for allocation. With limited attractive opportunities in the market, many fund managers are opting to hold onto cash reserves, waiting for the right moment to invest.

In just 10 years, equity AUM expanded from ₹1.9 trillion to ₹30 trillion

Recent data from AMFI, released on Tuesday, highlights ongoing strong inflows into mutual equity funds. August 2024 marked the 42nd consecutive month of net inflows into equity funds, with total inflows reaching ₹38,239 crore, up 3.3 percent from July's ₹37,113 crore. August's inflows were the second highest this year, following June's ₹40,608 crore.

Systematic Investment Plans (SIPs), a method that allows investors to invest small amounts regularly, reached a new peak in August. Contributions to SIPs hit a record of ₹2,354.7 crore, marking the 14th consecutive month of lifetime highs.

The robust inflows and the equity market rally led to a sharper growth in the assets under management (AUM) of equity schemes as it touched ₹30 trillion for the first time in August, which is 45 percent of the total assets being managed by the industry. A decade ago, the equity MF AUM was at ₹1.9 trillion. 

With these inflows, the industry's net assets under management rose to an all-time high of ₹66.7 lakh crore at the end of August from ₹65 lakh crore at the end of July.

Additionally, the number of mutual fund folios reached a new milestone of ₹20.45 crore, reflecting increased investor confidence in the mutual fund sector.

Overall AUM triples to ₹66.7 trillion in just 5 years

Hitesh Thakkar, acting CEO of ITI Mutual Fund, highlighted the impressive growth in Assets Under Management (AUM), saying, “It’s remarkable to consider that it took the Indian mutual fund industry 50 years to reach ₹10 trillion in AUM from 1963 to 2013.”

“The industry then added another ₹13 trillion in just six years, reaching ₹23 trillion by 2019. By August 2024, we have seen our AUM surge to ₹66.70 trillion, tripling from the 2019 figure. Mutual funds are an attractive investment option due to their cost-effectiveness, transparency, and the opportunity they offer for retail investors to participate in India’s growth,” Hitesh Thakkar added.

He highlighted that India is one of the fastest-growing economies in terms of GDP growth, financialisation, and digitisation. He noted that Moody’s latest report forecasts India’s economic growth at 7.2 percent. He also pointed out that sectoral/thematic funds, flexi-cap funds, and large and mid-cap funds have seen the most significant net mobilisation of funds among equity and hybrid funds.

Shift in ownership

The influx of retail investments post-pandemic has significantly reshaped ownership dynamics. According to an analysis by domestic brokerage firm DAM Capital, domestic institutional investors (DIIs) saw their ownership of Nifty 500 companies reach a record high of 16.9 percent in the quarter ending June 2024.

In contrast, foreign portfolio investor (FPI) ownership has been on a consistent decline, hitting its lowest level in nearly 12 years at 18.8 percent. Compared to the previous quarter, FPI ownership dropped by 30 basis points (bps) on a quarter-on-quarter (QoQ) basis, bringing the total value to USD 843 billion. This downward trend was even more pronounced in the Nifty-50, where FPI ownership fell by 40 bps QoQ, settling at 24.5 percent.

The influence of FPIs in the Indian market has steadily waned. Since March 2021, FPI-free float ownership has declined each quarter, with only two quarters showing slight increases. 

As of June 2024, FPI free float ownership stood at 39 percent, down from a peak of 48 percent. Meanwhile, domestic investors, including DIIs and individual investors, now control nearly 53 percent of the free float. DIIs hold around 35 percent, while individual investors account for approximately 18 percent.

The report also highlights how domestic investors have played a stabilising role in the market. It said that in every post-COVID global downturn, whether driven by Federal Reserve rate hikes or geopolitical tensions, domestic investors have consistently offset FPI outflows.

Since 2019, the combined domestic holdings of DIIs and individual investors have surpassed those of FPIs, underscoring the growing influence of local investors in the Indian stock market.

Will steady inflows continue to support Indian market?

Every dip in the Indian stock market recently caused by Foreign Portfolio Investor (FPI) outflows has been promptly bought up by domestic institutional investors (DIIs), with strong support from retail inflows. 

Whenever global uncertainties and market volatility have led to sell-offs by FPIs, domestic investors have stepped in to stabilise and drive the markets higher. This consistent pattern of domestic buying has been bolstered by robust retail investment, ensuring that even amid global economic turbulence, the Indian stock market remains resilient. 

These inflows have contributed to stretched valuations; however, analysts believe that this trend is likely to persist in the near term. 

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.