Domestic money flow into Indian equities outstripped foreign fund flows in a cumulative two-year cycle in FY16-17 for the first time in seven years while a broad-based comparison of stock ownership suggests favourable tailwind for Indian funds and investors.
The total market value of domestic money invested in the BSE-200 at the end of March 2017 was bigger than the value of foreign fund holdings for the first time in two years. It is estimated that the value of Indian non-promoter and non-government holdings was $323 billion compared with $303 billion for foreign funds. This is the first time this has happened in eight quarters. The cumulative 24-month flow of domestic funds have been greater than the FPI flow for the first time since October 2010. Domestic funds invested $16 billion in local stocks in the two years compared with $6 billion for FPIs.
After a gap of seven years, domestic investors are once again emerging as a force to reckon with in the Indian equity market as foreign fund flows remain volatile. Experts and financial market analysts say that fund flow from DIIs appears to be more stable and is growing by day thanks to increasing SIP investments and rising flows into National Pension Scheme and the Employee Provident Fund Organisation. Domestic money includes investment by institutional investors and retail investors.
The rising share of local funds is important as it reduces market volatility and fluctuation every time FPIs pull out money as part of global risk aversion strategy. This was a major reason for the Indian equity market to hold on its own in the December 2016 quarter even though FPIs sold $4.5 billion worth of equities.
Domestic mutual funds have received investments worth $12.5 billion every year in the last two years. The assets under management of domestic equity funds increased to $94 billion in FY17 against $31 billion in FY14, implying an annualised growth of 44%. Experts are expecting monthly SIP book to increase to Rs.6,000 crore by next fiscal compared with Rs.4,200 crore currently.
SIPs by retail investors have played a big role with monthly flows increasing to Rs.4,200 crore from about Rs.3,500 crore last year. According to AMFI, mutual funds are on an average adding 6.3 lakh SIP accounts every month with an average SIP size of Rs.3,200 per account.
SIP accounts for nearly 40% of the total monthly equity MF collection in the past few months. The contribution of equity MFs is likely to increase to 45% in five years from current 35% led by growth in financial savings and steady returns, said CLSA.
The firm expects 17% CAGR growth in AUM in the next five years on the back of 29% growth in the past three years.The AUM penetration in India is lowest at 12% of GDP compared with 55% for the world.
There are two other important reasons behind the spurt in domestic flows. First, the government has mandated that all new government employees have to subscribe to the NPS.
The total AUM of the NPS has reached around Rs.1.7 lakh crore through the contribution of 51 lakh employees. Of this, over 12.7% was in equities in February 2017.
Besides, new NPS accounts have been opened by people in the private sector to avail additional tax rebate of Rs.50,000. The incremental contribution from government and private sector employee may add $700-1,000 million every year to equities.
Second, the government raised the share of equity investment by EPFO to 10% of the new money in FY17 from 5% in FY16. EPFO fund is worth Rs.1 lakh crore, which means around Rs.10,000 crore will be deployed in equities.