Domestic Investors Drove Indian Markets This Year, Despite Heavy FPI Selling

Indian markets had a tumultuous 2023. The year began with the Indian benchmark index Nifty50 hitting a 52-week low of 16,828 points in March and then rallied over 28% reaching a lifetime high of 21,593 points in the last month of 2023. The other benchmark index BSE Sensex surged over 10,500 points to breach the 71,700 points mark. It was also the year that India became the fifth country in the world with an equity market capitalisation of $4 trillion. 

The euphoria seen on Dalal Street was despite foreign portfolio investors (FPIs) selling heavily this year. FPIs sold Indian equities worth more than Rs 40,000 crore since September this year, as per the data compiled by ICICI Securities. Yet, the Indian equity market managed to stand firm, because domestic investment went up exponentially through the year. Domestic retail investors pumped money into the markets mostly through systematic investment plans (SIPs). SIP accounts reached an all-time high of 7.44 crore in November 2023 compared to 7.30 core in October, as per the data compiled by ICRA Analytics. The SIP AUMs also witnessed a sharp uptick, scaling to Rs. 9.31 lakh crore for November 2023, as compared to Rs. 8.60 lakh crore in Oct 2023.

“Households investing in the equity market have quintupled in five years, that's how much our equity culture has penetrated,” Ridham Desai, managing director at Morgan Stanley India, said at the Global Economic Forum 2023. 

 

SIP Ensured Continuous Flow Of Money 

For domestic investors, SIPs were the clear favourites over one-time large investments into mutual funds. SIP is an investment vehicle offered by many mutual funds that allows investors to invest small amounts periodically instead of lump sums. The frequency of investment is monthly, quarterly, semi-annually, and annually. SIPs have become so popular that the Securities and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch recently said that the capital markets regulator was working with mutual fund houses to make Rs 250 SIP viable for the industry.

“Sachetisation (investing in small amounts)  will help drive the financial inclusion agenda and in turn boost the domestic equity markets. It will also channelise higher inflows through the SIP route thereby leading to greater participation of small retail investors,” said Ashwini Kumar, Head Market Data, ICRA Analytics.

Previously, an equal number of investors were investing through SIPs and a hefty amount at one go in a single mutual fund. However, the pattern changed over the years and now people prefer SIPs over one-time investment. “Most of the salaried individuals are investing through SIPs as that helps them get into the habit of regular investing. It is not possible to keep a regular check on the market and decide when to invest. The market may be down today, but may just go up tomorrow. So, individual investors are mostly preferring SIPs,"  said Nisha Sanghavi, a certified financial planner and director and co-founder at ProMore Fintech.

The mutual fund corpus has gone up by almost Rs 13 lakh crores in equity funds in the last five years or so.  “Investors are preferring to invest via the SIP route, which accounts for more than Rs 6 lakh crore of MF inflows. Indian equity markets have outperformed emerging markets, notching smart gains consistently, thereby rewarding the equity investors,” said Sandeep Bagla, CEO at Trust Mutual Funds. 

 

FPI vs Domestic Investments  

Domestic investors kept the money flowing into the markets in a year when FPIs sold steadily since September with some mild reversals in November and December. Foreign portfolio investment in India fell to Rs 40,936 crore in 2022-23, a sharp decline from Rs 2,67,100 crore inflows recorded in 2020-21. A major selling wave in financial stocks was the primary reason behind the decline. The strengthening of the dollar and the US Fed rate hikes were among the other reasons that forced FPIs to exit. 

Despite the heavy sellout by FPIs, the Indian markets continued to flourish because domestic investments primarily came from mutual funds, according to data compiled by the Association of Mutual Funds in India (AMFI). Mutual funds (MF) inflow in the financial year 2022-23 went up by 7% to Rs 40.05 lakh crore against Rs 37.70 lakh crore in the previous fiscal. The assets under management (AUM) of the Indian MF industry have grown from Rs 8.90 lakh crore as of November 30, 2013 to Rs 49.05 lakh crore as of November 30, 2023 more than a 5-fold increase in 10 years.

“Foreign investors have taken out more than Rs 2 lakh crore since 2021 and that was primarily due to three reasons; the strengthening dollar, higher bond yields, and higher interest rates in the USA. But the real backbone of the market is the retail investors. There are around 17,000 SIPs from where the real money is coming and financialisation of savings is happening with opening of demat account with retail investors flows have balanced all foreign portfolios selling,” said Sanjiv Bhasin, Director, IIFL Securities. 

The Indian mutual fund industry has witnessed a 125% surge in net inflows and around 24% growth in AUMs since the beginning of this calendar year 2023. As per ICRA Analytics, the growth will continue to sustain even in 2024. Several factors have made traditional investors of India who earlier relied on safer investment options like fixed deposits, turn towards equities. 

 

Small Cap Fund- The Saviour?

ICICI Securities equity strategist  Vinod Karki told The Core in an earlier interview that foreign investors have mostly neglected the small and micro-cap funds and focussed largely on the financial sector. The sector that mostly attracted hefty foreign investments failed to perform this year, resulting in a negative sentiment among investors. 

“Their portfolio orientation is heavy weights in high-quality financials which have been underperforming and the outperforming sectors are the small cap, micro caps, where they have a lesser holding. So a mix of significant selling due to this yield scarcity and their portfolio orientation have resulted in the investment reaching decadal low,” said Karki. 

At a time when the large-cap funds and the major sectors underperformed, domestic investors trusted the micro and small-cap funds and did not hesitate to invest in new companies as overall, there was now a pro-entrepreneurship sentiment. “My hypothesis is that the capital-output ratio is coming down because of new technology. You need to put in less capital for more output. If the capital-output ratio keeps on coming down, the positive impact on the Indian stock market will be more in the next 25-30 years.  If we take all the banks’ assets today, it will be much lower than the market capitalisation,” said Ashishkumar Chauhan, CEO of the National Stock Exchange of India. Capital output ratio signifies the relationship between the value of capital invested and the value of the output.

Despite FPIs not investing in small-cap funds, they recorded the maximum inflows under equities. Inflows into mid-cap and small-cap funds grew by more than 63% between the January and November period this year, but for large-cap funds inflows fell by more than 57% in the same period, according to AMFI data.

“The recent outperformance in small-cap stocks has prompted persistent inflows into the small-cap funds through the SIP route. Retail investors have also chosen to invest around Rs 1.75 lakh crore in the multiple new fund offerings as well,” said Bagla.

 

Also Read: ‘Emerging Markets Were More Nimble’: CRISIL’s Chief Economist DK Joshi On Developments of 2023