From the early ’90s when only closed-ended funds prevailed, from the time when NAVs used to be calculated once a month, from the time when equities were considered to be speculative and bonds were longterm investments, from the time when parents worried about their daughter marrying an analyst or a fund manager, from the time when banks did not sell mutual funds, from 6% upfront loads to nil now, we have indeed come a long way.
The cumulative impact of this long journey is clearly visible over the past couple of years where, despite foreign funds being large net sellers, Indian equity markets have showed tremendous resilience.
It is interesting to note that since January 2017, FPIs were net sellers of about $5 billion (on 90-day cumulative basis) on three occasions. But unlike in the past, Indian equity markets held up well on each of these three occasions. This was possible due to sustained domestic flows into equity funds, currently ranging between Rs 10,000 crore and Rs 12,000 crore a month, of which sticky SIP flows itself are Rs 7,000 crore to Rs 8,000 crore (an average Rs 3,000 from 2.5 crore SIPs). This is the power of retail investors and this has led to a big shift in power in capital markets from offshore players to onshore. This showcases collective strength of retail investors and how they, once a marginal participant in the equity markets, have now become a dominant force.
This is a result of years of tireless effort by many: The regulator who has focused on making mutual fund products simpler, cheaper and more aligned to investor interest; IFAs, banks and their relationship managers, national distributors, etc, who have tirelessly explained the nature and power of equities to millions and have handheld investors, encouraging him/ her to hold tight and to persist in times of volatility, media which has explained the long-term nature of equities and enhanced the visibility of equity mutual funds, mutual fund rating agencies that have done likewise, and finally the mutual fund companies themselves. The end result of this collective effort over more than two decades is a large shift in investor behaviour: From a seasonal approach to investing in equities, mainly in times when markets were moving up and FPIs were buying and vice versa, to a secular, long-term oriented, systematic investing in equity funds over years and hopefully over decades. Along the way, the deeper penetration of internet, email, WhatsApp and cheap data on one hand and demonetisation, weak returns from other assets like real estate, gold, etc, on the other also helped.
In my opinion, the best is yet to come. Flows of Rs 10,000 crore to Rs 12,000 crore (about $1.7 billion) a month while appear to be large today, we are below our potential and have room to grow significantly. India is a $2.6-trillion economy and current domestic flows form less than 1% of GDP and about 5% of household savings compared to higher equity allocation globally.
There are several factors that support higher allocation of household savings towards equities over time. Public sector banks are now focused on distributing funds. The reach of these banks is higher than their private counterparts. Longterm investors in equity funds have, by and large, experienced good outcomes compared to other asset classes. This good investor experience is the biggest force that should lead to higher allocation to equities. Driven by the sustained local flows into equity funds, the volatility of markets should logically be lower in future compared to the past which, in turn, should make equities more attractive and lead to higher allocation. Further, for the first time, average inflation has been less than 5% over the past four years. Given the inflation-targeting framework, if it remains low on a sustained basis, nominal interest rates should be lower than the past. This would also make a case for higher allocation towards equities for retail investors.
Apart from the optimistic outlook for local flows, equity markets are also attractively valued in my opinion. India’s market capitalisation to GDP is near the 60% mark and driven by improving fundamentals of key sectors and profit growth should also recover. Thus, the outlook for equity market is positive in the medium to long term.
Projections are always hazardous. However, a case can be made for a 2x or higher growth in equity flows over the next 5-10 years. A near-doubling of nominal GDP in six years and therefore of household savings and an increase in allocation towards equities from 5% of household savings to 6-10% should make this possible. If these numbers are hard to believe, consider the following: Our gold imports even today are one and half times compared to equity flows.
I remember a quote which seems apt for Indian domestic flows: “The top of one mountain is always the bottom of another”. Thus, while we have come a long way in past three decades, we are still far below the potential and it’s time to dream bigger.
(The writer is the chief investment officer, HDFC Mutual Fund)