Thanks to SIPs, Retail MF Investors Are Proving To Be Smarter Than FPIs 

One of the least-noted factoids after demonetisation is the frenetic growth of the mutual fund industry after November 2016. With interest rates crashing after demonetisation, there was a huge shift in household savings towards mutual funds, and this trend continues.

At last count, the mutual fund industry’s assets under management (AUM) were heading towards Rs 25 lakh crore (Rs 24.31 crore as at the end of September 2018), and retail investors were key to this growth.

Systematic investment plans (SIPs) were swelling at the rate of nearly Rs 7,500 crore a month as at the end of October. And 2018-19 will surely be the best year ever for SIPs – possibly clocking a massive inflow of Rs 90,000 crore, given the current run rate. The previous best was in 2017-18, when SIPs generated Rs 67,190 crore in inflows.

What these heavy flows indicate is a coming of age of the retail investor, who is no longer afraid of the ups and downs of the market, and prefers to invest for the long term. SIPs are the best vehicles for doing so, for they tend to average out the cost of scrip acquisition by mutual funds, who buy more when prices dip and less when the stock market is up. The retail investor, for her part, gets more units when the markets are down, and less when they are booming.

While foreign portfolio investors (FPIs) still dominate the Indian equity markets, the domestic mutual fund industry is steadily becoming a counter-weight to them. In the year to March 2018, mutual funds saw their market share of the capital markets more than double from 8.5 per cent in 2014 to 18.4 per cent. FPIs saw their overwhelming share fall from 61.8 per cent to 56.4 per cent. Still very big, but we are probably only a few years away from the point where domestic money will rock the markets as much as foreign investors.

In 2018 so far, this was anyway the case. While FIIs were net sellers in equity to the tune of Rs 43,710 crore, domestic mutual funds pumped in more than twice that amount, at Rs 110,287 crore.

This increase in financial savings through the mutual fund route is partly an unintended consequence of demonetisation, when banks newly flush with money started cutting deposit rates. Thus, while flows into SIPs were rising even before demonetisation, they started accelerating after that. In 2016-17, average monthly inflows were around Rs 3,660 crore into SIPs. In the year after, monthly inflows zoomed to nearly Rs 5,600 crore. And this year, it could be in the range of Rs 7,500 crore.

The share of mutual funds in financial assets is thus rising inexorably. Between 2014-15 and 2017-18, the proportion of mutual fund assets under management rose from 12.7 per cent of bank deposits to 21.36 per cent. When mutual funds start eating into the lunch of banks, you know that the retail saver is seeking higher returns. She is now seeking not only good returns, but better post-tax returns. Mutual fund investments, even when invested in debt, benefit from the indexation of costs to inflation, while bank deposits do not have this advantage.

The Indian retail investor is no longer a skittish duck trying to time entry and exit according to market moods. Another interesting facet is that she is getting smarter than the other smarts. While FPIs sold heavily when the rupee was tanking and the market tumbled, the retail investor was tanking up on cheap shares. The current rally is a tribute to her.