Driven by positive real interest rates and better growth prospects, mutual fund houses bought shares worth ₹ 16,500 crore in August, the highest-ever equity investment in a single month. Transition of savings from physical assets to financial assets have been supporting the inflows.
On the other hand, foreign portfolio investors (FPI) stood net sellers in domestic equity markets for the first time since January 2017. Overseas investors sold shares worth ₹ 14,293 crore in August, according to the data available with NSDL.
On divergent trend between FIIs and domestic institutional investors (DIIs), Himanshu Srivastava, Senior Research Analyst - Manager Research, Morningstar Investment Adviser India said, "This could be attributed to the investment opportunities available at the manager's disposal. While for domestic institutional investors must scout for investment opportunities within India, lot of FIIs have global mandates and hence continue to compare India with other markets to evaluate which stands better on risk-reward profile. So, there would be times when there are divergent trends in the investment pattern of DIIs and FIIs."
FIIs are net buyers to the tune of ₹ 44,221 crore in 2017 so far whereas DIIs are net buyers to the tune of ₹ 42,332 crore during the same period.
Srivastava added that the "increasing participation of DII compared to FII reduces the dependence on foreign money giving much needed stability to the markets. This also shows that Indian managers are seeing this market correction as an investment opportunity which should ideally be the case."
At present, mutual funds have about 1.52 crore SIP accounts through which investors regularly invest in domestic mutual fund schemes. AMFI data shows that the mutual fund industry added about 8.23 lach SIP accounts each month on an average during the FY18, with an average SIP size of about ₹ 3,250 per SIP account.
Despite positive momentum in the domestic equity market in 2017, some of the mutual fund houses are holding a portion of cash.
Raunak Onkar, Co-Fund Manager (Equity) & Head - Research, PPFAS Mutual Fund said, "As of our July 2017 factsheet around 16 per cent of the fund's AUM is in cash and cash equivalents. Some of it is on account of selling a few our existing holdings and new inflows coming in through SIP or one-time investments."
Benchmark equity indices BSE Sensex advanced nearly 20 per cent on a year-to-date basis till September 1.
Fund houses are looking further bullish on domestic equity market, Saravana Kumar, CIO, LIC MF said.
"Our view on the domestic equity markets is quite positive for remainder of FY17 due to India's macro-economic construct, undergoing structural changes and likely improvements in the corporate profitability. However, we have recent turned cautious due to rally in equity markets. At elevated market levels, valuation multiples themselves bring in implied risk. Our thesis is FY17 would see more strategic steps towards solving some of the structural issues faced by economy and would see renewed interest in completion of earlier initiatives. Though valuation is a cause of caution, we remain positive from longer term perspective," said Kumar.
In July, HDFC, AU Small Finance Bank and Indian Oil were the most preferred stocks of the mutual funds scheme. The net purchase of HDFC were ₹ 670.26 crore, of these ICICI Prudential bought shares worth ₹ 296.49 crore and HDFC MF bought shares worth ₹ 66.01 crore.
ICICI Prudential MF and Franklin Templeton MF purchased Indian Oil shares worth ₹ 353.95 crore and ₹ 147.02 crore, respectively, out of net purchase of ₹ 383.02 crore by all MF schemes.
On the other hand, Reliance Industries and Bharat Petroleum were most sold stocks in July. Figures of August will come later this month.
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