By Nikunj Dalmia
Historically, the triangle has been: markets go up, FIIs buy, and DIIs or retail share follows. But right now, the ends of the triangle don’t match; Markets are booming and roaring, FIIs are coming and domestic investors are selling at a record pace. We had record outflows of nearly Rs 20 billion in recent months. What is causing this?
In March, there was a record exit from FPIs, record purchases by domestic institutional investors and markets are at record lows. If I have to choose the triangle, I will always choose March over November, when the markets are at their highest. If my investors are making a profit, so be it. But definitely, the lower tier will be a buyer rather than a seller.
That said, in November as well as October and September, we have seen some profit bookings from our clients. We have seen redemptions by people in financial need. As an industry, we have seen some institutional investors accept an asset allocation call. But I would like to assure investors that our fund managers do not sell to raise cash because they think the market is expensive.
In any case, we have displayed a cash balance in the market and our cash levels have remained practically stagnant during the last eight and nine months. We sell because our investors are putting in rebates. It is not a call to the market.
When do you see that things will stabilize? Next quarter things will be hectic and only starting next financial year, which is April 2021, could we be in for a different turnaround.
Mutual fund investors are not a homogeneous group. They are a mixed bag. If I look at the retail behavior, the peak flows from SIP were Rs 8.4 billion per month. The bottom SIP flow was Rs 7,800 crore per month. Now we go back to Rs 8,000 crore. In general, retail SIP flows have been maintained and the average collection there is above Rs 3,000. HNI and family office have seen some rebates to fund other opportunities, including businesses that require support during the Covid-19 period.
Some of the institutional investors have also booked earnings. Now there is one more element to mutual fund redemption. We also manage asset allocation products such as the Balanced Advantage Fund. Now, in January, we were at a 40% equity allocation. In March, it became 80% capital allocation, today it returns to 45% capital allocation.
In this category of balanced advantage funds, because market valuations have moved in a certain range, capital allocations have fallen. In our own case, we would have sold about Rs 1.2 billion worth of shares between June, July, August and September and October in this particular fund. This is to bring the equity allocation to a neutral weight from the March overweight.
We have to make a profit reserve because that is the mandate of the fund. If you put all of these things together, we see a normalization in retail flows. We see that a normalization is taking place in institutional flows. However, HNIs and family office space now have cash and have to convince themselves that market valuations have actually improved rather than deteriorated with the index rise.
Before the September quarterly result, many investors thought the equity markets were trading 30-35 PE forward. The September quarterly profit for Nifty 50 companies reached the all-time high of Rs 1.07 billion in Indian business history. If I annualized Rs 1,07,000 crore in four quarters, that’s Rs 4,28,000 crore over the Nifty 50’s Rs 100,00,000 crore market cap, that’s an upfront PE of 24, not 30-35.
Now the day the family office, HNIs, and other large investors convince themselves that this Rs 1.00 billion quarterly profit rate is likely to continue, I am confident that their allocation will start to shift towards equity and we will see that normality returns in its assignment.
What will be your advice to those who are currently using the strength of the market to exit some of the old investments?
Our approach has always been a disciplined asset allocator when markets are cheap; be overweight, when markets are expensive. Be underweight and invest according to your risk profile. I think this is a great opportunity for India to turn a crisis into an opportunity.
All the catalysts for rapid economic growth – low interest rates, high liquidity are falling into place, but the banks have yet to go out and lend. Foreign portfolio investment flows, foreign direct investment flows will reach record levels, but we also need domestic entrepreneurs to invest. Markets will go up, but not all companies will go up and you will still have to pick up the right stocks.
My recommendation for an investor is not to pay too much attention to the news, just follow your financial plan, markets are markets and they will oscillate between optimism and pessimism. There will also be a bull phase and a bear phase in the future, but if you maintain your disciplined asset allocation, it will always pay off.
When we’ve talked about the mutual fund industry in the past, the mutual fund industry hasn’t gone beyond 10-12 cities. Is that trend changing?
Without a doubt, more and more of our AUMs come from B 30 cities, and obviously change does not happen overnight. We need to earn the trust of investors in B30 cities, word of mouth is the most important thing for mutual funds.
As I create a group of satisfied customers, they will bring in another group of satisfied customers, and eventually this will become a chain reaction. When I started my career in mutual funds, my AUM debt was Rs 37 crore. Today it has grown to more than Rs 2.15,000 crore.
When we started our career, we had no idea. We will manage this kind of money and all of this has happened because we were able to win the trust of investors and finally a J-curve came into play. The J-curve has reached the major cities. It is about to turn in semi-urban India and we have to go and build the same trust and trust base in rural India. In time, the mutual fund industry will become an integral part of the portfolio of all Indian citizens.
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