DIIs’ investments in Indian equities at record high so far this year

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Amid steep valuations and disappointing earnings, domestic institutional investors (DIIs) ploughed a record amount of money into stocks in 2017 so far, more than double what they invested in all of last year.

According to data from BSE, local insurers, pension funds and mutual funds were net buyers of Indian shares worth Rs74,728.35 crore till 10 November 2017, against Rs35,526.37 crore in all of 2016.

Last year’s demonetization of high-value currency notes prompted many Indians to shift their wealth from gold and real estate which have not been yielding good returns to the stock market, analysts said.

“Financialization of savings post demonetization has led to massive buying by domestic investors,” said Teena Virmani, vice-president at Kotak Securities Ltd.

Dhiraj Sachdev, vice-president and senior fund manager at HSBC Asset Management agreed. “Lack of alternative investment opportunities in other asset classes given low yields in fixed income or real estate led to massive shift amongst DIIs to look at equities. With low interest rates or rental yields, such fixed income asset classes or property will continue to take a back seat compared to equities. As such, higher domestic inflows should sustain going forward as well,” he said.

The gush of domestic money drove equity markets to set new records this year even though foreign institutional investors (FIIs) stayed away in some months. Benchmark indices Sensex and Nifty have soared 25-26% in 2017, while MSCI India was up 25.30%, MSCI Emerging Markets 26% and MSCI World 11.76% this year.

So far in 2017, FII made net investments of $29.63 billion (or Rs1,88,934.70 crore) in Indian markets, after being sellers in August and September. These investors returned following news on recapitalization of state-owned banks and planned investments in infrastructure.

By 30 September, holdings of domestic mutual funds and insurance companies in India’s largest listed companies were at their highest level in at least 25 quarters. According to data provided by Capitaline, these institutions held a 10.8% stake in the BSE 500 index, which accounts for at least 90% of India’s market capitalization.

Democratization (accessibility to everyone) of financial assets has also led to the massive inflow of funds into equities, said Ajay Bodke, chief executive officer & chief portfolio manager, portfolio management services at Prabhudas Lilladher Pvt. Ltd. “Rise of professionals has led to growth of investment through systematic investment plans (SIPs) across India which was earlier concentrated only in a handful of states,” he added.

According to the Association of Mutual Funds in India (AMFI), mutual fund systematic investment plan (SIP) accounts stand at 1.73 crore, and the total amount collected through SIPs during October 2017 was at Rs 5,621 crore. AMFI data shows that the mutual funds industry added about 8,86,000 SIP accounts every month on an average during 2017-18, with an average investment of about Rs 3,250 per account. Through mutual fund SIPs, one can invest a fixed amount periodically instead of making a lump-sum investment.

However, concerns about continuous earnings downgrades and threat of economy weakening may slowdown pace of domestic investors’ flow of funds into Indian equities. Bloomberg data shows that Sensex firms’ consensus earnings per share (EPS) forecast for the current financial year has been cut by 5.8% since April and by 10.97% for the next year. “If there is no earnings recovery in the next two quarters, pace of DII inflow may decelerate. Domestic investors are pumping funds into Indian equities on hopes of an earnings recovery. Also, if crude oil touches $74 per barrel, it may spell trouble for the fiscal health of India,” Bodke added.

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