Mutual Funds infused record $44 bn into Indian Equities in 2 years

It is a known fact that FPIs have been major sellers in Indian equities since October 2021. In fact, between October 2021 and June 2022, the FPIs had sold equities to the tune of $33 billion. There has been some respite in the second half of 2022 but FPIs are back to their selling ways in 2023. However, the flows from mutual funds were exactly in contrast. For instance, mutual funds have infused Rs1.8 trillion into equities on a net basis in FY22 and an equivalent amount in FY23 too. That is seriously quite a lot and it actually translates into net infusion of $44 billion into Indian equities in last two financial years. This is inflows from mutual funds alone and we have not accounted for LIC and other life insurance companies. Overall domestic flows could be much higher, but we will come back to that.

How domestic funds infused $44 billion into equities in 2 years

The table below captures month-wise net flows into Indian equity markets by domestic mutual funds. The data clearly shows an inflow of nearly Rs1.8 trillion each in FY22 and again in FY23 also.

Data Source: SEBI

What is the data point that really stands out in this case, when we look at the net inflows by mutual funds into Indian equities? In the 12 months of FY23, domestic mutual funds were net buyers in 11 months and were net sellers only in August 2022; that too fairly marginal. For FY23 overall, the net infusion by mutual funds into Indian equities stood at Rs1.82 trillion or $22.2 billion in US dollar terms. The million dollar question is whether the mutual fund infusion in FY23 really offset the outflows by the FPIs? Let us look at the numbers.

In the latest financial year FY23 alone, the FPIs were net sellers to the tune of $5.1 billion in Indian equities. Even if you add the FY22 selling, the total FPI selling in the last two financial years on a net basis were just about $23 billion. That is almost compensated just by the FY23 inflows from mutual funds of $22.2 billion. We must not forget that mutual funds had infused a similar amount in FY22 also, so mutual funds have made Indian flows a lot more comfortable instead of exposing them to the vagaries of FPI flows. Having said that, the FPI outflows would have still impacted stock prices but that is only because FPI flows also impact the currency. However, if there is one reason for the bounce in equities in FY23 even in the midst of heavy FPI selling, it is the resilience and conviction of Indian mutual funds.

But FPIs were sellers in debt in FY23

The overall figure of FPI flows may not look as flattering as the figure for equity flows as FPIs were net sellers in debt in the year FY23. Of course, FPIs remained net buyers in debt in FY22, but that changed in FY23 due to a variety of reasons like higher bond yields, hawkishness of central banks, concerns over inverting yield curve, slowdown fears etc. Here is a consolidated view of total flows by domestic mutual funds into equity and debt combined for FY23 and compared with FY22.

Data Source: SEBI

The overall picture shows that total mutual fund flows into equity and debt combined fell sharply by -55.4%. This was largely due to the net redemptions in debt for FY23. For example, in the financial year FY23, FPIs withdrew Rs57,889 crore from debt, due to the reasons mentioned above. This led to a fall in overall flows from equity and debt put together. As we stated earlier, the sell-off in debt by mutual funds can be largely attributed to the spike in interest rates and the persistent pressure of redemptions that many debt fund categories witnessed during the year. The pressure on bond yields was a global phenomenon as most of the central banks had embarked on a hawkish mode.

How will mutual fund flows pan out in FY24

How do we sum up the story of mutual fund flows in FY23 and FY22 combined? Clearly, the sell-off in debt was triggered by the rising yields and that is likely to reduce in the coming year, considering that yields are closer to the peak levels now, if not already at peak levels. RBI may not have completed its rate hike cycle in entirety, but the pause in the April policy is reflective of the fact that enough has already been done. It also shows that the RBI is willing to strike an independent path on monetary policy.

The question is whether the mutual fund flows will continue to be positive in the coming year FY24 also? While it is hard to say with any degree of certainty due to multiple dynamics, one can infer that the flows would continue. In fact, many of the reasons for the continuance of these flows are largely fundamental in nature. As of now, most of the domestic mutual funds are betting on the idea that India would eventually transform into a $5 trillion GDP story by the end of this decade at the very best. Also, steady SIP flows will ensure that equities continue to elicit positive flows from mutual funds. FPI flows may continue to remain volatile, but that may not really matter. The moral of the story in the last 2 years is that MF flows are not only positive, but they are big enough to offset selling by FPIs. That is the good news.