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Monday, July 16, 2018

Fund surge: Physical assets’ loss is equity market’s gain

The biggest beneficiary of waning attractiveness of traditional investment instruments, thanks to multiple factors like demonetisation, govt’s cashless push and low interest rates, has been the stock markets.

Written by Sandeep Singh | New Delhi | Updated: November 17, 2017 1:30:13 am
real estate, gold price, mutual funds, IPO, sensex, stock market, demonetisation. effect, indian economy, India GDP, Arun Jaitley, foreign portfolio investment, While net inflow into equity schemes of mutual funds in calendar 2016 stood at Rs 45,073 crore , inflow in the first ten months of 2017 has been Rs 1,05,772 crore.

As real estate transactions and demand for gold fell post demonetisation along with with prevailing low interest earning on fixed deposits of banks, a direct beneficiary has been the equity markets as investments into mutual funds and initial public offerings (IPOs) witnessed a sharp jump this year.

While net inflow into equity schemes of mutual funds in calendar 2016 stood at Rs 45,073 crore , inflow in the first ten months of 2017 has been Rs 1,05,772 crore.

For IPOs, the mobilisation has been significantly higher. While the amount raised by companies via IPOs stood at Rs 26,494 crore in 2016, in the first ten months this year it stood at Rs 46,239 crore. The jump can be attributed to the relatively superior performance of equity instruments compared with the returns from fixed deposits, gold and real estate over the last few years. Many feel that the rush can also be attributed to stringent regulatory requirement for gold purchase along with a decline in real estate transactions post-demonetisation.

With a fall in currency in circulation following the November 2016 note ban and the push toward digitisation, cash to GDP ratio in the economy has come down from over 12 per cent before November 2016 to around 9 per cent now. From an investment perspective, a decline in cash also reflects a drop in consumption of physical assets, such as gold and real estate, and increased routing of funds into equities.

While equities have had a good run over the last three years, experts say that new investors should not get dissuaded by the current levels of the market and should start equity investment via mutual funds with a disciplined long-term approach.

real estate, gold price, mutual funds, IPO, sensex, stock market, demonetisation.  effect, indian economy, India GDP, Arun Jaitley, foreign portfolio investment,

Finance minister Arun Jaitley had said earlier this month that there has been a surge in primary market raising through public and rights issues. There were 87 issues of public and rights worth Rs 24,054 crore in FY16. In the first six months of FY18 have witnessed 99 such issues amounting to Rs 28,319 crore.

He further stated that the net inflow into mutual funds in FY17 increased by 155 per cent compared with FY16. Even the premium collection for insurance companies more than doubled. Jaitley pointed out that the cumulative collection during November 2016 to January 2017 period increased by 46 per cent over the same period of the previous year. Premium collections too witnessed a 21 per cent jump for year ending September 2017 over the corresponding period of previous year.

Mutual fund players also agree to this. “Undoubtedly demonetisation helped channel the flows from physical to financial assets. But the entire credit can’t be given to that. Factors such as performance of equities, Sebi’s regulation, informed distribution have all come together to create the momentum for MF investment,” said Nilesh Shah, managing director, Kotak Asset Management.

Investment growth in equities

There has been a surge in inflows into equity schemes of mutual funds and the assets under management (AUM) over the last three and half years. Assets under management into equity schemes (including equity linked savings scheme) has grown 3.7 times from Rs 1,92,246 crore in April 2014 to Rs 7,07,989 crore as of October 2017. This is a result of a sharp rise in equity markets and a strong inflow into mutual funds. The net inflow in the 10 months of calendar 2017 stood at a high of Rs 1,05,772 crore. In comparison, the net inflow in 2016 stood at Rs 45,073 crore and that in 2015 stood at Rs 85,154 crore.

IPOs scaled a new peak this year and money raised by firms via public issues in the first 10 months of calendar 2017 stands at an all time high. According to data sourced from Prime Database in 2017 (till October 27), companies mobilised over Rs 46,000 crore through IPOs. Of this, over Rs 35,000 crore was invested by domestic participants. By comparison, the total amount raised by companies through their IPOs stood at Rs 26,494 crore in 2016. The previous high for IPO collection was in 2010 when the firms raised Rs 37,535 crore.

So, just on account of IPO mobilisation and net inflow into equity schemes of mutual funds the equity markets have received over Rs 1.5 lakh crore between January and October 2017. By comparison, foreign portfolio investment into Indian equities for the first ten months has been Rs 37,408 crore.

Should you invest in equities at current levels?

While the rush of flows into equities is a result of high growth in equity markets over the last three years and other asset classes lagging in performance, many investors may get the feeling that the market is at a high level for them to make an entry. But experts say that Indian equity market story remains intact and long-term investors should look to participate in it through mutual funds, instead of worrying about valuations and high levels at which these indices are currently trading.

“New investors must simply do their asset allocation and decide how much they can invest in equities. They should not look at past performance and not expect similar returns (return over the last three years) over the next three years. The fundamentals remain intact and disciplined investment with a long term view is what one should go by,” said Shah.

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