On August 24, when the Sensex plummeted by a record 5.94 per cent, or 1,625 points, foreign investors were big sellers and pulled out Rs 5,100 crore from the market in just one day. While panicky investors were dumping stocks, domestic institutions took a different strategy: they went on a buying spree and bought stocks worth Rs 4,000 crore. Is there a lesson for retail investors?
Domestic funds take sudden crash in markets as an opportunity to take more bets. And they have done reasonably well. Don’t rush to sell if you’re a long-term retail investor, fund managers say. Instead, stay invested. Increasingly, when foreign funds dump shares and the market gets nervous, local institutions have stepped in and poured money. And it’s not always because of directed investments based on phone calls from Delhi. Big institutions such as LIC and public sector insurers are big players in the market. LIC invested over Rs 60,000 crore in the stock market last fiscal. Mutual funds with assets under management of over Rs 13,00,000 crore have been attracting inflows as never before with inflows into equity funds rising 5.67 percent to a record high of Rs 3,93,000 crore in July.
A closer look at the trend in inflows and outflows reveal the contrarian approach of domestic and foreign institutions in the market. During the month of August, foreign investors who normally have a short- to medium-term outlook, sold stocks worth over Rs 11,000 crore in three weeks. Take the case of domestic institutions which adopted a different strategy and bought stock worth Rs 12,000 crore. “Our investments are primarily situational. We have always been a contrarion investor. When the market goes up, we sell … and when the market goes down, we buy. Last year the trend of the market was a rising trend, so we made unprecedented equity profits,” LIC chairman SK Roy told The Indian Express in a recent interview.
The dictum is: when foreign investors sell, domestic institutions buy and vice versa. In the case of retail investors, as long as the fundamentals are right, they don’t need to press the panic button.
Using this strategy, LIC has booked a profit of over Rs 24,000 crore from the stock markets in 2014-15. LIC’s fund huge kitty — it manages assets worth around Rs 20,00,000 crore — came to the aid of the government’s disinvestment plans several times. It is also showing that it can in some ways match the investment muscle of some of the bigger foreign investors.
This could also be a reflection of the institutionalisation of the markets. More institututional money is set to flow into the market, the latest being the Employees’ Provident Fund Orgnisation. Labour minister Bandaru Dattatreya, who was recently in Mumbai to launch EPFO investment in stock market, said the PF investment into the stock market can go up to 15 per cent of the incremental deposit every year. As the EPFO gets around Rs 1,00,000-1,20,000 crore as incremental deposits every year, its investment in exchange traded funds (ETF) can go up to Rs 15,000-20,000 crore.
The domestic institutional play in the market can only get bigger, which can help offer a counter balance to foreign investors and protect retail investors to some extent.
Why are domestic players confident?
Their confidence stems from one crucial factor: sound economic fundamentals. The markets and the economy are in a much better position in 2015 than in 2013 when they faced a brutal onslaught. Fund managers say the current volatility has more to do with global risk aversion than with the health of our economy. Global markets are becoming increasingly integrated and risk is now spreading faster than ever before. However, India is better placed to weather a contagion with room for providing stimulus through rate cut, currency support through forex reserves and fiscal space opened by lower energy prices, said Ritesh Jain, chief investment officer, Tata Asset Management.
On Black Monday (August 24), while Dalal Street went into a tailspin in a sell-off triggered by the Chinese markets, Reserve Bank Governor Raghuram Rajan said, “While I don’t want to opine on the future direction of markets, I will say that relative to other countries India is in a good position….”
Unlike domestic players, foreign investors take into account different factors, including the performance and the interest rate movement in big markets like the US and China.
The RBI also gave enough indication on what it will do with the rupee and that it won’t target any level of the rupee to intervene to arrest its slide or gains. Against this background, what should an investor do? Global markets are likely to remain volatile and Chinese market woes are unlikely to be over. And US Fed rate hike plan is round the corner. The bottom line remains the same: if you’re an investor, stay invested. Domestic institutions are precisely following this principle. Sell-offs a la the August 24 crash are a good opportunity to expand the basket.