Opinion Small-town investments drive the market

As the capital market enters Vikram Samvat 2080, expectations of investors are high amid worries on the inflation and interest rates front — especially the US bond yields. What’s noteworthy is the rising influence of domestic investors, especially mutual funds which have been collecting a record amount from retail investors month after month despite concerns in the market. This rising power of Indian retail inflow into domestic equities is a significant development, especially because a large chunk of it is coming from small towns. It is a reflection of a shift in the country’s investment culture from conservative fixed deposits to a riskier wealth creation tool — the equity mutual fund. This has blunted the impact of outflow of funds by the foreign portfolio investors on the movement of benchmark indices.

October witnessed the highest ever monthly SIP inflow of Rs 16,928 crore. While that takes the seven-month aggregate in the current fiscal to Rs 107,240 crore, it follows an inflow of Rs 155,972 crore in FY’23 and Rs 124,566 crore in FY’22. If October’s strong inflow came despite a sudden escalation of conflict between Israel and Palestine, and foreign portfolio investors turning cautious and pulling out funds over concerns of it expanding to more West Asian nations, the strong SIP flows over the last two financial years came even as interest rates kept rising globally, dragging the growth rates down. In October, for example, the FPIs pulled out a net of Rs 28,891 crore from Indian equities between October 1 and November 9. But its impact on the benchmark Sensex has been just 1.5 per cent. Contrastingly, an FPI outflow of Rs 10,836 crore in August 2011 led to the Sensex fall of over 8 per cent. Even in October 2018, an FPI outflow of Rs 28,921 crore led to a Sensex fall of nearly 5 per cent. Why this difference? While the domestic institutional flow led by mutual funds exceeded the FPI outflow by 21 per cent between October 1 and November 9 this year, the DII flow in August 2011 was lower than the FPI outflow by 23 per cent. In October 2018 too, the DII inflow was nearly 10 per cent lower than the FPI outflow. The DII strength has come on account of the SIP inflows. If the SIP inflow in October 2018 amounted to Rs 7,985 crore, it more than doubled to Rs 16,928 crore in October 2023.

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The big change has come not in large cities but in those that are ranked below 110. Their share in industry AUM (assets under management) in September 2023 — is 18.33 per cent. Ten years ago, the share of these cities in the MF industry AUM on a much smaller base was just 2.57 per cent and five years back, it was 9 per cent. The power of retail is enormous and the flows have been undisturbed by events around the world — war in Ukraine and Palestine, actions of the US Fed, rising inflation, concerns over quarterly earnings and how the bond yields may impact the fund flow. This is building a good set of investors and helping stabilise the Indian markets.