Business

After demonetisation and GST, do we have a market disruptor?

Updated : September 26, 2018 12:56 PM IST

Fund flows drive equities and market sentiment, but the first could be short-circuited in the near term.

The benchmark equity index, NSE-50 or Nifty, has delivered compounded annual returns of a little over 17 percent over the past six years.

Money fuels stocks. Fortunately for Indian equities, net combined fund inflows from foreign portfolio investors (FPI) and domestic institutional investors have been significantly positive over the past seven to eight years, and that has resulted in a strong bull trend.

The benchmark equity index, NSE-50 or Nifty, has delivered compounded annual returns of a little over 17 percent over the past six years. During this period, barring 2013, most other years have seen net institutional inflows (net of foreign and domestic inflows) of about Rs 25,000-45,000 crore a year, and that can explain the strong underlying bullish sentiment over the period.

And while foreign investors led the charge between 2012 and 2014 —offsetting net selling by domestic institutions — to push the Nifty higher by 79 percent over the period, the domestic institutions stepped in to counter the net foreign outflows from 2015 onward. The Nifty has gained a further 33 percent since 2015.

What’s worrisome today, is the possibility of the fund flows from domestic institutional investors getting disrupted or significantly tempered, at a time when foreign investors still remain mostly underweight emerging markets.

The reason: market regulator Sebi’s decision to reset the way mutual funds incentivise sales of their schemes. The market regulator has asked for incentives to be trailed over the duration of investor participation, rather than being paid as an upfront commission for funds mobilised.

Such a radical shift, though with its long-term merits, along with a slashing of expense ratios for schemes is bound to cause some short-term readjustments in the industry, which the distribution system will take time to settle down with.

This adjustment period, however, could have a significant impact on the equity market, as inflows into mutual funds (especially ex-SIP) could crimp. This may well set the markets up for a weaker few months, unless foreign fund selling eases.

While mutual fund data over the coming months will likely reveal the true impact of the regulatory measures on fund flows to the industry, which has had a golden run with assets under management (across asset classes) growing at a CAGR of 17.4 percent over the past 10 years to Rs 25 lakh crore today, the market is unlikely to wait that long to be proved wrong.