With Domestic Institutional Investors (DIIs) turning net buyers in the Indian equity markets over the last couple of months, there is hope that the bull run would continue for the next two-three quarters, till the end of calendar year 2021.
This optimism is based on the trend in Foreign Portfolio Investors (FPIs), who recently turned net sellers in the equity market. Although Covid-induced uncertainties may eventually spoil the optimism, the dynamics has once again highlighted the divergent trend in the approach of the two sets of institutional investors.
The Indian equity markets have seen that FPIs and DIIs – comprising domestic mutual funds (MFs), insurance companies, EPFO and NPS – are on the opposite side of the trade. When one goes on a buying binge, the other sets out on a selling spree. This time, the FPIs who were net buyers in the market till March have become the net sellers. The foreign portfolio investors were net buyers in the equities to the tune of $36 billion in FY21 and were the main liquidity providers in Indian equities after the first wave of the Covid-19 pandemic. The FPI activities slowed down since the beginning of the new financial year 2021-22.
Following the trend, DIIs, who were net sellers, have turned net buyers after a gap of more than six months. According to data released by the Association of Mutual Funds in India (Amfi), Equity funds witnessed inflows of Rs 3,437 crore in April after receiving inflows of Rs 9,115 crore in March 2021.
“There is a reversal of trend with DII selling seen from June 2020 through February 2021. During this period, the domestic institutional investors sold equities worth Rs 1,24,172 crore ($17 billion). This trend is now getting reversed with buys of Rs 10,299 crore in March and April and may continue since SIP inflows are robust,” says Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
The flow of Systematic Investment Plans (SIP) is now back to the pre-Covid levels with April inflow reaching Rs 8,590 crore. In February-March 2020, it was Rs 8,600 crore, declined to Rs 7,800 post-Covid and then saw a sharp rise in the last four months (January: Rs 8,000 crore, February-March: Rs 8,350 crore, April: Rs 8,600 crore). The FPI/DII activities determine the cash flow in the markets as they are the dominant participants. They are powerful institutions with huge cash and expert fund managers to identify and act on short-medium term developments across global and domestic markets.
“The simple law of money-making is to buy low and sell high. In line with this, whenever the sentiment turns sour, global investors sell across markets and DIIs take advantage of this and try to buy at lower valuations and price points. Also in a raging bull market, when FPIs are on a selling spree, we see DIIs deploying cash in the markets,” says Devang Mehta, who heads the Equity Advisory wing at Centrum Broking.
Even though there is no established long-term correlation between DII and FPI investments, during many periods, their investment strategies have moved in opposite directions, according to Vijaykumar.
The FPI investment is hugely influenced by the bond yields in the developed world, particularly in the US. When the bond yields are low, they invest huge amount of money in emerging markets and this will be disproportionate to the investible funds of DIIs. “During market crashes, the FPIs will flee, taking out huge funds, while domestic institutions like LIC will be directed to buy to mitigate the crash. That’s why the investment strategies appear moving in opposite directions,” he explains.
While investing in the markets, there’s always a possibility of macros changing dynamically and its impact on fund flows. Rise in bond yields in the US is the single biggest threat to the ongoing bull run across the globe. If the 10-year yield rises sharply, say to 2 per cent levels, there will be a sell-off in the markets, leading to a major crash. But, Vijaykumar says, the present market consensus is that this is unlikely in 2021 since the market views the current rise in inflation in the US as transitory. The current situation where India has grossly failed in controlling the second wave of Covid-19 is one of the important macro fronts which has discouraged FPIs and it could be one of the significant reasons for beginning of their withdrawal from the Indian markets. Hence, it is wishful thinking that the FPIs will eternally keep on pumping money in our markets.
“For the FPIs, India is one of the markets where they invest and have other choices as well, hence, the pendulum can swing either ways. However, given the expectation of a strong recovery, once the Covid numbers come down and vaccination gathers pace, it will be difficult for both global and domestic investors to ignore a growth economy like India. We are at an inflection point in terms of earnings growth across a lot of sectors. Though the short-term trajectory of earnings growth for one or two quarters will be impacted by lockdowns, the long-term trend seems on track,” says Mehta.
One of the reasons why there is a divergent trend witnessed in the investment pattern of domestic and foreign investors can be due to the source of funds flowing into their funds. When there is good amount of redemption, they are forced to redeem even if the market is strong. So, most of the activity in the DII space is based on the mindset of the people who invest in these funds. But more often than not, in the past few years, retail investors and even high Networth individuals (HNIs) have been looking to invest aggressively in the markets on substantial dips.
“This is the primary reason why markets have been holding and not only dependent on foreign flows. Whether the DIIs are capable of holding the fort against the FPIs is debatable, but most importantly they provide a good cushion in volatile times against strong outflow of funds by the FPIs,” Mehta says.
The DIIs need not be aggressive buyers during a big sell-off. “The DIIs will buy only when the correction has run its course and valuations have turned attractive,” Vijaykumar says.
Although fund flows and liquidity are important parameters to watch out for in the short to medium term, it makes a lot of sense for the long-term retail investors to focus on macro and micro fundamentals, valuations and merits of the businesses they have or want to buy in the portfolio.
Money is seldom made watching fund flows, it just gives you a fair idea of the prevailing sentiment. There are innumerable moving parts if one tracks the markets on a day-to-day basis. “It is important to ignore the short-term noise, take advantage of volatility, and focus on the long-term goal of wealth creation,” Mehta says.
Retail investors need not try to blindly follow either the DIIs or the FPIs. Retail should focus on buying high-quality stocks and sticking with them for the long-term, ignoring whatever the DIIs and the FPIs do in the short-term. “For the vast majority of retail investors, the best strategy would be to invest in good mutual funds via SIPs,” suggests Vijaykumar.
yagnesh@outlookindia.com