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Domestic investors turn cautious over uncertain election outcome

Sandeep Singh
Foreign portfolio investors pull out over Rs 5,000 crore from Indian equities in Jan 2019

While foreign portfolio investors pulled out over Rs 5,000 crore from Indian equities in January 2019 amidst global growth concerns and trade war tensions between US and China, the domestic investors too seem to be turning cautious following growing uncertainty on general election outcome and gross and net inflows into equity mutual funds have seen a notable moderation over last three months.

While the average net inflow of funds into equity schemes over the 10-month period between January and October 2018 stood at nearly Rs 10,000 crore, it has declined steadily over the last three months from Rs 7,579 crore in November to Rs 5,765 crore in December and then to Rs 4,914 crore in January 2019. By comparison, the net inflow in January 2018 stood at Rs 13,404 crore.

The gross sales of equity schemes have witnessed a significant drop over the last three months. While the average gross sales for equity schemes between January 2018 and October 2018 stood at over Rs 25,000 crore, the average sales in the last three months amounted to Rs 15,200 crore. While political stability is something that investors look for, mutual fund experts feel that uncertainty around the outcome of general elections 2019 has pushed some investors on the sidelines and they would return once the uncertainty is out of the way.

It is not only the value of investments that have gone down, data sourced from Association of Mutual Funds in India shows that in the quarter ended December 2018, new folio additions for equity schemes witnessed the slowest sequential growth in nine quarters or 28 months.


Results of polls a major factor on investors' minds

Uncertainty around election outcome is one of the biggest factors that plays on the minds of investors in India. While existing retail investors who invest for the medium to long term do not generally stall their SIPs, both large investors and the new entrants wait for election uncertainty to get out of the way before taking their investment call. A continued decline in net inflows into equity schemes and moderation in growth of folio numbers in the December quarter (lowest in 9 quarters) shows that investors are waiting for the elections to get over.

While the equity folios expanded by 5.3 per cent or 29.5 lakh in September 2018 over June 2018, new folio additions in equity schemes grew by modest 3.6 per cent or 21 lakh in the quarter ended December 2018 to 6.12 crore. In fact, in the quarter ended March 2018 the folio numbers in equity schemes expanded by 8.6 per cent or over 42 lakh over that in quarter ended December 2017.

"With the general election outcome very uncertain as of now, new investors and even the large investors are shying away from entering the markets currently and that has slowed the pace of inflow of funds and addition of folios," said the head of a leading MF distribution firm.

Over the last two years equity mutual funds have seen a significant jump in assets under management from Rs 442,810 crore in January 2017 to Rs 687,086 crore and even the folios in equity schemes have risen from 3.9 crore in December 2016 to 6.12 crore in December 2018. Following increase in penetration and distribution push in smaller towns and sharp rise in retail participation, mutual funds have provided a much needed stability to Indian stock markets and a counter balance force against the FPIs.