Mutual funds invest Rs 1.82 lakh cr in equities in FY23 on strong push from retail investors

New Delhi: Mutual funds remained bullish on the Indian equities in 2022-23 and invested Rs 1.82 lakh crore largely due to strong interest from retail investors and the correction in the market that led to a reasonable valuation.

This comes following a similar amount of Rs 1.81 lakh crore invested by mutual funds in the stock market in the preceding financial year 2021-22 (FY22). Before that, they had pulled out Rs 1.2 lakh crore from equities in 2020-21, according to the data from the Securities and Exchange Board of India (Sebi).

Going ahead, the equity outlook for the current financial year (FY24) will start improving in a couple of quarters once inflation starts coming down in the US and its central bank -- US Federal Reserve -- will change its policy stance from hawkish to dovish, Rajiv Bajaj, Chairman and Managing Director of Bajaj Capital, said.

In the longer term, India's growth prospect is higher amidst concerns about slowing growth in major developed economies.

"The government's favourable policies along with a focus on investment-led growth (Capex Push) and improved balance sheet of banks will drive earnings growth in the near future. The PLI (Production-linked Incentive) policy and the China+1 drive, are likely to boost India's manufacturing sector and contain our trade deficit. This is the reason why most of the investors are bullish on India's growth story and what better to play it except through Indian equities," he said.

According to the Sebi data, mutual funds have invested a net amount of Rs 1.82 lakh crore in the just-concluded financial year.

Shruti Jain, CSO at Arihant Capital, attributed a host of factors to mutual funds' investment in equities, including valuations coming to a reasonable level leading to positive sentiment among institutional investors.

The Indian retail investors have warmed up to equity mutual funds and in fact, these have become their preferred investment option in volatile times. SIPs (Systematic Investment Plans) continue to be a popular investment method among retail investors.

"The correction in the equity market has also helped. This has led to an increased inflow in equity funds, and consequently, we are witnessing increased buying by mutual funds into equities," Jain said.

In addition, equity is one of the best investment avenues for generating inflation-beating returns. The performance of NSE's benchmark Nifty over the last 22 years depicts that equity is not as risky as it is perceived by the investors while it provides an inflation-beating return, Feroze Azeez, Deputy CEO at Anand Rathi Wealth, said.

History shows that there have been only four instances in the last 22 years when Nifty has delivered a negative average return for the respective calendar years and the CAGR (Compound Annual Growth Rate) return has been 12.86 per cent in the last 22 years, he added.

In terms of sectors, financial services continued to have the biggest allocation in mutual fund portfolios followed by IT, capital goods, auto and healthcare.

The massive selling by Foreign Portfolio Investors (FPIs) from the Indian market has been absorbed by Domestic Institutional Investors (DIIs), including mutual funds and insurance companies. This is a reflection of the rising clout and maturity of domestic investors.

FPIs dumped Indian equities to the tune of Rs 37,631 crore in the last fiscal and sold equity worth Rs 1.4 lakh crore in FY22.

On the other hand, mutual funds have pulled out over Rs 40,600 crore from the debt markets during the period under review. The major outflow was seen in liquid funds, which is normally the case at the end of every financial year. Apart from liquid funds, ultra-short duration as well as short duration funds too saw outflows.

"Debt as an asset class is becoming attractive globally, which could also be why there were some outflows from India," Arihant Capital's Jain said.

According to Bajaj, the withdrawal from debt in FY23 could be primarily attributed to the tightening monetary policy stance maintained by the Reserve Bank of India (RBI) throughout the year. The apex bank has increased the repo rate by 250 basis points to tame inflation. This has resulted in an upward shift in the yields across the curve which resulted in muted gains or mark-to-market losses in the investor's portfolio.

Further, he said that the withdrawal from debt funds would have been higher but for the debt fund taxation changes announced at the end of March led to significant inflows in the last eight days of the month.

Under the new rules for debt mutual funds, investments will be considered as short-term capital gain, stripping off the long-term tax benefits that investors enjoyed.

In the new regime, flows in debt mutual funds are expected to moderate due to the removal of long-term capital gains taxation. This could lead to an increase in flow to equity-oriented funds in the hybrid category. Some of the primary beneficiaries in hybrid space could be -- Equity Saving Funds, Dynamic Asset Allocation Funds and Multi-Asset Allocation Funds -- that enjoy equity taxation, Bajaj said.