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The ‘Modi premium’ to equity inflow and rising SIP numbers
With investor confidence in equity investment going up, SIP inflows in equity mutual funds have increased to Rs7,119 crore in March 2018 from Rs4,335 crore in March 2017
Mutual fund investors have shown resilience and faith in domestic equity markets at a time when foreign investors seem to be looking elsewhere. Since January to April-end 2018, net inflows in domestic equity mutual funds are slightly over Rs50, 000 crore compared to nearly Rs29, 000 crore for the same period last year. This comes on the back of regular systematic investment plan (SIP) inflows increasing to Rs7,119 crore in March 2018 as compared to a monthly inflow of Rs4,335 crore in March 2017.
The number is significant given that while Rs43, 600 crore was invested in equity mutual funds in March 2018, as much as Rs39, 000 crore flowed out, leaving a net inflow number of Rs6, 600 crore. The lump sum redemptions, experts said, had more to do with the impending implementation of long-term capital gains tax starting April 2018. With continued SIP support and additional buying, net inflows in April shot back up to around Rs12, 400 crore for equity-oriented schemes.
Equity investments
In April 2017, SIP inflows were roughly 45% of net inflows into equity schemes, they are up at 54% for April 2018. It does look as if money invested through this route is here to stay across market cycles. “Investors who choose to invest in equity through SIPs are being advised to stay for the long term. This money is going to continue to come and remain invested despite the uncertainty,.
Historical trends have shown that equity returns stabilise if you remain invested over longer periods of 5, 7, 10 years despite short-term volatility. The ups and downs in the near term can be a result of various factors, including external shocks from developed economies, global geopolitical risks and our own macroeconomic data.
“Rising US bond yields make the global equity risk premium less attractive and US bonds lucrative compared to investing in assets across the globe, hence, turning money flow away from emerging markets back to the US. FII flows have in turn become negative in EM including in India,”
According to data from NSDL, FIIs and foreign portfolio investors (FPIs) were net sellers to the tune of around Rs5,500 crore in April 2018 and so far in May have sold around Rs4,300 crore in domestic equity markets.
Today, domestic flows and not FIIs are supporting the equity market. There is a section concerned that this support may be artificially elevating the market given that macroeconomic data—specifically rising government securities (G-sec) yield, depreciating rupee, expected fiscal deficit in FY19 and impact of crude oil prices—are unfavorable today.
“We call it the Modi premium. Data shows that during the past 4 years, under the Modi regime, the average trailing PE (valuation) for Nifty 50 has remained at 22.96 times—3.5 points higher than previously. This is thanks to factors like demographics, financialisation and dominant performance of equity. It matters that on a post-tax basis, neither fixed income, gold nor real estate has delivered, that leaves only equity.”
What should you do?
Valuations look elevated as earnings revival in corporate India is yet to happen in any meaningful way. For many sectors, despite good sales growth, operating income is low and with crude prices rising and risks appearing for the domestic rate cycle, pressure on margins may continue.
But experts said there are pockets of growth too. “We have to be selective in our choices, there is value in sectors like IT, two-wheelers and ancillaries, to count a few,”
Experts said investors need to be more selective, either by choosing direct equity or by picking mutual fund schemes carefully. Large funds will find it harder to invest flows and stock selection may not be efficient, investors can benefit from picking good quality but relatively smaller-sized schemes which can focus on stock selection.
“So far there is no reason to doubt the long-term track record of equity. Earnings remain intact for many companies if you look at it bottom up. Equity is patient capital and one has to remain invested, tactical opportunities notwithstanding,”
But risks are present and it’s not just the macroeconomic data. The concern is that a domestic economy fuelled by consumption rather than investment in capital expenditure can fall flat sooner or later. Moreover, the consumption expenditure is to some extent driven by leverage which can start to get stressful if the interest rate cycle turns even before the current non-performing asset stress for banks gets elevated. While it’s important to track this trend, with India’s retail debt-to-GDP ratio around 11%, it may be too soon to press the panic button yet.
With fixed income rates moving higher, forthcoming NCD (non-convertible debenture) issues rumored at yields of around 9-9.5% and gold prices
Top 4 reasons to continue with your SIP in a volatile market
Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy. As an investor you don’t need to time the market. Always remember markets will fluctuate but your financial goals won’t!
After much analysis and debate, you have taken the plunge and invested in the equity fund thasan (SIP), a step by step way towards generating wealth, you hear that equities are in a free fall, or are too risky or are too overvalued.
Here are four reasons why you should invest in equities for the long-term and continue with your SIP.
Reduces the average cost
In SIP one starts investing a fixed amount regularly. Therefore, one ends up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging. Generally, those who are not well versed with the swings of the market would stay away from buying when the markets are down. They mostly tend to invest when the markets are rising.
Starting an SIP tends to bring discipline to our portfolio as SIP investors buy even when the markets are low, which actually is the best time to buy. As an investor you don’t need to time the market. Always remember markets will fluctuate but your financial goals won’t!
Invest regularly for power of compounding
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. The interest you will earn from your invested amount will be re-invested, and thus increase your principle amount. Starting an SIP will help you harness the power of compounding as you invest a set amount every day/ week/ month irrespective of the wild swings of the market.
Market timing gets irrelevant
one of the biggest difficulties in equity investing is to determine when to invest? Apart from the other big question, where to invest? While investing in a mutual fund solves the issue of where to invest, SIP helps us to overcome the problem of when to invest. SIP involves disciplined investing irrespective of the state of the market. When the markets are high, it may not be prudent to commit large sums at one go, thus balancing your portfolio. This makes timing the market less relevant, therefore reducing your worries about the state of your investments in volatile markets.
Does not strain daily finances
Mutual funds allow us to invest very small amounts (starting from Rs 100) in SIP, as against larger one-time investment required, if we were to buy directly from the market this makes investing easier as it does not strain our finances In fact, SIP becomes one of the ideal investment options for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market. Deep-pocketed investors who wish to accumulate their savings prudently might opt for a larger SIP amount.
Mutual funds now nearly a fifth of FDs as small towns take SIP of equity funds
For K Srinivasalu from Ongole in Andhra Pradesh’s Prakasam district, ‘investment’ only meant parking his money in insurance schemes. That was till last year when a friend talked him into considering mutual funds (MFs) for better returns. It’s been six months since the 35-year-old started a systematic investment plan (SIP) in an equity MF.
Tuticorin-based Dr P Poornima, meanwhile, has increased her SIP investments in equity MFs by 40 per cent. “Real estate and gold have turned unstable. Equity MF SIPs are useful in long-term wealth creation,” she said.
As Indian investors seek higher returns than those from bank fixed deposits (FDs), smaller cities are leading the rush towards MF investments. Money invested in MFs (called assets under management, or AUM) now amounts to roughly a fifth of savings in FDs, which is an all-time high. At the same time, growth in bank deposits has never been slower since 1963.
In 2017-18, total deposits with banks increased by a mere 6.7 per cent year-on-year (y-o-y) to Rs 115 lakh crore, while the AUM of MFs surged 22 per cent y-o-y to more than Rs 21 lakh crore, according to data with the Association of Mutual Funds in India (AMFI).
While SIP registrations in the top 15 cities — called T15 — increased by 89 per cent last year, the growth rate was even faster in the next 15 cities — called B15 — at 95 per cent with more than 53 lakh new registrations, according to data with CAMS MFDex, which represents 96 per cent of the MF industry.
People in smaller cities are also increasing the size of their SIPs faster than investors in bigger cities. In B15 cities, the average live SIP size grew 6.5 per cent to Rs 2,679 at the end of March, compared with a 3.1 per cent increase to Rs 3,766 in T15 cities.
“Awareness about SIPs has reached even smaller towns, an investment platform for MFs. Inflows into SIPs stood at around Rs 7,119 crore in March alone — the highest ever for a month. Investors committed Rs 67,190 crore through SIPs in 2017-18 — a 53 per cent y-o-y increase, which is also an all-time high.
Investment advisers count poor returns on FDs, the shadow of non-performing assets (NPAs) on public sector banks, and the popularity of balanced funds with monthly dividends among the reasons for the middle class’ shift to MFs.
State Bank of India (SBINSE 0.54 %), the country’s largest bank, offers 6.4 per cent interest on a one-year FD, while leading private sector banks offer 6.6-7 per cent interest. After tax, the returns shrink by 5 per cent to 30 per cent, depending on the investor’s income slab. This is less than the one-year returns on liquid and ultra-short-term fund schemes and much less than the nearly 12 per cent returns from several diversified fund schemes in the past one year.
“People are not happy with the returns on bank FDs, Said by an investment advisory. “The real returns on bank FDs are almost negligible.” Taking the RBI’s projection for retail inflation into account, the real returns on bank FDs would be a measly 0.75-1 per cent. Like FDs, gold and real estate have also given abysmal returns in recent years.Financial Advisories, said, “People are investing in MFs through SIPs as physical assets such as gold and property have not been doing well for quite some time.”



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