Tue. Jul 23rd, 2024

Generally, the retail investors are late to the party. Many times, their entry is seen as an indication of the peak of an ongoing rally in the stock market. However, the upswing in mid-cap and small-cap stocks is all initiated and funded by retail money. Retail investors have put their best foot forward by committing their money to smallcap equity schemes and midcap equity schemes.

For example, as per the monthly data releases by the Association of Mutual Funds In India since April 2022, smallcap equity funds and midcap equity funds have seen net inflows of Rs 48,650 crore and 33,486 crore respectively. This has pushed up the prices of stocks. Systematic investment plans, the preferred means of investing in mutual funds for individual investors, have been a force to reckon with.

The monthly contribution of SIP is on the rise and stands at Rs 16,927 crore for October 2023. Individual investors have been investing in stocks directly, as well. Now let’s look at the other big segment of market participants.

Foreign portfolio investors, foreign institutional investors – FII, as they are popularly known, have been heavy sellers in Indian equities. Since September 1, till November 9 they have sold stocks worth Rs 43,659 crore. In the past, when FIIs used to sell such a big amount in equities, our markets used to crumble.

But in the aforesaid period, the Nifty 50 index is almost flat with gains of 0.7%. Selling by these institutional investors is well absorbed by domestic flows. It speaks volumes about the strength of the stock market rally. Despite such incessant selling by foreigners, none is worried about the market stability. Domestic institutional investors and small investors directly investing in stocks have emerged as a strong counter-balancing mechanism in India as against foreign money moving in and out of India.

This formidable counter-balancing force is not built overnight. Policy reforms, sustained economic growth momentum and a strong eco-system of well-regulated markets as well as pool products such as mutual funds made this possible. Such an arrangement needs to be put in place in the debt markets as well.

Recently it was announced that the government of India securities (G-sec) will be included in the global index- JP Morgan Global Bond Index – Emerging Markets (GBI-EM). Also, there is an expectation that Indian government securities will be included in more global indices. This means that many foreign institutional investors tracking respective debt indices will start buying Indian government securities. As per estimates, US$20-25 billion may be invested in government bonds. Since this is the beginning of a new era, the allocation will be gradual. From June 2024 each month the weight of Indian G-sec will go up by one percentage point from zero now in the aforesaid index.

And over 10 months it will reach the 10% cap. This is expected to lead to a situation wherein 3.5 to 4% of outstanding Indian government bonds will be owned by FIIs, from the current level of around 1.5%. If more index manufacturers include Indian g-sec then the FII ownership further goes up.

At this moment most market participants are talking highly about this fund infusion by foreigners. It means yields should come down, and other things remain the same. It should also provide one more source of money to the Indian government. These benefits should translate into better times for the Indian economy.

The other side of the coin is this money can go out of India if the index manufacturers decide to cut India’s weight due to operational reasons or because of the worsening macroeconomic picture in India in the future. If the foreign money goes out in a hurry, then it may push up bond yields. It may also put pressure on forex markets, among other things.

Hence to prevent the occurrence of such a situation in the future, it is necessary to build a counter-balancing mechanism by encouraging domestic investors to invest in government securities. RBI Retail Direct is a step in the right direction.

That platform has enabled small investors to bid in the auctions and buy government bonds. More steps should be taken to popularise investing in g-sec. Pooled products such as mutual funds should be incentivised to attract long-term money in schemes focusing on government securities.

SIP book of the mutual fund industry is currently focused on equity schemes and to some extent hybrid schemes. If such a book with a commitment to invest monthly in government securities either through MF or otherwise can be built, then it may reduce the risk in the system.

(The author is the CEO of Choice Equity Broking. Views are his own)

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