Retail Retreat And Foreign Panic Amid Market’s Massive Sell-offs

As Association of Mutual Funds in India (AMFI) data suggests, the April month experienced more than 16 per cent decline in mutual fund inflows. The concern escalates with foreign outflows, as foreign institutional investors (FIIs) continued to exhibit their selling mood for the consecutive eight-month. 

This institutional activity is categorically reflected in the Indian stock market as the benchmark indices, Nifty and Sensex delivered merely 1.51 per cent 0.62 per cent returns in 2024 so far. 

According to AMFI data, equity mutual fund inflows fell 16.42 per cent to Rs 18,917 crore during April. However, the assets under management (AUM) of the Indian mutual fund industry reached Rs.57.26 lakh crore by the end of April, representing a 7.2 per cent increase. Equity-oriented schemes accounted for 43.2 per cent of the total AUM, while debt category schemes accounted for 25.5 percent.

“This surge in inflows can be attributed to factors such as quarter-end demands for advance tax, diminishing year-end redemptions, and continued volatility in the stock markets, leading investors to favour cash for short-term investments,” said Gopal Kavalireddi, Vice President (Research), Fyers.

Gimmick Behind Record SIPs
Notably, systematic investment plans (SIPs) breached the Rs 20,000 crore mark to reach a total of Rs 20,371 crore during April. SIP book was at Rs 19,271 crore in March against Rs 19,187 crore in February 2024.

“Overall, April has been a record of sorts for SIP, however equity mutual funds saw a decline in inflows due to investors reducing their allocations to large-cap stocks. This clearly brings forth the point that the retail investors are mindful of the increasing uncertainty ahead of the Lok Sabha election results. The surge in inflows has been more on the account of investments in debt schemes as opposed to equity,” said Aamar Deo Singh, Senior VP (Research), Angel One.”

Amid foreign inflows, the DIIs buying backed by robust SIPs growth mitigate the volatility in the Indian stock market. Albeit, it should also be noted that SIP is a unique tool designed to utilise for certain market conditions. 

“SIPs, by design, encourage a long-term perspective, SIPs benefit from rupee-cost averaging and mitigating risk over time. Foreign portfolio investors (FPIs), on the other hand, might have lower risk tolerance or be following a global investment strategy that necessitates capital reallocation, independent of the Indian market's fundamentals. Therefore, the rise in SIPs signifies a commitment to long-term wealth creation through disciplined investing, rather than a disregard for potential risks,” said Sonam Srivastava, Founder and Fund Manager, Wright Research.

Reliability Fades In Indian Market
Increased volatility in the Indian stock market and uncertainty over election results have compelled the investors to look for safer returns. While, delay in rate cuts due to geo-political instability, persisting inflation, Q4 corporate earnings and general elections knocking the door with low voter turnout seemed to have blurred the near-term outlook for the Indian market. 

The benchmark indices, Nifty and Sensex have delivered merely 1.51 per cent and 0.62 per cent returns respectively in 2024 so far. 

FIIs have been on a selling spree on the back of rising ten-year US bond yields, around 4.5 per cent, making it attractive for FIIs and FPIs. The Lok Sabha election results on June 4 and tepid Q4 results across many sectors and companies have also added to the selling pressure from FIIs. And all this is reflected in an 80 per cent week-on-week surge in India volatility index (VIX), said Singh. 

“Another reason behind the selling by FIIs is that the China and Hong Kong market’s valuation is attractive compared to India. The Chinese and Hong Kong market price to earnings (PE) ratio is around 10 times compared to PE of 21 times for India. Both the Chinese and Hong Kong markets are outperforming currently presenting an opportunity for FIIs to re-enter the markets,” said Anand Jain- Director, Buy-side Investment Research, Acuity Knowledge Partners. 

Foreign And Domestic Tug of War
According to the data, FIIs and DIIs generally behave oppositely, while India's growth story acts as a mutual consensus. FIIs consider the global picture and seek for opportunities on a global scale across asset classes, whereas DIIs are more domestically focused. 

Singh anticipated that in the near-term, expectations remain that DIIs are likely to be on the buying side of the market, whereas FIIs would be more on the sell-side, till such time, they have more clarity on the outcome of the elections.

The reversal of the FII selling trend in Indian equities may hinge on global economic conditions, election outcome and clarity on Fed policies. The near-term outlook is dominated by the outcome of Lok Sabha elections. The street earlier discounted a thumping victory for the current ruling party BJP, but lower voter turnout have raised concerns whether the BJP can achieve the hyped landslide victory in 2024, said Jain.  

FMCG and IT Preference
As Q4 corporate earnings arrived on Dalal Street, investors closely watched the market performance of blue chip stocks. The much suppressed FMCG and IT sectors performance will decide the fate of these sectoral stocks in the near-term. 

“In Q4, the IT sector experienced sluggish growth owing to growing challenges in BFSI and retail industries across the globe. Then again, the cost-cutting measures and the depreciating INR have helped boost margins. Amid these developments, the short-term outlook for this sector remains neutral with a below-par growth outlook for FY25,” said VLA Ambala, Research Analyst and Co-Founder, Stock Market Today.  

She further added, FMCG revenue growth continues to be in line with the sector's expectations. While volume growth was recorded in the low single digits, the operating profit growth surpassed expectations thanks to lower input costs and a significantly improved product mix. This is why we can expect the sector to show improvement in growth, positioning it better than IT at the moment.

In terms of year-to-date (YTD) performance, Nifty IT index has plunged more than 7 per cent, whereas Nifty FMCG has declined more than 3 per cent.