Local Funds to Guard India From China-Type Swings, Tata Says

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  • Domestic funds' ownership of BSE 100 climbs to two-year high
  • Mutual funds cushion biggest foreign outflow in seven years

Foreign investors’ sway over Indian stocks is set to wane as local mutual funds take a bigger slice of the $1.4 trillion market, providing a buffer against price swings sparked by events like China’s yuan devaluation last month, according to Tata Asset Management Co.

Even as the worst emerging-markets rout in four years rubbed off on India’s benchmark S&P BSE Sensex, domestic stock funds took in a net 92 billion rupees ($1.4 billion) in August, 50 percent more than July, data from the Association of Mutual Funds in India showed last week. Global investors, on the other hand, sold the most shares since October 2008.

Foreign funds hold 22 percent of the nation’s top 100 companies, more than the 13 percent owned by domestic ones, leaving India’s stocks prone to the global risk perceptions of overseas investors. When the U.S. Federal Reserve first signaled in 2013 that it would withdraw stimulus, outflows pushed the rupee to a record low. Now, the gap between the two is narrowing, mitigating such risks, said Ritesh Jain, chief investment officer at Tata Asset.

“Within three years, whatever foreign investors do will not impact us,” Jain, who oversees $4.2 billion in assets, said in an interview in Mumbai. “I have started getting money at every fall.” Tata Mutual’s assets have increased 28 percent in the 12 months ended June, data compiled by Bloomberg show.

Domestic inflows have gathered force since Prime Minister Narendra Modi’s Bharatiya Janata Party swept to power in May 2014. Stock funds attracted flows of as much as 1.14 trillion rupees in the past 16 months, exceeding the 934 billion rupees that Deutsche Bank AG estimates they received between January 2002 and April 2014. They bought $2.4 billion of shares in August.

Optimism that lower interest rates and tumbling oil prices will help revive company earnings growth is luring investors toward equities, which have traditionally been shunned in a nation known for its penchant for gold. A 4 percent drop in bullion prices in the past year and sluggish property demand have dulled the investment appeal of alternative assets, Tata’s Jain said.

“The good thing is domestic money is not panicking,” Sunil Subramaniam, chief executive officer at Sundaram Asset Management Co., which has $3.2 billion, said in a phone interview from Chennai. “India will benefit from lower oil and commodity prices at a time when China is slowing.”

While purchases by local institutions have helped restrict this year’s fall in the Sensex to 6.5 percent, versus a 16 percent decline in the MSCI Emerging Markets Index, mutual funds may not be able to sustain their support to equities if the global turmoil continues, according to Anil Ahuja, the Singapore-based chief executive officer of hedge fund IPEPlus Advisors. The stocks gauge rallied 1 percent to 25,856.70 on Monday, extending last week’s 1.6 percent gain.
“The domestic institutional investor is not yet a credible counter to a potential foreign investor selling because the size of the two is very different,” Ahuja said.

Indian mutual funds managed $186 billion in stocks and bonds at the end of June, while global investors’ equity holdings alone are worth $166 billion.

Even so, Tata’s Jain sees the shift toward financial assets accelerating as the government opens more than 170 million new bank accounts and the central bank keeps rates high enough to keep inflation within a government-approved target. Indian households have about $400 billion in stocks, compared with $1.1 trillion in bank fixed deposits, Morgan Stanley said in a May report.

“The money will first come to the banking system and then to mutual funds,” he said. “If you know inflation won’t go above 4-5 percent financial assets would deliver higher returns than physical assets like real estate."