Stocks Glitter More Than Gold in India as Mutual Fund Flows Soarby and
Equity funds make up 32% of assets, up from 20% in 2014: AMFI
Positive real returns fueling shift to financial assets
Indian investors are shifting savings into stocks like never before.
Mutual funds showed net buying of shares for a record 10th straight quarter in September, data from Bloomberg show. Households are putting more money into financial assets as slowing inflation reduces the value of gold, a traditional favorite.
Shibabrota Konar exemplifies the shift. He’s stopped buying exchange-traded funds backed by gold and now invests at least 15,000 rupees ($225) a month into stock funds. A jump in industry-wide accounts to a record 50 million at the end of August show he’s not alone.
“Gold has eroded wealth in the past three years, while stocks have taken off,” says Konar, a 43-year-old telecom engineer who lives in Mumbai. “Equity funds offer the best way to create long-term wealth. And I can invest in small amounts.”
Retail investors like Konar have been the main contributors to mutual funds’ growth since Prime Minister Narendra Modi took office in May 2014 with the biggest mandate in three decades. Assets with money managers swelled to an unprecedented 16 trillion rupees ($241 billion) in August, with stock plans making up 32 percent of the pie. The proportion was 20 percent in April 2014, data from the Association of Mutual Funds in India show.
Analysts cite several reasons for the trend:
- Investors seeking higher yields as returns from gold and real estate stagnate.
- Government policies spurring prospects for economic and corporate earnings growth.
- A generation of millennial investors ready to take on risk.
- Inflation-adjusted returns turning positive in the past two years after staying negative for most of the previous five years.
The gush of money into funds has sent the nation’s small- and mid-cap stocks to a record, while providing companies with a growing pool of capital to tap for their initial share sales and helping the market weather events such as the U.K. vote to leave the European Union. Early signs suggest investors are looking past last week’s military offensive too. The S&P BSE Sensex has risen 1.7 percent in two days, recouping more than half of last week’s 2.8 percent tumble spurred by India’s attacks on Pakistan terrorist camps.
Optimism that slowing inflation may prompt the central bank to lower borrowing costs from a five-year low is also pulling investors toward stocks, says Mirae Asset Global Investments (India) Pvt. The new central bank Governor Urjit Patel led a united monetary policy panel to cut interest rates at its first review on Tuesday. The Sensex closed with a third day of gains after the policy decision.
“It’s time to back up the truck for stocks,” said Gopal Agrawal, chief investment officer at Mirae Asset, which manages $600 million. “The migration to moderate-risk equity products like mutual funds is growing at a phenomenal pace because of their relative attractiveness” over alternatives such as bank deposits, he said.
Equity funds have attracted 1.63 trillion rupees from April 2014 through August this year, according to AMFI data. That’s more than the 934 billion rupees that Deutsche Bank AG estimates funds got between January 2002 and April 2014.
The market benefits from a regular stream of money flowing from savers setting aside a fixed amount every month as part of their mutual fund investment plan. The industry takes in 35 billion rupees monthly from 11 million investors aiming to smooth out market swings through averaging, according to AMFI.
“People have begun to invest with maturity,” said Nilesh Shah, chief executive officer of Kotak Mahindra Asset Management Co. The Mumbai-based money manager, which has $9.5 billion in assets, got new inflows on Thursday when the financial markets were jolted after the nation announced it attacked terrorist camps in Pakistan.
Demographic trends are also helping, said Navneet Munot, chief investment officer at SBI Funds Management Pvt., which has $18 billion in assets.
“The bulk of our population is under 35 years of age and this generation has a much higher risk appetite,” he said. “The millennials will drive the equity boom over the next five years.”
The optimism among Indian investors contrasts with skepticism from savers elsewhere. Inflows into Japan’s stock funds fell in July to the lowest since November 2012, and stayed near that level in August, data from the Investment Trusts Association in Japan show. Almost $90 billion was pulled from U.S. mutual and exchange-traded funds for the year through August, even as the S&P 500 Index gained almost 20 percent from a February low, according to data compiled by Investment Company Institute and Bloomberg.
Indian families will probably buy $300 billion of equities in the next decade, six times as much as they did in the past decade, Morgan Stanley said in a May 2015 report.
“You will be surprised with the amount of money that will come into the markets over the next three to five years,” Anand Shah, the chief investment officer at BNP Paribas Asset Management India Pvt., said in an interview in Mumbai. “The incentive to buy real estate and gold is diminishing by the day.”