July was a historic month for Indian equities, with total equity inflows (equity plus equity-linked savings schemes plus equity component of balanced funds) into domestic mutual funds rising to an all-time high of Rs 182 bn or $2.8 bn. The accelerating momentum of inflows into the equity schemes of mutual funds indicates that the financialisation of the domestic savings cycle in India — which began in earnest in 2014 — is becoming deeply entrenched. The rising component of Systematic Investment Plans in total monthly inflows underscores how significantly the profile of Indian savings is shifting towards equity investments, driven by the fulcrum of real interest rates, which remain sustainably high.
Mutual funds’ aggregate ownership rises to new high
With consistent net buying, aggregate domestic mutual fund ownership of BSE 500 companies has also increased to a new high. Domestic mutual funds’ ownership of BSE 500 companies rose from a low of 3% in March 2014 to 6% as of June 2017. While the trend is encouraging, the absolute holding of domestic mutual funds and domestic insurance companies, at 11%, remains significantly lower than that of foreign institutional investors. We view this as a constructive development, as it incrementally reduces the vulnerability of Indian equities to external developments.
Sectoral ownership — preference for cyclicals
An analysis of the sectoral ownership of domestic mutual funds shows that mutual funds have shown a strong preference for domestic cyclical sectors. Three key sectors —Financials, Industrials and Consumer Discretionary —account for almost 60% of mutual funds’ ownership value in the BSE 500 companies, as of June 30, 2017. Sectors where we see relatively lower ownership include Real Estate, and Telecom.
Financials, Utilities and Healthcare are over-owned
Our calculations for the Nifty 50 index and aggregate domestic mutual fund portfolio holdings indicate that the Financials, Utilities and Health Care sectors are over-owned sectors vs. the benchmark index. Consumer Staples, Energy and IT Services are under-owned sectors. Under-owned stocks should be more immune to disappointments, in our view.