FPIs bet big on risk in India; mutual funds go big on small-cap stocks

As mutual funds sold high beta and value stocks, FIIs bought into the risk.

FIIs brought inflows of around $4.6 billion from April to 17 May.

As FPIs continued buying into the India story with renewed vigour in the last one and a half months, adding active risk to their portfolios to maximise their gains, mutual funds began to reduce exposure to risk factors . From April to 17 May, FPI inflows were strong at $4.6 billion, mutual funds net sold stock worth $800 million, according to a report by ICICI Securities.

Top sectoral buys for FPIs, MFs

FIIs purchased high beta and value stocks, the same type of shares mutual funds sought to shed. The primary sectors of focussed buying from FPIs were cyclical and capital-intensive sectors, such as financials, industrials, discretionary consumption, and metals. However, despite being averse to risk from exposure to beta and value stocks, mutual fund data indicated heavy buying in small-cap funds, indicating a propensity for size risk. The top sectoral choices for mutual funds were financials, IT, materials, transportation and real estate.

FPI inflows to India vs other EMs

India has seen heightened inflows from FPIs compared to other emerging markets. So far, FPIs have pumped in $2.7 billion into the country, compared to $1 billion in Indonesia and Brazil respectively. When compared to Indonesia, Brazil, South Africa, Philippines, Turkey and Thailand, India is the only country that has seen continuous FPI inflows for the months of March, April and so far, in May.

Why are FPIs buying into the India story?

The report credited India’s relative outperformance to global equities as a key factor driving inflows, which is further driven by the reduction in valuations. This is measured by the difference in the NSE Nifty 50 P/E valuation versus that of the MSCI EM index. “NIFTY50 P/E valuation premium over MSCI EM index at 56% is significantly lower than the recent high and closer to the long-term median of ~45%,” said the report.

India FPI inflows amongst the highest amongst EMs in recent times

The premium that was attached to investing in India versus other emerging markets has dropped significantly. Coupled with the reduction in the fiscal deficit and current account deficit falling, the rupee remaining steadfast and inflation moderating within RBI’s threshold, India seems set for outperformance to FPIs. However, rising valuations will be a key risk to FPI flows towards India going ahead, according to the report.

FIIs versus DIIs  

Calendar YearFII Equity (in $ billions)DII (in $ billions)
Source: Bloomberg, I-Sec research

Over the past five and a half years, DIIs have been buyers in the India story for every year, except CY20, while FPIs were net sellers for two years. However, they both have been net purchasers of Indian equities over the past few decades, with FPI purchasing equities totaling $21 billion CY18 onwards, and DII inflows of $76 billion.

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First published on: 18-05-2023 at 15:12 IST