It has been a year since Prime Minister Narendra Modi announced demonetisation, and mutual fund inflows have seen an unprecedented rise since then. Interestingly, in October 2016, equity mutual funds inflows stood at Rs 9,394 crore, a 16 month high back then. As anticipated the November month recorded a slight drop to Rs 9,079 crore. Inflows bounced back to cross the five figure mark and surged to inflows of Rs 10,103 crores in December 2016. Since then, equity mutual fund investing in India has reached unprecedented levels crossing the Rs 20,000 crore level in August 2017, while the overall assets under management (AUM) topped the Rs 20-lakh crore mark.
While overall AUM posted a growth of 25 per cent since November 2016, which was almost same for prior eleven months, the equity AUM has grown by 36 per cent since the note ban as against a 19 per cent growth during the previous year. According to Morningstar India, equity mutual funds have witnessed a total inflow of Rs 1.35 lakh crore and the balanced fund (mix of equity and debt) has received Rs 74,000 crore between November 2016 and October 2017.
“Demonetisation, definitely, helped people move money to bank accounts and from there to mutual funds.” Nilesh Shah, chief executive officer, Kotak Mahindra Asset Management had told CNBC TV18 in August this year. In April this year, Bonanza Institutional Equities Vice President Yogesh Nagaonkar said that mutual funds are not finding enough opportunities to deploy the inflow of cash post demonetisation into suitable options in the markets. Some mutual funds have even stopped accepting new cash, as they are waiting for the market valuations to go cheap, Nagaonkar said back then.
As a direct consequence of the staggering inflows, the cash balances are likely to increase. For want of opportunities to deploy excess cash, industry players such as BlackRock Inc’s Indian unit in February shut its DSP BlackRock Micro Cap Fund to new investors. In April this year, Motilal Oswal Asset Management Co had stopped accepting new cash for its Next Trillion Dollar Opportunity Strategy, which mostly invests in small and mid-cap stocks, because it says the rally has made valuations untenable, according to a bloomberg report.
Has mutual fund investing in India peaked? Far from it says ace investor Rakesh Jhunjhunwala. In an interview to CNBC TV18 last month, Rakesh Jhunjhunwala said, “Indian money into the market is going be a tsunami! I think it’s not even reached a flood.” A lot of growth inflows in the funds is due to growth in the SIP book. A report by Deutsche bank in August underscored how the rising component of Systematic Investment Plans (SIPs) is changing the profile of Indian savings towards equity investments.
“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,” Deutsche Bank said in a research note. In the last financial year 2016-17, a total of Rs. 43,921 crore was collected through the SIP route. “We view this as a constructive development, as it incrementally reduces the vulnerability of Indian equities to external developments and also reduces the cost of capital for domestic companies,” the Deutsche bank research report noted.