A dimming confidence

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For some time now, there has seemingly been a growing disconnect between the stock indices and the broader economy. While economic growth has fallen precipitously, the Sensex has scaled new heights

The sharp fall in inflows into equity mutual funds signals a shift of mood within the investor community in India. These inflows plummeted to Rs 1,312 crore in November — the lowest levels since June 2016 — according to latest data from the Association of Mutual Funds in India (AMFI).

That this fall has taken place despite the Sensex hitting a record high, and foreign investors pumping around Rs 20,000 crore into the stock market during this period, seems to reinforce the view that sentiment in India has been badly hit. It suggests that investors are voting with their feet, and is in line with the findings of the Reserve Bank of India’s (RBI) consumer confidence survey which reveals that sentiment on the general economic situation and the employment scenario in the country weakened further in November.

For some time now, there has seemingly been a growing disconnect between the stock indices and the broader economy. While economic growth has fallen precipitously, the Sensex has scaled new heights. But a closer look at the market suggests that the rally was largely driven by a few stocks, reflecting the fact that investors were shifting to high quality stocks at any price. In fact, while returns in the large cap category have been around 12 per cent over the past year, they were much lower for the small and mid-caps, reflecting the pain in the larger economy.

The fall in inflows in November could be indicative of a reassessment by market participants of the growth trajectory. India’s economic growth has fallen from 8 per cent in the first quarter of 2018-19 to 4.5 per cent in the second quarter of 2019-20. The fall in nominal growth to 6.1 per cent is particularly disconcerting, as it would mean lower sales and profit growth for companies. With growth prospects likely to remain uncertain for the foreseeable future, cuts in earnings per share are likely to continue, further depressing sentiment.

The only silver lining in the data seems to be that inflows, channeled through systematic investment plans (SIPs), remained stable, rising marginally to Rs 8,272 crore, up by Rs 27 crore last month, with the total number of SIP accounts increasing to 2.94 crore. Yet, if concerns over the country’s growth prospects deepen further, these inflows are unlikely to hold up. Markets are forward looking. And with the Monetary Policy committee (MPC) deciding against cutting rates further, they will now be eying the upcoming Union Budget in February for measures to shore up the economy.

The finance minister cannot afford to ignore the great expectations. A comprehensive reform package is needed to revive both business and consumer confidence.