The Nifty 50 is edging close to its life-time high, thanks to strong inflows from mutual funds, which have offset the impact of foreign fund outflows.

Net buying crosses ₹25,000 cr

The strong surge of funds into bank accounts post demonetisation appears to have found its way into the equity market through the mutual fund route; net buying of equity by mutual funds has crossed ₹25,000 crore in the last five months. Foreign portfolio investors, on the other hand, have been net sellers in the segment during this period. They have pulled out more than ₹29,000 crore.

Data from industry body Association of Mutual Funds of India shows net flows into equity-oriented funds (comprising equity funds, equity-linked savings schemes (ELSS) and other exchange-traded funds) have surged over the last four months. These inflows totalled ₹10,334 crore (in October 2016), ₹11,909 crore (November 2016), ₹14,452 crore (December 2016) and ₹11,678 crore (January 2017).

AMFI data also shows that corporates, banks and high net worth individuals contributed more than retail investors to the inflows. AMFI’s latest assets under management analysis report (as of December 2016) shows that the equity AUM of corporates rose 16 per cent month-on-month, while that of banks and HNIs rose 6 per cent each. In comparison, the AUM of retail investors rose 3 per cent.

Corporates too pitch in

Corporates have upped their investments, notably in equity-oriented MFs, especially in arbitrage funds. Many corporates shifted their investments from liquid funds to arbitrage funds as the former lost sheen. Returns from liquid funds fell to 7-7.5 per cent a year from about 9 per cent levels two years back, due to dip in the rates of very short term instruments.

Arbitrage funds also give similar returns. But they score over liquid funds due to their tax advantage. Arbitrage funds are treated as equity-oriented funds, and hence are exempt from long-term capital gains tax if the holding period is more than a year. Liquid funds are debt funds and do not enjoy such beneficial tax treatment.

Inflows into ELSS also witnessed gradual increase, with the fiscal year-end approaching and tax planning gathering momentum.

ETF boost

Significant inflows into other exchange-traded funds (ETFs) also added to the corpus of equity mutual funds. The Employees Provident Fund Organisation and provident funds of other PSU companies have started investing in the stock market through ETFs via SBI Nifty ETF and SBI Sensex ETF.

The Labour Ministry allowed the EPFO to invest up to 15 per cent of its incremental corpus in equities through ETFs. It is estimated that EPFO’s investment in ETFs for the financial year will total about ₹13,000 crore. The Further Fund Offer of the Central Public Sector Enterprises ETF also brought in ₹6,000 crore.

Compared with other investor categories, incremental inflows from retail investors has been relatively low during the recent periods. But their participation in the market through systematic investment plans (SIPs) this year has been noteworthy.

According to AMFI, mutual fund SIP accounts stood at 1.28 crore and the amount collected through this mode in January 2017 was ₹4,095 crore. Mutual funds have been adding about 6.86 lakh SIP accounts each month on an average during the current financial year, with the average SIP size of about ₹3,200 per account.

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