Hail the resilience of domestic investors amid volatility

K. S. Badri Narayanan | Updated on: Jun 24, 2022

Mumbai: Investors watching Union Finance Minister Pranab Mukherjee presenting the annual Budget 2012-13, on the screen outside the Bombay Stock Exchange in Mumbai on Friday. PTI Photo by Mitesh Bhuvad (PTI3_16_2012_000082A) | Photo Credit: cueapi

Unlike 2008, mega pullout by FPIs failed to cause a big dent

Are foreign portfolio investors not market movers anymore? The old order changeth as despite the mass exodus of FPIs — who sold a whopping ₹2.65-lakh crore since October 2021 — domestic markets are relatively calm.

Rewind to 2008. A pull out of nearly ₹53,000 crore had caused a heavy fall of 66 per cent in Sensex — from a high of over 21,000 to around 7,700. In fact, it took 4-5 years for investors to overcome that shock.

Cut to 2021-22. This time around FPIs have offloaded Indian stocks in truckloads. One of the major reasons for the relative stability to our markets is the unflinching faith reposed by domestic investors — both institutions and retail. During the period, they pumped in over ₹2-lakh crore into the stocks, cushioning the fall.

As a result, Nifty fell about 10.5 per cent and NSE Nifty 500 tumbled 11.50 per cent when developed markets such as Nasdaq, Dow Jones, Germany and France saw even bigger falls.

FII ownership declines

A recent report from Motilal Oswal Financial Services revealed that the FII-DII ownership ratio in the Nifty-500 declined to 1.4 in Q40-FY22 (from 1.6 in Q4-FY21). While FPIs reduced their ownership in 60 per cent/72 per cent of Nifty-500/Nifty-50 companies q-o-q, DIIs raised their stake in 58 per cent/72 per cent of Nifty-500/Nifty-50 companies, respectively, it said.

This clearly demonstrates how DIIs now act as a counter-balancing party against the huge sell-offs by FPIs. Earlier, with DIIs used to hold only a small amount at their disposal, unable to match the firepower unleashed by an FPI sell-off.

Matured investors

Today, funds invested by DIIs are mostly from retail investors who continue their investments in mutual funds via SIPs and new fund offers. Instead of panicking, this time around domestic investors are showing some maturity as their expectations about equity returns have moderated and real. Besides, surging demat accounts also indicate continued individual interest in the market. Investors are willing to wait for a long-term.

One of the main reasons why domestic investors are betting on Indian equities is TINA (there is no alternative) factor. Investors now firmly believe that equity will outperform the other asset classes such as real estate, gold, etc. The awareness created by mutual funds through various campaigns and launch of new fund offers also attracted retail investors and inflows that reflected in ever-growing industry asset size.

EPFO/NPS lend helping hand

Earlier, only Life Insurance Corporation of India used to be counter-party to an FPI sell-off. But, now two more big institutions such as EPFO (assets over ₹15-lakh crore as the end of March 2021) and National Pension System (over ₹7.36-lakh crore as of March 31, 2022) help mitigate incessant selling by FPIs and lessen the burden of LIC too.

So, one should not worry about FPIs selling? Though benchmark indices withstood heavy sell-off, half of small-cap and mid-cap stocks slumped at least 20 per cent to 75 per cent. So, FPI selling is a cause of concern, temporarily. But if investors endure the current pain, even a 15-20 per cent return of FPI money can do wonders for them.

Published on June 24, 2022
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