Record domestic inflows counter FPI pullout, keep market afloat in 2022

Mutual funds' net equity investment in 2022 highest ever at Rs 1.8 trillion; domestic investors as a whole pump in Rs 2.74 trillion

Domestic investors turned saviours for the Indian equity market in 2022 amid aggressive selling by foreign investors. Domestic institutional investors (DIIs), which includes mutual funds, insurance, banks and other entities, together invested a record sum of Rs 2.74 trillion in Indian equities this year (till December 22).

Mutual funds alone pumped in a net of Rs 1.8 trillion into equities, over 2.2 times more than 2021 and also the highest ever, shows data from the Securities and Exchange Board of India (Sebi). Retail investors, who mostly opt for the systematic investment plan (SIP) route for investment in equity mutual funds, persistently bought MF units throughout the year irrespective of the market condition. Data from the Association of Mutual Funds in India (Amfi) shows SIP inflows rose gradually throughout the year to touch new highs almost every month. The inflows rose from Rs 11,500 crore in January 2022 to Rs 13,300 crore in November 2022.

The persistent flow of retail money through mutual funds and other sources like insurance and direct equity more than counterbalanced the outflows resulting out of heightened selling by foreign portfolio investors (FPIs). Till December 28, they had pulled out a net of Rs 1.2 trillion from the Indian market.

Experts say this is the first time that the Indian market has remained almost unperturbed by the exodus of foreign investors.

"This is the first time when markets have ended with gains despite FPIs selling aggressively. Credit to the retail investors who have flocked to the market in large numbers in the last three years, whether through direct equity or mutual funds," said G Chokkalingam, founder, equities research and advisory firm Equinomics.

The markets delivered mediocre returns this year. The benchmarks Sensex and Nifty ended 2022 with 4.4 per cent returns. However, the performance is still better when compared with other major economies. Globally, the markets witnessed a record $18 trillion wipeout this year on the back of recession fears.

"Retail participation played a key role in maintaining market stability in a year marked by bouts of volatility due to geo-political and macro-economic factors. When foreign investors were fleeing, the market found support from retail investors who continued to pour money with a belief in the domestic growth story," said DP Singh, Deputy MD & Chief Business Officer, SBI Mutual Fund.

According to G Pradeepkumar, CEO of Union Asset Management Company, the equity market is in a sweet spot as the strong flow of retail money has brought down volatility. "This support from domestic investors saved the market from a major correction and, in turn, helped the MF industry to continue bringing new investors into its fold," he said.

In its market outlook for 2023, BofA Securities has said that the domestic flow is expected to continue albeit at a slower pace. "Our conservative estimate is that provident funds, pension funds, insurance funds and SIPs could contribute at least $20 billion (around Rs 1.6 trillion) into Indian equities in calendar year 2023," the brokerage said.

Given that the SIP inflows have remained resilient throughout this year despite the market going through bouts of corrections, the MF industry believes that retail investors have matured and perceive the volatility in equity markets as an opportunity for wealth creation. Reports show that retail investors try to invest more during periods of market downturn to accumulate MF units or stocks at lower prices.

Foreign investors turned net sellers in 2022 after being net buyers in the last three years owing to a variety of factors, ranging from interest rate hikes by major central banks to fears of global recession. The depreciation of the rupee has also added to the nervousness of foreign investors. A fall in the rupee eats into the returns of FPIs. Another factor that has led to the pullout by overseas investors is the spike in commodity prices.