Will retail attitude turn positive, or fund inflows taper off?

The Nifty Midcaps 150 is down by 6.05% and the Nifty Smallcaps 250 is down by 6.5%

There have been major variations in returns across large-caps, midcaps and smallcaps in the first three weeks of May. The Nifty closed at 10,718 on May 2 (May 1 was a holiday) and it declined by 1.69 per cent to hit 10,535 by May 22. The Nifty Next 50 declined 5.7 per cent in the same time. 

The reasons for the decline include higher crude oil prices, weaker rupee, and poor sentiment post-Karnataka elections. Note that the Nifty and Nifty Next 50 track very large caps, where the bulk of trading volumes comes straight from institutions.

Look at smaller stock indices. The Nifty Midcaps 150 is down by 6.05 per cent. The Nifty Smallcaps 250 is down by 6.5 per cent. There are many direct retail investors in midcaps and the small cap segment is dominated by retail. 

The giant caps of the Nifty have seen less capital loss than the largecaps of the Nifty Next 50, which in turn, has outperformed the midcaps. The midcaps have marginally outperformed the smallcaps. Since retail investors focus on smaller stocks, higher capital losses in those segments is an indicator that retail attitude has been bearish through May. 

We have further confirmation, when we examine DII (domestic institutional investor) and FPI (foreign portfolio investor) numbers. FPIs have sold about Rs 55 billion of equity so far in May. The DIIs bought net Rs 100 billion in equity. That’s net institutional buying of Rs 45 billion. The DII buying has been more than enough to comfortably absorb the FPI selling. 

But, the market has gone down despite the net positive institutional position, which can only happen with net selling. The logical conclusion is that retail has sold heavily. This could be a one-off, or it could be that retail investors have decided, in aggregate that it’s time to cash out. 

Another useful data set is mutual fund inflows. For the past two years, direct retail buying has generally gone hand-in-hand with strong equity fund inflows. April 2018 certainly didn’t see a slowdown in fund inflows, though there were indications of weaker retail sentiment.

AMFI (Association of Mutual Funds in India) data indicates Rs 65 billion came in via SIPs (systematic investment plans) in April and the overwhelming majority of SIPs comes from retail plus HNI (high networth individuals). A total of Rs 107 billion flowed into equity schemes (except arbitrage) in April 2018, which was a huge jump over the Rs 63 billion of equity inflows in April 2017. In fact, this was one of the largest months ever, for equity inflows. However, total inflows of Rs 1.374 trillion was lower than Rs 1.507 trillion inflows in April 2017.

Apart from equity, another category with higher inflows was liquid/money market funds, which saw net inflows of Rs 1.16 trillion in April 2018, versus Rs 990 billion in April 2017. 

Investments in income funds slowed sharply, falling from Rs 346 billion (April 2017) to Rs 52 billion in April 2018. 

Market indices offered mixed returns in April. The net institutional position was positive at Rs 31 billion, with net equity sales of Rs 55 billion by FPIs in April balanced by DIIs buying of Rs 86 billion. The Nifty rose by 3.18 per cent through April. But, the Nifty Next 50 was down 1.9 per cent and the midcaps and smallcaps down by 1.9 per cent and 2.9 per cent, respectively. 

The numbers indicate DIIs have been the only buyers so far in 2018-19 fiscal. Retail is selling, and FPIs are selling. Fund inflows, especially SIPs, are generally committed for periods ranging from six  months to a year, so these can lag direct retail trading patterns. The key question: Will retail attitude become more positive, or will fund inflows taper off?