Clearly, the foreign portfolio investors (FPIs) have been net sellers in FY23. After net outflows of $33 billion between October 2021 and June 2022, the FPIs did mellow down and turn net buyers in the second half of 2022. However, for the calendar year 2022 and even for FY23, they still remained net sellers.
The case was exactly the opposite in the case of domestic mutual funds. For instance, mutual funds infused Rs1.8 trillion into equities on a net basis in FY22 and an equivalent amount in FY23 too. That translates into net infusion of $44 billion into Indian equities in the last two financial years from mutual funds alone. That is a lot of money and it is much more than what FPIs have taken out in that period. Remember, we have only spoken about SEBI registered mutual funds and not of all the domestic institutions like LIC and private insurers. If we add that, the final number would be much bigger. But the moral of the story is that in the last couple of years, the domestic mutual funds have been filling up the gaps created by persistent equity selling by the FPIs.
How domestic mutual fund infused into equities in FY23
The table below captures the month-wise flows into Indian equity markets by domestic mutual funds. The table is quite self-explicit.
Mutual fund flows into Indian equities in FY23 (month-wise) and vis-à-vis FY22 |
|||
Period |
Gross Purchases |
Gross Sales |
Net Purchases /Sales |
Apr-22 |
1,09,219 |
86,848 |
22,371 |
May-22 |
1,43,135 |
1,05,336 |
37,799 |
Jun-22 |
96,719 |
74,668 |
22,051 |
Jul-22 |
91,678 |
86,965 |
4,712 |
Aug-22 |
90,595 |
91,716 |
-1,121 |
Sep-22 |
1,23,727 |
1,05,125 |
18,602 |
Oct-22 |
77,347 |
71,029 |
6,318 |
Nov-22 |
96,134 |
94,446 |
1,688 |
Dec-22 |
1,01,206 |
86,513 |
14,692 |
Jan-23 |
1,12,172 |
90,819 |
21,353 |
Feb-23 |
1,01,629 |
88,804 |
12,825 |
Mar-23 |
1,05,431 |
84,666 |
20,764 |
2022-23 (FY23) |
12,48,991 |
10,66,937 |
1,82,055 |
2021-22 (FY22) |
12,55,852 |
10,75,950 |
1,79,902 |
Change YOY |
-0.55% |
-0.84% |
1.20% |
Data Source: SEBI
In the 12 months of FY23, the domestic mutual funds have been net buyers in 11 months and were net sellers only in the month of August 2022. Even that was a month of fairly marginal selling by the domestic mutual funds. For the year overall, the net infusion by mutual funds into Indian equities stood at Rs1.82 trillion or $22.2 billion. That is a lot of money to be infused in the Indian markets. Does it really manage to offset the FPI outflows from Indian equities during this period?
Now FPIs sold $18.5 billion in Indian equities in FY22 and another $5.1 billion in Indian equities in FY23. That is approximately offset by the $22.2 billion of inflows from mutual funds into Indian equity, but remember we are only talking about FY23. If you add the FY22 figure also, the total inflows into Indian equities from mutual funds is more than $44 billion, which is much more than FPIs have taken out in the last couple of years. Of course, the impact on prices would still be there since FPIs also impact the currency. However, if there is one reason for the bounce in equities amidst heavy FPI selling, it is due to the resilience and conviction in Indian equities demonstrated by the domestic mutual funds.
Mutual funds debt flow story for FY23
The table below captures the month-wise flows into Indian debt markets by domestic mutual funds. The table shows contrasting trends in FY23 compared to FY22.
Mutual fund flows into Indian Debt in FY23 (month-wise) and vis-à-vis FY22 |
|||
Period |
Gross Purchases |
Gross Sales |
Net Purchases /Sales |
Apr-22 |
96,277 |
89,452 |
6,825 |
May-22 |
1,53,238 |
1,70,507 |
-17,269 |
Jun-22 |
1,16,221 |
1,24,902 |
-8,681 |
Jul-22 |
1,17,347 |
1,12,887 |
4,460 |
Aug-22 |
1,45,972 |
1,40,212 |
5,760 |
Sep-22 |
1,41,320 |
1,61,705 |
-20,385 |
Oct-22 |
94,631 |
1,03,955 |
-9,324 |
Nov-22 |
1,22,119 |
1,23,690 |
-1,571 |
Dec-22 |
1,26,207 |
1,23,639 |
2,567 |
Jan-23 |
1,37,207 |
1,45,807 |
-8,600 |
Feb-23 |
1,48,433 |
1,61,301 |
-12,868 |
Mar-23 |
1,84,026 |
1,82,829 |
1,197 |
2022-23 (FY23) |
15,82,997 |
16,40,886 |
-57,889 |
2021-22 (FY22) |
16,31,109 |
15,32,903 |
98,206 |
Change YOY |
-2.95% |
7.04% |
N.A. |
Data Source: SEBI
Debt investments by FPIs did see positive flows to the tune of Rs0.98 trillion in FY22 but it turned to outflows in the year FY23. In fact, if you look at the month-wise debt flows in FY23, then debt flows were negative in 7 out of the 12 months with the debt outflows being concentrated around the quarter ends. That has to be correlated with the outflows that mutual funds have seen in their debt schemes during the advance tax period. However, much of the mutual fund outflows from debt were focused at the short end of the yield curve, which is where most of the treasury funds are focused on.
There was one more reason for the sharp-selling in debt in FY23, and that had to do with the rising bond yields in India. During the year, the RBI had hiked rates by 250 basis points taking bond yields closer to the 7.5% mark. Rising bond yields are never good news for bonds as they result in bond price depreciation, which mutual funds are required to provide for in their NAV calculations. That had led to overall pressure on Indian debt paper and that was evident in the actions of mutual funds also.
The big picture: How were MF flows overall in FY23?
The table below captures the month-wise flows overall into equity and Indian debt markets combined by the domestic mutual funds. Clearly, the outflows in debt have mellowed the overall picture of mutual fund flows in FY23.
Mutual fund flows into India Overall in FY23 (month-wise) and vis-à-vis FY22 |
|||
Period |
Gross Purchases |
Gross Sales |
Net Purchases /Sales |
Apr-22 |
2,05,496 |
1,76,300 |
29,196 |
May-22 |
2,96,373 |
2,75,843 |
20,530 |
Jun-22 |
2,12,940 |
1,99,571 |
13,369 |
Jul-22 |
2,09,024 |
1,99,852 |
9,172 |
Aug-22 |
2,36,568 |
2,31,928 |
4,639 |
Sep-22 |
2,65,047 |
2,66,830 |
-1,783 |
Oct-22 |
1,71,978 |
1,74,984 |
-3,006 |
Nov-22 |
2,18,253 |
2,18,136 |
117 |
Dec-22 |
2,27,412 |
2,10,153 |
17,260 |
Jan-23 |
2,49,379 |
2,36,626 |
12,754 |
Feb-23 |
2,50,062 |
2,50,105 |
-44 |
Mar-23 |
2,89,456 |
2,67,495 |
21,961 |
2022-23 (FY23) |
28,31,988 |
27,07,823 |
1,24,166 |
2021-22 (FY22) |
28,86,961 |
26,08,853 |
2,78,108 |
Change YOY |
-1.90% |
3.79% |
-55.35% |
Data Source: SEBI
The overall picture shows that total mutual fund flows into equity and debt combined fell sharply by -55.4%. This was largely due to the net redemptions in debt for FY23. If you leave the debt portion out, then the equity flows of mutual funds have been at par at around Rs1.8 trillion in both the years. The sell-off in debt by mutual funds can be largely attributed to the spike in interest rates and the persistent pressure of redemptions that many debt fund categories witnessed during the last fiscal year FY23.
So, what is the big picture emerging? Clearly, the sell-off in debt was due to the rising yields and that is likely to temper considering that yields are closer to the peak levels now. RBI may not have completed its rate hike cycle, but the pause is reflective of the fact that enough has already been done. The big question is whether mutual funds will continue to infuse funds into equities? That is also largely likely to continue in FY24 for a plethora of reasons; and many of them are largely fundamental.
Most domestic funds are betting on the India $5 trillion GDP story. That is a secular one. Also, steady SIP flows will ensure that equities continue to elicit positive flows from mutual funds. So, FPIs may remain volatile in their approach, but that may not really matter. Domestic mutual funds have finally come of age.
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