MF ownership of BSE 500 firms at new high

Aggregate domestic mutual fund (MF) ownership of BSE 500 companies has touched a new high — rising from a low of three per cent in March 2014 to six per cent as of June 2017.

The rise in ownership has been driven by record inflows through systematic investment plans (SIPs) into equity schemes, leading to consistent net buying from asset management companies in Indian stocks, said a note by Deutsche Bank.

Total equity inflows (including the equity component of balanced funds) rose to an all-time high of ~18,200 crore ($2.8 billion) in July.

“The accelerating momentum of inflows into equity schemes of MFs indicates that the financialisation of the domestic savings cycle in India, which began in earnest in 2014, is becoming deeply entrenched,” said Abhay Lajjawala, research analyst at Deutsche Bank.

“The inflows reduce the vulnerability of Indian equities to external developments and also reduce the cost of capital for domestic companies,” he added.

According to the note, the absolute holding of domestic MFs and domestic insurance companies remains at 11 per cent, significantly lower than that of foreign portfolio investors at 21 per cent.

FPIs have been the dominant market price setters, given their size and trading patterns in India. However, the past couple of years have indicated a change, with domestic institutional investor (DII) flows increasingly, being the primary driver of market direction.

DIIs have pumped in excess of ~1.28 lakh crore in the past three years, mostly led by robust investment from MFs, against inflows of ~1.33 lakh crore from FPIs during the period. In 2015, MFs were four times that of FPIs, and in 2016 it was nearly three times. So far this year, it has been neck and neck at around ~50,000 crore each.

Financials, industrials and consumer discretionary account for almost 60 per cent of mutual funds’ ownership value in the BSE 500 companies, as of June 30, 2017, according to the Deutsche report.

Sectors with relatively lower ownership include real estate, telecom and utilities. Financials, utilities and healthcare are over-owned sectors, while consumer staples, energy and IT services are under-owned.

“An equity investment culture is rising and is taking a more formal form. Most new-age investors are professionals… Given their lack of expertise, resources and time, these investors are investing through insurance schemes and MFs,” said a recent note by foreign brokerage Jefferies.