Mkt participation of FPIs, DIIs falls to 15-year low | Economic Times

Mumbai: While the Sensex and Nifty are hovering near all-time highs, institutional participation in the Indian stock market has declined to a 15-year low. Market participants said a drop in flows from foreign funds due to elevated share valuations have led to the decline, which has been offset by a jump in activity by individual investors starved of other high-yielding investment avenues.So far in June, the average daily turnover by institutions in the cash market, including foreign portfolio investors (FPIs) and domestic institutional investors (DIIs), has been ₹25,200 crore a day, about 30% of the aggregate ₹79,600 crore on both the NSE and BSE, according to an ET study. In September 2006, institutional participation as a percentage of daily turnover was 28.63%, rising to a high of 89.21% in May 2015. It was 59.38% in March last year when the share of individual investors started rising.FPIs sold stocks worth ₹8,500 crore between April and June after being buyers in the January-March period to the tune of ₹44,500 crore. 83941315‘Mid- & Small-cap Stocks Vulnerable’Declining institutional participation could add liquidity risk to the Indian markets, especially in mid and small-cap stocks, analysts said.“With low institutional participation, a sudden change in market sentiment may create big trouble for mid and small-cap stocks that are currently trading at irrational valuations,” said Sanjeev Prasad, co-head, Kotak Institutional Equities. “While large-cap stocks are trading at a reasonable valuation, mid and small-cap stocks have rallied sharply with retail money and exit in many of them could pose a big risk in case of corrections.”Institutional investors in India include foreign asset managers, domestic mutual funds, insurance and other vehicles. The daily average turnover of FPIs declined to ₹15,513 crore in June from 18,358 crore in the January-May period. That of DIIs — mostly mutual funds and insurers — declined to ₹9,628 crore from ₹10,712 crore.Trading by individual investors, both retail and high networth ones, has surged. The average daily turnover by non-institutional investors in the cash market was Rs 54,400 crore in June, 70% of the total. This comprises only direct investments in stocks. Retail investors also invest in equity through mutual funds and equity-linked insurance products.Lack of Investment OptionsIndividual investors have been aggressively participating directly in the stock markets since March last year, a trend usually seen during bull-run peaks. This time, they have been active since the market rebound in late 2020 soon after the Covid-triggered sell-off as the lack of other investment options boosted appetite for stocks. The traditional investment avenues are going through a dull phase — interest rates are low and real estate prices are unattractive, while gold has been volatile.“For the last few months institutional participation has gone down, but over the longer period their turnover remained the same but non-institutional volumes have risen significantly, which is a global phenomenon,” said Gautam Duggar, head of research, Motilal Oswal Financial Services. “A large portion of fixed-deposit money from retail investors has been diverted to equities amid lower interest rates.”In February 2020, the retail investor contribution was 47% of the total cash market turnover, falling to 42% a month later, then steadily increasing to 70% now. Since April 1, 2020, more than 18.8 million new investors have opened demat accounts with Central Depository Services Ltd (CDSL) and National Securities Depository Ltd (NSDL).Fund Flows in Equity SchemesWhile flows into equity mutual funds soared to a 14-month high in May, many new retail investors have of late preferred putting money into stocks directly. Starting March 2020, flows into equity schemes had begun receding with these products witnessing outflows between July and February. Equity schemes however have begun receiving investor money in the past three months.Indian benchmarks have outperformed many other emerging markets so far in 2021 on the back of higher retail investor participation. The MSCI India index has risen 15% so far this year, whereas the MSCI Emerging Market and MSCI World indices have gained 8% and 13%, respectively.“Non-institutional investor participation has risen meaningfully in Indian markets, adding liquidity risks in the event of a correction,” said Sanjay Mookim, head of India research, JP Morgan. “MSCI India has been remarkably resilient through the second Covid-19 wave, yet underlying market dynamics have been deteriorating for some time.”