While a transition from physical to financial assets seems to be underway, inflows into equity schemes of domestic mutual funds continue unabated, notes Deutsche Bank. Abhishek Saraf and Abhay Laijawala of Deutsche Bank said in their June 9 research report titled “India Equity Strategy” point out that the cumulative 13-month inflow into local equity mutual funds is almost equivalent to inflows of the past 12 years in nominal terms.

India: Mutual funds see 13th straight month of net inflows

The Deutsche Bank analysts point out that despite weakening sentiment on the near-term prospects for Indian equities and a general tendency of retail investors to be momentum-driven, India’s equity mutual funds posted strong net inflows of INR 101 billion (~US$1.6 billion) in May 2015. As can be deduced from the following graph, this was the 13th successive month of positive net inflows into equity MFs, accumulating to INR 918 billion (US$14.9 billion), which on a nominal basis is almost equal to the net cumulative inflows witnessed over the past 12 years (January 2002 to April 2014):

Net flows into India equity MFs

The analysts point out that cumulative inflows have posted several periodic highs. For instance, equity schemes have now posted their highest-ever net inflows on 3M/6M/12M moving aggregate bases with flows in the past 3m/6m/12m standing at INR291 billion / INR 480 billion / INR 898 billion respectively:

Cumulative inflows India

Moreover, on a US$ basis, the three-month and six-month cumulative inflows are the fifth-highest ever (primarily due to INR movements), while 12-month cumulative inflows remain the highest-ever, even on US$ terms.

Transition from physical to financial assets underway

Abhishek Saraf and Abhay Laijawala point out that thanks to persistent inflows, domestic mutual funds too have continued to be net buyers of Indian equities, investing US$655 million in May. Mirroring the sustained streak of inflows, the mutual funds have in turn been net buyers of equities for 13 straight months now:

Investments in equities by domestic MFs India

Interestingly, the analysts highlight that the quantum of investments into equities has not kept pace with the quantum of inflows into the funds. They point out that between January and May, mutual funds have seen net inflows of US$6.6 billion, but net investments into equities stood at US$3.2 billion, signifying cash accretion of US$3.4 billion before dividend payouts.

Painting a confident note on the future, the Deutsche Bank analysts argue that domestic investors will support the market, given the accretion of a strong cash surplus, and they anticipate a continuation of inflows into MFs on a medium- to long-term basis.

Highlighting the long-pending shift in the nature of Indian households’ savings from physical assets to financial assets, the analysts note that the share of financial assets in Indian households’ savings had dipped to multi-decade lows of 32%.

Breakdown of household savings India

The analysts argue that this trend should reverse as India’s economic distortions start to normalize and real interest rates remain in positive territory:

India's real interest rate

Combing through the latest data from the World Gold Council, the analysts note that the share of coins + bars within the overall gold consumption had dropped to 21% in Q4FY15 from the peak of 44% witnessed in 1QFY14.

Gold demand in India India

The Deutsche Bank analysts believe the above transition towards financial assets will augur well for the financial sector and have zeroed in on Axis Bank, HDFC Bank, SBI, HDFC and Bajaj Finserv as their top picks.