Do it yourself: SIP

Showing posts with label SIP. Show all posts

Thursday, February 20, 2025

Do not mistake effect for cause

If social media posts are any guide to the popular sentiments, then definitely the Indian equity markets have frustrated even most seasoned investors. In particular, the young investors and traders who had their first tryst with the equity investing/trading are sounding completely disillusioned.

The seasoned investors who have experience of negotiating bear markets multiple times, are mostly frustrated due to the lack of adequate policy support and regulatory overbearance. In my view, insofar as the policy support (or lack of it) is concerned, it is mostly due to misplaced expectations and persistence denial of actual execution. The issue of regulatory overbearance is however a matter of debate.

However, the new class of investors is disillusioned for multiple reasons. First, many of them had committed to investing/trading as their preferred full-time occupation. After this severe market correction, their capital has materially depleted and their confidence is badly shaken. The worst part is that many of them appear clueless as to why the prices of the stocks they own are falling sharply; or why the technical analysis that was working so perfectly for the past four years has suddenly stopped yielding any results.

For the benefit of these investors/traders, I would like to highlight a few points that might help in a slightly better assessment of the current market situation.

FPI selling

This is the single most popular reason cited for the correction in stock prices. For record, as per final SEBI data, since 27 September 2025 (when Nifty 50 recorded its all-time high level of 26277) the foreign portfolio investors (FPIs), have net sold appx Rs2.6 trillion worth of Indian equities on stock exchanges. Adjusted for inflows in the primary market, this net sale number is appx Rs two trillion.

In this period, domestic institutions have net bought over Rs 2.75 trillion worth of equities in the secondary market alone.

The key points that the market participants are missing are—

· The stock prices at any given point in time are determined by the forces of demand and supply. The net institutional buying (demand) has been positive on almost all days (except 5 days) since 27^th September.

· Most of the damage has occurred in small and microcap stocks. FPI participation in this segment of the market is usually very low. On the other hand, the domestic mutual funds have the highest amount of asset undermanagement (AUM) in midcap and smallcap categories. Moreover, as per the latest available AMFI data, the retail participation is the highest in the midcap and smallcap categories. So technically, retail investors should be the strongest mover of prices of this category

So, blaming FPI selling for the fall in stock prices may not be justifiable.

Hike in capital gain tax

In the final budget for FY25, the finance minister hiked the long-term capital gains (LTCG) tax to 12.5% (from 10% previously) and short-term capital gains (STCG) tax to 20% (From 15% earlier). Almost every market participant on social media has cited this as one of the primary reasons for the underperformance of the Indian equities in the past 5 months.

In this context, it is important to note that—

· In the budget for FY19 (presented on 1^st February 2018), the then finance minister had hiked the LTCG from 0% to 10%. After a small correction, one month later in March 2018, the benchmark Nifty was at the pre-budget level and 2x in 30 months (October 2021) despite pandemic related issues. FPIs net sold Rs530 billion worth of Indian equities (secondary market) in 2018, but bought Rs 1720 billion in the subsequent two years.

Obviously a 10x hike in LTCG neither hurt the stock markets nor prevented FPIs from pumping in huge money in the Indian equities. This time the hike is just 25%.

In my view, the reason for the current decline in stock prices is a combination of several factors. Some of these could be listed as follows:

Economic slowdown – the GDP growth is declining for the past few quarters and now appears to be settling in the 6-6.5% range. This is insufficient for sustaining the current level of government spending, which has been a primary driver of growth in the past few years.

Earnings slowdown – The corporate earnings that have been growing at a rate of 18-19% CAGR for the past four years (FY21-FY24), are peaking. FY25 earnings growth is expected to be in low single digits, while next couple of years the earnings are expected to grow at a rate of 10-14% CAGR. These estimates are also subject to downgrade. With lower economic and corporate growth, the European and Chinese equities with much cheaper valuations and stronger growth visibility (assuming peace deal between Russia and Ukraine) become relatively more attractive.

Liquidity squeeze – Covid-19 related fiscal and monetary stimulus resulted in abundant liquidity in the Indian financial system. At peak the banking system liquidity surplus exceeded Rs 10 trillion in September 2021. In April 2022, the RBI accelerated withdrawal of the surplus liquidity, resulting in the widest liquidity deficit of over Rs 3 trillion in January 2024. This massive liquidity squeeze, coupled with fiscal tightening (Fiscal deficit cut from 9.5% in FY21 to 4.8% in FY25RE), and persistent positive real rates have definitely resulted in lower leverage available to traders and punters in the equity markets. Moreover, the regulatory measures to curb excessive speculation (including stricter margin norms and enhanced surveillance measures) also removed a lot of froth from the market.

Unwinding of leverage of market participants and promoters (active in the market) is the primary reason for the fall in stock prices, not the hike in LTCG or selling of FPI.

Fortunately, the regular household flows (SIP and other wise) to the Indian equities have helped the domestic institutions to absorb all the FPI selling, unlike in 2000 and 2008 market falls. Besides, stronger regulatory measures that resulted in lower issuance of Participatory Notes (PNs) (a kind of derivative instrument on underlying Indian equity stock with obscure beneficial ownership), made sure that the selling was orderly and volatility did not spike. But for these two factors, we could have witnessed much sharper fall and higher volatility in the market, just like 2000 and 2008 when even the benchmark indices fell 10-15% in a single day.

If you are looking for reversal of trend in the market trend, look for a reversal in trends of growth, earnings and liquidity not FPIs flows; for FPI flows are effect not the cause.

Tuesday, January 28, 2025

Prepare for the spring

Presently, the total market capitalization of the NSE is close to Rs415 trillion, almost the same as it was during the last week of May 2024. The benchmark indices like Nifty 50, Small Cap 100, Nifty 500, Bank Nifty etc. are also trading almost at the same levels as prevailed during the last week of May 2024.

Decent returns for the last one-year

The benchmark indices may be down 12-16% lower from their September 2024 highs; but they are still yielding a return of 6-9% for the one-year period.

Average asset under management (AUM) of Equity/Growth mutual fund schemes at the end of May 2024 was appx Rs25 trillion. The six-month period from June to December 2024 saw a net inflow of Rs2.7 trillion in these schemes. For the month of December, the average AUM of these schemes was Rs 31 trillion. This implies over 11% net value gain in these schemes during the June-December 2024 period.

For the full year 2024, the value gain in equity MFs is close to 22%. Most equity-oriented funds have yielded over 10% return in the last one-year period. Some sector funds like Pharma and IT Services, have yielded 18-25% return for the past one year. Even the worst performing sector, viz., Banking funds, are yielding ~7% return.

Why is it sounding like a disaster?

Thus, prima facie, household investors (retail) who invested in equities should not be bothered much by the current correction in the stock prices. But looking at the sentiments of these investors, it sounds like a disaster-like situation. Why is that?

In my view, this disappointment (panic, if you prefer it that way) is a function of multiple factors. Some of these factors could be listed as follows:

Misplaced expectations: Many retail investors have accelerated deployment of funds post general election results in early June. They expected massive reforms in the first few months of the new government, as promised in the election manifesto. Many such investors also believed that victory of Mr. Donald Trump in the US presidential election could also be a very good omen for the Indian economy and markets. They are apparently disappointed on both the frontiers. The Modi 3.0 term has been largely uninspiring so far; where Trump 2.0 is sounding ominous so far. This disappointment is likely making retail investors less optimistic about the future prospects of the Indian equities.

Misallocation: While the mutual fund investments, especially through systematic investment (SIP) method, have been much talked about, empirical evidence indicates that retail investors have materially increased allocation to direct equity investment. For the context, the retail ownership of listed Indian equity is ~23%, all time high. The data on shareholding pattern of various companies indicate that most of retail capital allocation has happened to the popular themes like government capex (defense, railways, roads), clean energy (solar, wind, biofuels), and new commerce (modern retail, ecommerce, platforms, fintech, etc.). Several IPOs from these sectors witnessed phenomenal retail interest, even post listing at huge premiums. The correction in the prices of these stocks has been brutal (40-75% from recent highs). The worst part is that this damage could be permanent, as the bubble in valuation is bursting.

Mistiming: Retail investors may have materially increased their allocation to equity post the July 2024 Budget (closer to all time high prices). The average cost of their holding may therefore be much higher; implying low or negative return in the portfolio despite good positive overall returns yielded by benchmark indices and mutual funds.

It is pertinent to note, while the aggregate number of SIPs is encouraging, the internals are bothersome. The number of SIPs discontinued is alarmingly high. Average age of an SIP in about 2.5 years. In December 2024, about 83% of SIPs were discontinued.

Inexperience: Empirical evidence indicates that there has been a material rise in young new investors in the past four year (Post Covid). Since, the stock prices have risen sharply in this period, without witnessing any substantial correction, most of these investors lack experience to weather the market down cycles. The sharp fall in stock prices in a matter of three months, accompanied with negative news flow (specially about incessant FPI selling) might be making these investors excessively jittery.

Prepare for the spring

While the current market conditions appear like the fall season, the spring may not be far away. It is important that the investor do not become disheartened and prepare for the coming spring. In preparation, the following step must be taken:

· Remove the plants with rotten or weak roots.

· Provide nourishment to good plants.

· Prune the existing plants.

· Rope new plants.

· Repair the hedges.

If you do not prepare your garden before the spring sets in, there are good chance of missing the bounty next season would have to offer.

Thursday, July 4, 2024

Unravelling the myth of SIP

Rising participation of household (retail) investors in the Indian stock markets has been a topic of interest for the past couple of years. Most analysts and strategists have highlighted this as a key factor behind a sustained rise in the benchmark indices and low volatility, despite subdued foreign flows. Even the Prime Minister and many senior ministers made it a point in their campaign in the recently concluded general elections.

In particular, a consistent rise in household investments in the mutual funds through systematic investment plans (SIP - a popular method to automatically invest a predetermined amount at predetermined intervals) has been cited as a strong support for the Indian equities.

Most market participants are confident about this support to the Indian equity markets and its positive impact on the valuation, volatility and breadth of the market. I acknowledge the rise in the participation of household investors in equity markets. I am however not very confident about its sustainability and impact on the market performance. I would like to see more scientific evidence of growth in SIP and its impact on markets.

In this regard I find the following data points noteworthy.

· The share of household savings in the gross national savings has been declining for the past many years. India’s gross savings rate stood at 29.7% of gross net disposable income (GNDI) in 2022-23, with households contributing 60.9% of aggregate savings against a ten year average of 63.7%.

· The share of net financial savings in total household savings has seen a declining trend in the past decade. It stood at 28.5% in 2022-23, from an average of 39.8 per cent during 2013-2022.

· Net financial savings of households have declined to 5.3% of GDP (FY23) from an average of 8% during the last decade (2013-2023).

· The sharp rise in household financial savings during the pandemic (51.7% of total household savings in 2020-21) has been drawn down subsequently, as in many other economies, and shifted towards physical assets.

· Bank deposits, provident fund and insurance continue to dominate the composition of household savings deployment. Post Pandemic there is some shift towards shares, debentures and mutual funds category, but it does not denote any change in the long term trend.

· SIP flows have risen in the past few years. The rise has been quite remarkable in the post pandemic period. As per AMFI data, from Rs 43921 crores in FY17, SIP flow rose to Rs199219 crores in FY24.

· However, if we see on a relative basis (as a percentage of market capitalization), SIP flows have not seen much growth in the post pandemic period. In fact, at the current run rate, FY25 SIP flows as a percentage of market capitalization would be almost the same as FY19.

Wednesday, August 26, 2020

De-institutionalization of household savings

For two years 2017 and 2018, the growth in Indian stock market was mostly attributed to the institutionalization of household financial savings, as investors increasingly turned to the professional fund managers for managing their money. The asset under management of mutual funds, portfolio managers, pension managers, ULIPs etc grew at highest rate. The regulators also supported the fancy campaign "Mutual Fund Sahi Hai!"

Net inflows in domestic mutual funds quickly reached from sub Rs5000cr during summer of 2016 to Rs.20,000cr in autumn of 2017. The contribution through systematic investment plans (SIP) increased from Rs3000cr in April 2016 to over Rs8000cr by end 2018. The total asset under management of equity mutual funds had increased from ~Rs5trn in early 2017 to over Rs10trn by August 2018.

In July 2020, the net inflows in mutual funds were negative.

The Economics Times, recently conducted a survey of investors to analyze the trend. The survey discovered that 3 out 10 mutual fund investors may have moved to directly investing in stocks. This indicates a serious setback to the trend of institutionalization of household savings. It is pertinent to note that this trend is developing when the savings of the Indian household are contracting structurally.

About 79% of the investors who decided to invest directly instead of mutual funds thought that COVID-19 induced correction in stock markets offers better opportunity in the stock market and they can better utilize this opportunity than the professional fund managers. About 29% felt that mutual funds have not performed well and they need to trade themselves to make the loss. About 15% found that cost of direct trading is less than the cost of investing through mutual funds; while another 9% have used trading in stock markets to compensate for lower income or job loss due to lockdown.

It is important to assess whether this is just a small blip in the long term trend of institutionalization of financial savings or the trend has stalled and may reverse from here!

Will be glad to share my thoughts in later posts.