May will see a sharp bounce back in equity flows: Sunil Subramaniam

"I think that this month's numbers have to be looked at in two perspectives. One is that I think March was the end of a long period of FIIs selling. Starting from December 15, the FIIs have been dumping India. It started with the Adani factor, then the Silicon Valley Bank and the Credit Suisse factors," says Sunil Subramaniam, MD & CEO, Sundaram Mutual.

What do you make of the numbers in April? There is definitely a dip. Do you agree with that take that it is more to do in a month full of holidays? There were a lot of bank holidays etc. and that may have also hit it or is there a sentiment change that you are also seeing?
I think I agree with the fact that this is an odd month because of the holidays. Also, please remember that March saw unusual action in the last four days right, so there was a flow into debt funds because of the grandfathering of the tax, so some amount of equity funds also would have seen some kind of a thing.

So I think that this month's numbers have to be looked at in two perspectives. One is that I think March was the end of a long period of FIIs selling. Starting from December 15, the FIIs have been dumping India. It started with the Adani factor, then the Silicon Valley Bank and the Credit Suisse factor. And then from, I think towards the end of March, FIIs started coming in. But domestically, there was a concern that the valuations were too high?

I think this spilled over to April in terms of the flows. It was a very flattish month. But the second point here I would
like to stress is now FIIs have come back. I think market sentiment reads into what the FIIs are doing. So I think May will see a sharp bounce back because FIIs have brought in something like that 20000 crores plus into April number one. Number two, as the news of the Fed fighting the battle against inflation, succeeding to some extent comes in, you will see again FII flows coming in.

But what this means is that the rate cut cycle, when it starts in the US there will be a slowdown coming. So what happens with domestic advisors is that when they sense this, they tend to move into small and midcap stocks versus large cap stocks. So if you see the month on month inflow, you have seen a slight uptick in the midcap and the small cap segment. So that is a clear indication that advisors are directing their clients to get into more domestic industrials, domestic sensitive stocks as a allocation.

So there is some amount of reallocation from large caps into mid and small which are more domestic oriented in a broad based allocation that is one trend.

The second trend is that you got to look at it in the context of the fact that Indian economic news is good. So investors’ sentiment towards the equity market I do not think has suffered but what is happening is just a reallocation. On the debt segment, I think one of the key things to bear in mind is that the bounce back in liquid is a normal yearly phenomenon because when March end comes through lot of institutions, banks especially, do not like to display the mutual fund investments on their balance sheets as of 31st March. So they tend to temporarily pull their money out of mutual funds and park it elsewhere.

Institutions also, because banks are chasing deposits in the month of March, banks tend to offer higher rates for big value deposits to tide over their credit deposit ratio in the month of March that is another thing which drives in the month of March a drop in liquid.

So this time in April, there is a bounce back because naturally people feel that mutual funds will give them better returns than their investment in the bank. So this bounce back in the debt and liquid segment is a consequence of the usual year end coming back of flows into the mutual fund industry so nothing unusual about that.

Okay, so nothing unusual about April but what is your outlook looking like because we have seen a really hot streak as far as mutual fund participation is concerned for over 20 months now. Do you think that appetite still exists or are there concerns it might wane?
I do not think there are concerns. See, if you look at the March numbers, there was a bit of concern around India valuations and that FIIs were pulling out. But the strong bounce back in April of the stock market will reinforce the confidence of the domestic investor in the stock market. So I think what has happened is that with the FIIs coming back in April, I think the confidence and hence May onwards, I would see a bounce back in equity flows back up to that. So as you mentioned 20 continuous months, a little bit of a drop in a particular month is acceptable. But I think the two trends I see are strong inflows continuing into equities number one. Number two, a re-allocation within equities away from large caps into mid and small caps which essentially reflects away from international oriented sectors like IT, pharma, cyclicals.