February 21, 2024

The increased awareness among investors about stock market investing is driving inflows into mutual funds.

Dear Reader,

The mutual fund industry reached a major milestone in December 2023. Assets under management in the industry rose to Rs 50.8 lakh crore, up 27 percent from December 2022. Investors retained their faith in the equity markets despite a flare-up of geopolitical tensions and a moderation in growth rates in some sectors.

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Systematic investment plans saw a record 40.32 lakh registrations in December 2023, a quantum jump from December 2022. Inflows into equity mutual funds remained strong, supported by the launch of new mutual fund schemes. The small cap and mid cap mutual funds together received as much as 40 percent of the equity fund flows in calendar year 2023, significantly higher than in 2022.

The increased awareness among investors about stock market investing is driving inflows into mutual funds. As such, the relatively stable macroeconomic scenario of India and steady earnings growth remain a major attraction for investors. So much so that domestic institutional investors, boosted by large investor flows, have emerged as a stable counterweight to volatile foreign fund flows.

Analysts expect the positive momentum in mutual fund inflows to continue, supported by a pause in interest rate hikes by central banks and continued financialisation of savings.

However, investors should be wary of valuations, especially in mid cap stocks. “A key concern for Indian equities currently emanates from the high exuberance in mid/small caps, which will limit their prospective returns vis-à-vis large caps,” warn analysts at ICICI Securities.

The 20 times one-year forward price to earnings multiple of the Nifty 50 index may seem reasonable despite the influx of fund flows into equity markets that tends to inflate valuations.

But valuations are pricing in a rosy earnings scenario and therefore, warrant caution. Initial estimates indicate a moderation in Nifty 50 index earnings in FY25 vis-à-vis the growth rate in FY24. Investors should watch out for unforeseen events that can dent investor sentiments or earnings projections. The upcoming earnings season will provide important cues for investors.

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