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Demand for Indian equity is far more than the supply
Nilesh Shah, MD, Kotak AMC
Feb 17, 2017 | Source: Economic Times
Right now, domestic flows can probably explain why the markets are holding on and the mutual funds space has been seeing fantastic flows coming from crores of domestic retail investors through systematic investment plans. If we see the demand-supply equation in the Indian market between LIC and private insurance companies Mutual Funds, EPFO and new pension scheme, retail and HNI investors, the demand for Indian equity is far more than the supply.
In November, December and January, FIIs were net sellers which was keeping markets under check but in February post budget, we have seen FIIs becoming marginal buyers which means there is hardly any supply.
What could help the markets move up higher from here? The market is disintegrating or dissecting the corporate earnings declared so far.
Clearly, despite demonetisation, we have seen some amount of momentum coming back in certain sectors. This is partly explained by the unorganised sector losing market share to organised sector courtesy the cash crunch. Maybe it explains inherent growth in the economy courtesy good monsoon which came last time and also the benefits of Seventh Pay Commission spending or maybe finally the interest rates in real terms which has come down or which has narrowed the gap is helping spur consumption.
We have been advising customers to move from fixed income funds to hybrid funds so that they can participate in the upside of equity market.
Risk reward ratio : Undoubtedly valuations have become a little bit above fair value in small and mid cap stocks but this time valuation is being paid for expected growth. Somewhere, especially in small and midcap stocks, the market is pricing that this trend of shifting businesses volume from unorganised sector to organised sector will continue and will result in higher profitability growth. Which is why there is little bit of front ending into the return but this money has come with a hope rather than greed.
There is a fair amount of maturity at retail investor level and this is best demonstrated that when markets are correcting, when markets are falling like it was in November 2016, we ended up receiving almost double the flows. When markets are rising, the flows abate a little bit. When markets are falling, flows increase. This tremendous maturity shown by retail investors courtesy regulators, distributors advisors is the positive sign of Indian equity market.