Did you know that there is now Rs 4,000 crore a month flowing in through SIPs into equity mutual funds every month? That's a flow of around Rs 48,000 crore a year. Two years ago, this figure was Rs 2,000 crore a month. That means that not only is this SIP inflow huge, it's also growing at a rapid pace.
To give you a scale of this money, during 2016, the net investments that foreign institutional investors (FIIs) made in India was Rs 20,568 crore. In the year before that, this number was Rs 17,808 crore. Of course, earlier, there have been years with much higher FII investments, but at this point in time, domestic individual mutual fund investors far outweigh FIIs.
Note that unlike FII money, or even the episodic investments in equity by domestic individual investors, SIP investing is steady. Whether the market rises or falls, investors continue with their SIPs. And that's not all in terms of guaranteed inflows - there's the EPFO, too, and the NPS. The EPFO is now investing in equities at a rate of Rs 13,000 crore a year. NPS data is harder to come by because of the diversity of plans on offer but it should be at least Rs 2,000 crore. Obviously, both these are even steadier than SIPs and will also grow steadily. The increasing work force and salary increases will ensure that.
So we now have a base of steady domestic equity investments of a minimum of Rs 48,000 crore + Rs 13,000 crore + Rs 2,000 crore = Rs 63,000 crore per year. This is a historic turn of events for Indian stock markets, and it's something that affects equity investing profoundly. By now you would obviously believe that these inflows would be extremely good for equity investors. Instinctively, most equity investors feel that rising stock prices are good for them and falling prices are bad. That's sort of true, but not always.
The ideal situation is that you should be able to buy at low prices and sell at high prices. If the market is dominated by a steady flow of investments, then that could actually be a problem. If any stock has even halfway good prospects, you may never get to invest in it at a good value. At the end of the day, steady inflows must be matched by economic growth, growth in companies' profitability and good governance. There are always stocks that satisfy these criteria, but the question now is: are these stocks available in enough number and enough volume to satisfy a steady long-term flow of Rs 63,000 crore a year? Can this amount be deployed well? Or are we going to end up with an overpriced market that is just living on this liquidity?
I'm afraid I don't know the answer. It all depends on growth and the other factors that I mentioned above. It also depends on how many broad-based, well-run businesses go public. However, leaving aside the aggregate level, this guaranteed liquidity puts a special responsibility on you as an individual investor and on us as your advisor. Overpriced markets are always a recipe for disaster at some point in the future. When that disaster strikes, the only protection is quality. If we always take care to invest in quality companies with deep and all-round strength, then we'll be fine in the long term. Moreover, we must stay focused on getting stocks at a good value and on exploiting volatility to find value.
Contrary to investors' first reaction, it turns out that large steady inflows may be a problem disguised as a blessing. It will take constant effort to do well in the coming years.