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FPI vs Mutual Funds - Changing times

Who buys when deep-pocketed foreign investors sell?


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Increased tax surcharge on foreign portfolio investors, the fear of escalating global trade war, a downward revision of GDP growth by the Reserve Bank of India (RBI) and a rapid decline in auto sales have sent the Indian equity market sharply lower from its all-time high since the budget. This fall is also largely attributed to heavy selling by foreign investors (FPIs) selling. Since July 2019, FPIs have sold stocks of around Rs 25,000 crores. However, it is not happening for the first time in the history of the Indian market. In 2008, foreign investors sold shares of more than Rs 1 lakh crores, while in 2018, they sold shares worth Rs 73,000 crores. As investors, we often tend to panic as soon as FPIs start selling. However, we should remember that this will not shut the market overnight and that they still hold a significant chunk of the market (21.6 per cent of the market worth Rs 26.2 lakh crore as of July, 2019).

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But the major difference between 2008 and 2019 is the ever-increasing presence of mutual funds, specifically since 2015. Since July 2019, they have bought shares of more than Rs 30,000 crores. Unlike those times when FPI sat in the driver's seat of the Indian market, mutual funds have started gaining size and dominance. However, still, the market follows the direction of FPI's flow but this trend is gradually witnessing a reversal. Since 2015, mutual funds have invested three times the total foreign investors flow in the last 10 years. The following tables depict reversal of the trend in mutual fund flows since 2015.

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