Are Domestic Investors Playing Safe?

The Indian equity benchmark indices - BSE-Sensex and Nifty-50 have been scaling all-time high pretty often in the last few weeks. After the sharp decline in the index return of more than 20 per cent in March 2020, the improvement has been sharp and has reached levels much higher than the pre-COVID levels. However, this improvement has been fuelled primarily by strong inflows from the foreign portfolio investors, supported by a huge flush of liquidity infusion from global governments and central banks. On the contrary, data shows that domestic investors have been relatively more cautious in their investing approach post the outbreak of the pandemic.

To illustrate this, equity mutual funds have sustained outflows since July 2020 onwards with a cumulative amount of around Rs 60,000 crore compared with a net inflow of around Rs 30,000 crore in the corresponding period last year. These outflows can be partly ascribed to profit-booking by investors based on the perception that stock markets have become overvalued and can correct anytime with pullout from other investors. Domestic investors have instead preferred investing funds into bank deposits, debt mutual funds, holding cash or gold Exchange Traded Funds (ETFs).

From the start of the fiscal till November, total bank deposits have registered a growth of almost 6 per cent as against the modest growth of 3 per cent in the same period previous year. This is despite notable decline in fixed deposit rates and low savings rates. Debt mutual funds continue to register inflows of Rs 2.7 lakh crore during April to November, 2020, chiefly owing to the low interest rates environment in the economy and high debt issuances during FY21. Interestingly, investors continue to have faith in debt mutual funds (including corporate bonds funds, dynamic bond funds) despite the default concerns which recently made headlines. Individuals are also holding cash with them as currency with the public has recorded a growth of 13.8 per cent in the financial year so far this year (till November 20, 2020). Under such uncertain times, cash is the king and economists have technically defined this as “precautionary savings''.

Gold, which is attributed to be a safe-haven asset, is showing mixed signals. Although gold consumption in India has plunged by more than 50 per cent in the first half of the year, investment demand has surged with inflows increasing from Rs 96 crore so during April to November 2019 to Rs 4,700 crore in the same period of the current year.

All these numbers show that domestic investors are playing safe and choosing liquidity, moderate and assured returns over riskier bets. The pertinent question which remains is whether this cautious approach of domestic investors will continue going ahead amidst fears of corrections in equity markets or will domestic investors join the bandwagon of making riskier bets in the equity markets.

Although risk appetite of an individual is one key decision criterion for investment, there are 2 broad macro trends which point out why investors could play safe. Firstly, incomes of people have been hit adversely owing to the corona induced lockdown and stalled business activities. Salaries of employees in around 3,200 non-financial sector companies have recorded a fall in both the quarters of FY21.

Secondly, RBI’s survey on consumer confidence also shows deterioration in the people’s sentiment on their income and employment for the period one year ahead. These are interesting periods for the domestic investors who will be tempted to react to positive developments in the economy but are likely to continue with the strategy of investment in instruments providing assured returns till the time they get more clarity about their jobs, income and bonuses. It’s a tough call for the domestic investors but as they say “higher the risk, higher the returns”!

The author is Associate Economist, CARE Ratings