Business News

One of the steadiest sources of money flows into the stock market in recent years faces the risk of ebbing in 2025 if equities fail to repeat performances in the recent past. Flows through systematic investment plans (SIPs) into equity mutual funds-the equivalent of recurring fixed deposits in banks-crossed a record ₹25,000 crore every month in the past three thanks to strong returns. But amid forecasts for a tough year for stocks in 2025, market participants are wondering whether individual investors will pour money into equity schemes.SIPs have been a convenient way for retail investors to put small amounts into mutual fund schemes every month. Of this, 90-95% went into equity-oriented funds. The numbers speak about their popularity. In FY21, flows through SIPs were ₹8,007 crore, doubling from ₹3,660 crore in FY17. One reason for their popularity is strong returns from equity mutual funds. Investments made in Nifty 50 through SIPs have returned an average 14.36% over the last three years. That from the Nifty Midcap 150 was 29.89% and 31.85% from the Nifty Small cap 250 index against 7-7.5% from fixed deposits.The Nifty has gained in each of the past nine years. But with foreign investors turning sellers in local stocks and concerns over corporate earnings-considered a key reason for the recent bull run-there is uncertainty over the winning run continuing in 2025.The real test for SIP flows would be a market drawdown or low-single-digit returns. Though such instances are the best time to deploy capital, it needs to be seen if investor behaviour will be any different this time.

Mumbai: The selling by foreign investors of Indian stocks in 2024 was the second highest in a decade as announcement of a stimulus package in China, rich valuations, rising US bond yields and subdued second-quarter earnings resulted in risk-off sentiment.Analysts said that overseas investors are likely to remain cautious on India until clarity on Donald Trump's policies emerges and third-quarter earnings witness a revival. However, they expect foreign inflows to come back in the second half of 2025.Foreign portfolio investors sold ₹1,20,598.42 crore in the secondary markets in 2024, according to NSDL. In 2024, these investors had withdrawn ₹1,50,250.17 crore from Indian equities. In 2023, they were net buyers worth ₹1,32,648.25 crore - the highest ever in the past 10 years.Analysts said that in the first nine months of 2024, equities did receive robust foreign inflows. However, the sell-off since October led to the net negative foreign inflows in 2024."The tactical shift to China in early October along with rising US bond yields and the weak earnings in certain pockets of the market in Q2 led to a nosedive in foreign inflow of funds in 2024," said Neeraj Chadawar, head of fundamental and quantitative research, Axis Securities. "On the other hand, domestic investors deployed more than $60 billion that buoyed the markets."So far in December, overseas investors have bought stock worth ₹15,351.71 crore, after having sold shares worth ₹1.15 lakh crore in October and November. 116812486Overvaluation to Blame"The foreign outflows in 2024 were led by the lack of valuation comfort in Indian markets, especially compared with other emerging markets," said Abhilash Pagaria, head of alternative and quantitative research, Nuvama. "As the US markets have delivered strong performance and are reasonably valued, overseas investors are allocating to US equities."Pagaria said that while the China stimulus had limited impact, the Q2 earnings disappointment was a major blow to foreign investor sentiment.Nifty and Sensex have corrected 10% and 8.7%, respectively, since September 27 when the foreign sell-off began.Analysts said that investors globally will be keenly watching how the trade dynamics play out once president-elect Trump takes charge on January 20."The US Federal Reserve cut rates in December, but US bond yields have continued to inch higher. This divergence indicates lack of clarity on Trump's policies as both seem to be factoring different scenarios," said Chadawar.Chadawar added that if there is a corporate tax cut in the US, then the inflation could move higher and reduce the chances of an interest rate cut."If there are further rate cuts in the US, we could expect foreign money coming back to India. However, the rate cuts are likely to be in the second half of 2025," said Chadawar. "Until then, amid a strengthening dollar, weak foreign flows are expected to persist."The US Dollar Index Futures surged almost 8% since September 27. So far in December, it moved 1.87% higher to 107.792.Divam Sharma, founder and fund manager, Green Portfolio PMS, said that foreign investors are expected to wait and watch next year before allocating funds to India, as markets are not likely to be cheap but at the end of next year, they are likely to be net buyers.“Initial three to six months of 2025 are expected to be volatile as Trump forms the US government because although he has started giving hints, there is still uncertainty around policies,” said Sharma. “However, the second half of 2025 could see foreign inflows once the US policy impact settles.” Another major trigger that overseas investors will watch out for regarding deployment of funds would be the third-quarter earnings around mid-January. “If earnings sustain and markets provide valuation comfort, foreign money could trickle into Indian markets,” said Pagaria. “But valuation comfort is not likely in the near term in the Indian markets until domestic investors turn sellers and that is unlikely.” Pagaria said that IT stocks are at all time high valuations, banking stocks have been languishing and losing momentum amid MFI issues. Banking stocks are seeing passive foreign inflows but there is no trigger for active foreign inflows in sight, he added. In the past three months, Bank Nifty dropped 4.69% while the Nifty IT Index gained 3.33% in the same period. “Most of the earnings disappointment is factored in the markets and while a couple of quarters may also be slower, strong foreign inflow is expected in the second half of the year considering the consistent outflows in 2024,” said Sharma. Chadawar said that the likelihood of foreign flows to India are bright once the dollar stabilises, as India is best placed in the EM basket in terms of growth. “The quantum of inflow is dependent on the currency dynamics so if there is greater volatility in currency next year it could hamper foreign inflows,” he said.