DII's redemption is 3 times compared to FII's major 4 exists-Empirical study & Analysis of NIFTY

 

We have been hearing that the Indian equity market has matured significantly. Still, we failed to absorb that the October 2024 redemption of FIIs and its impact on the market have raised eyebrows towards the question -Are we Still Independent of FIIs?  For this, we did an analysis of the last 17 years of the Indian equity market driving the relationship between FIIs and NIFTY and DII’s and NIFTY. Over the last 17 years, FII inflows have been a key driver of Nifty's performance, especially during bull markets. However, while FII flows remain an essential factor for short-term market dynamics, long-term investors can benefit from focusing on broader economic and structural trends. This analysis is for those who have joined the capital market over the last 10 years. This analysis delves into finding out the various points in time when the FIIs pulled out of India and still the market has gone up in terms of wealth creation.

Correlation Between FII Flows and Nifty Performance

• Strong Positive Correlation:
• Periods of high FII inflows align with bull runs in the Nifty. For instance:
• 2010: Net FII inflows of ₹61,225 Cr boosted Nifty to 6,134.
• 2014: Net inflows of ₹87,359 Cr pushed Nifty to 8,282.

Further from the above data it is well clear that NIFTY has scaled new highs whenever ever the FIIs exited the market except in the years 2011 and 2015  when the market fell by 25% & 4 respectively from its last year. This shows that the market was having enough support from the DIIs. FII inflows signal bullish sentiment and liquidity-driven rallies, while outflows may indicate caution or risk aversion. While FII flows remain an essential factor for short-term market dynamics, long-term investors can benefit from focusing on broader economic and structural trends.

On the other hand, the fall only 8 times within the 17-year time frame and its peaks were well clear that it was a resetting period for the market. This also proved that any uncertainty from the FIIs end has resulted in long-term wealth creation since the FIIs reshuffle the portfolios and sector rotation is the key aspect of wealth creation.

• Market Volatility During Outflows:
• Sharp FII outflows often coincide with market corrections, though the severity varies:
• 2008: Large FII outflows of ₹1,01,802 Cr led to a sharp Nifty drop to 2,959.
• 2020 (COVID-19): FII outflows of ₹85,674 Cr caused a temporary crash in the Nifty, which later rebounded to 13,981 as FIIs returned.

 

Key Observations from FII & DII Data

1. FII Activity:
• Net Sales/Outflows:
• Significant FII outflows in years like 2022 (-2,86,494 Cr), 2023 (-19,525 Cr), and 2024 so far (-2,74,027 Cr).
• Largest historical outflow occurred in 2008 (-1,01,802 Cr), coinciding with the global financial crisis.
• Net Inflows:
• Periods of strong FII inflows were observed in 2010 (+61,225 Cr) and 2014 (+87,359 Cr), which align with bullish phases in Indian markets.

Now when we did an analysis of DII’s inflow and its impact it was found that DII's outflows typically reflect profit-booking or liquidity needs. Significant outflows can pressure the market, but the impact is often mitigated by other investor categories. Major redemption by DIIs has been only 3 times out of the 17-year time frame where the NIFT corrected within the range of 52% to 24%.  Hence FII’s exit and DII profit booking-based redemption go hand in hand where wealth has been created by investors as per the data. 

Now many investors will claim that they failed to make money or wealth during these market opportunities. The prime reason for the same is the behavioural aspect of the investors where during the period of FII’s turning negative towards the Indian market, domestic investors flee the market too. They stop their SIPs and Lumsum investments which leads to a broader double loss for the investors- opportunity loss and taxation cost loss. The impact of DII outflows on Nifty is generally less severe than FII outflows, reflecting the increasing maturity of Indian markets and diversified investor participation.

DII Activity:

• Net Purchases:
• DIIs have consistently supported the market during periods of FII outflows, e.g., 2022 (+2,74,737 Cr) and 2023 (+1,82,184 Cr).
• Notably, DIIs stepped in with strong inflows during market downturns, such as in 2008 (+72,966 Cr).
• 
  

• The Nifty's trajectory broadly correlates with institutional activity:
• 2008: FII outflows and global crisis led to Nifty falling to 2,959 points.
• 2014-2015: Strong FII inflows corresponded with bullish market trends (Nifty at 8,282 and 7,946).
• 2022: Despite large FII outflows, Nifty maintained resilience at 18,105, buoyed by strong DII inflows.

Long-term investors should view corrections caused by DII selling as opportunities to enter quality stocks at attractive valuations, keeping a close eye on global and domestic trends.  During years of significant DII inflows (e.g., 2014, 2017, 2020, and 2022), the Nifty showed strong or resilient performance, reflecting their influence in counteracting volatility.   The reason for going in-depth for this analysis is that we Indians are too focused and obsessed about FII's inflows and market returns that we have ignored DII's in most of the cases. DIIs typically favour sectors like banking, FMCG, and infrastructure, which tend to perform well during periods of DII-led rallies. Robust earnings growth in key sectors like banking, IT, and infrastructure has attracted DII interest. Pro-market reforms and stable policies have boosted domestic investor confidence, driving higher DII inflows. Increasing financial literacy and a shift from physical assets (gold, real estate) to equities have driven DII inflows.

 Conclusion:

While FIIs have historically had a dominant influence on Indian equity markets, the growing role of DIIs and domestic retail investors has reduced their impact on market stability. During years of significant DII inflows (e.g., 2014, 2017, 2020, and 2022), the Nifty showed strong or resilient performance, reflecting their influence in counteracting volatility. Further, it is found that DIIs often act as a counterbalance to FIIs. During FII outflows, DIIs increase their market participation, mitigating the impact on Nifty. Investors should diversify across asset classes and sectors to reduce the impact of DII-driven corrections, particularly in volatile markets. 

Retail investors have emerged as a strong counterbalance to DII selling pressure, particularly since 2020, highlighting the importance of retail participation in the market. The combination of rising income levels, increasing aspirations, and a surge in consumption levels has turned India’s tier II cities into equity market participation.  Nifty's resilience to large FII outflows in recent years signals a maturing market structure, offering opportunities for investors to navigate both short-term volatility and long-term growth.

On the other hand Pension funds from the US had already invested $50 billion in India, through various channels while the US government through the Development Finance Corporation is investing $4 billion. Net inflows into equity mutual funds, excluding arbitrage funds, rose from Rs405bn in September to a record Rs501bn in October.

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Analysis of US and China Fund Performances

 

The performance of international funds, particularly those focused on the US and China, has been a topic of growing interest for Indian investors looking to diversify their portfolios. The data highlights the returns of the top US equity, bond, and China equity funds over various timeframes and their corresponding AUM (Assets Under Management).

 1. US Equity Funds

Performance Highlights:

• Top Performers in the Last 6 Months:
• Navi US Total Stock Market FoF led with a return of 25.70%, reflecting its broad market exposure in the US.
• Navi NASDAQ 100 FoF followed closely with a return of 24.00%, benefitting from its focused allocation in tech-heavy NASDAQ.
• Top Performers in the Last 1 Year:
• Mirae Asset NYSE FANG+ ETF outperformed with a stellar return of 50.40%, driven by the growth of leading US tech companies like Amazon, Google, and Meta.
• Edelweiss US Technology Equity FoF secured a return of 34.80%, underlining the strength of the tech sector.
• Long-Term Performance (3 Years):
• Mirae Asset NYSE FANG+ ETF delivered 20.30%, significantly ahead of peers, proving its resilience and growth-oriented strategy.

Key Observations:

• Category Average Returns:
• Over 6 months: 20.20%.
• Over 1 year: 33.90%.
• Over 3 years: 12.30%.
• Funds focused on the NASDAQ 100, such as Kotak NASDAQ 100 FoF (22.40%) and Motilal Oswal NASDAQ 100 ETF (12.10%), showed consistent returns, supported by the robust performance of US technology companies.
• Larger AUM funds like Motilal Oswal NASDAQ 100 ETF (₹8,223 Cr) demonstrated stability, albeit with slightly lower returns compared to smaller, more focused funds.

 

2. US Bond Funds

Performance Highlights:

• Top Performers in the Last 6 Months:
• ABSL US Treasury 1-3 Year Bond ETFs FoF delivered the highest return of 7.90%, reflecting stability and favorable interest rate movements.
• Bandhan US Treasury Bond 0-1 Year FoF followed with 7.20%, emphasizing its focus on short-term US treasuries.
• One-Year Returns:
• The category average return stood at 6.30%, with relatively consistent performance across funds.

Key Observations:

• Category Average Returns:
• Over 6 months: 6.90%.
• Over 1 year: 6.30%.
• US bond funds are emerging as a stable investment option for conservative investors seeking exposure to US treasuries, with steady but modest returns.
• Funds with smaller AUMs, such as DSP US Treasury FoF (₹67 Cr), managed to maintain competitive returns, indicating efficient fund management despite their size.

 

3. China Equity Funds

Performance Highlights:

• Top Performers in the Last 6 Months:
• Mirae Asset Hang Seng TECH ETF delivered a strong 7.30%, capitalizing on the resurgence in China's tech sector.
• Nippon India ETF Hang Seng BeES followed with 4.40%, reflecting improved sentiment in the Hong Kong market.
• Top Performers in the Last 1 Year:
• Nippon India ETF Hang Seng BeES achieved 17.80%, leading the category.
• Mirae Asset Hang Seng TECH ETF posted 11.20%, benefitting from recovery in Chinese technology stocks.
• Long-Term Performance (3 Years):
• Most China-focused funds underperformed, with category average returns at -6.00%, signaling long-term volatility and challenges in the Chinese market.

Key Observations:

• Category Average Returns:
• Over 6 months: 11.50%.
• Over 1 year: 15.20%.
• Over 3 years: -6.00%.
• The negative long-term returns indicate geopolitical and regulatory challenges affecting the Chinese market, impacting investor sentiment.
• Funds like Edelweiss Greater China Equity Off-Shore Fund (-9.90% over 3 years) highlight the challenges of investing in China-focused equity markets.

 

Key Takeaways for Investors

1. US Equity Funds:
• Best suited for long-term investors seeking exposure to high-growth sectors like technology.
• Funds like Mirae Asset NYSE FANG+ ETF and Edelweiss US Technology Equity FoF offer robust returns driven by the dominance of US tech companies.
2. US Bond Funds:
• Provide steady returns with minimal risk, making them an attractive option for conservative investors or those seeking portfolio diversification.
3. China Equity Funds:
• Despite short-term recovery, long-term performance has been lackluster due to geopolitical tensions and regulatory uncertainties.
• Investors should tread cautiously and allocate selectively to high-potential sectors like technology.

 Conclusion

The analysis of US and China-focused funds highlights a stark contrast between the two markets. While US equity and bond funds offer stability and consistent returns, Chinese equity funds remain volatile with significant long-term challenges. Investors must evaluate their risk appetite and investment horizon carefully before allocating capital to these funds. Diversifying across both regions can be an effective strategy to leverage growth opportunities while mitigating risks.

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Where do your Small & Midcap Mutual Fund schemes stand in your portfolio?

 

The current market has led to a significant correction in the mid-cap and small-cap space. In October, the Nifty MidCap100 index and the Nifty SmallCap100 index declined 6.7% and 3%, respectively, and 8.8% and 6.9% from their respective all-time highs.

A nearly 10% drop from their all-time highs reflects a recalibration, but as noted, valuations in this segment still appear elevated by historical standards. The impact has also been reflected in the Mutual Fund space and its high time to reevaluate the investments made in this category and realign the investor's portfolio.

 

1. Top Performers by YTD Returns:
• Bandhan Small Cap: Outstanding YTD return of 39.46%, supported by high Net Equity allocation (92.76%) and a small-cap focus (73.46%).
• Motilal Oswal Small Cap: Achieved a strong 38.02% YTD return. However, it has a relatively lower Net Equity exposure (91%) and higher concentration in small caps (75.18%).
2. AUM Leaders:
• Nippon India Small Cap: The largest fund with AUM of ₹61,027 crore and a balanced allocation to large-cap (11.13%) and small-cap (68.94%) stocks.
• Axis Small Cap: Second-largest fund with ₹23,952 crore AUM, delivering 22.44% YTD returns. It maintains a well-diversified portfolio (86.95% Net Equity).
3. Small-Cap Focus:
• Funds with the highest small-cap allocation include UTI Small Cap (83.86%), PGIM India Small Cap (81.08%), and SBI Small Cap (80.91%).
• These funds generally exhibit higher risk but provide significant upside potential in favorable market conditions.
4. P/E and P/B Metrics:
• Motilal Oswal Small Cap has the highest P/E (42.36), indicating a more growth-oriented portfolio, but potentially higher valuation risk.
• Quantum Small Cap and HDFC Small Cap show lower P/E ratios (25.67 and 24.95, respectively), suggesting relatively undervalued portfolios.
5. Diversification (Number of Holdings):
• Funds like Nippon India Small Cap (224 holdings) and Bandhan Small Cap (182 holdings) are highly diversified, reducing concentration risk.
• In contrast, Motilal Oswal Small Cap (43 holdings) and ITI Small Cap (56 holdings) are more concentrated, possibly leading to higher volatility.
6. Noteworthy Comparisons:
• Quant Small Cap: High YTD return (23.89%) with significant large-cap allocation (22.13%), making it unique among small-cap funds.
• Nifty Smallcap 250 Index: Delivered 23.75% YTD return, serving as a benchmark for fund performance comparison.

Insights for Investors:

• Growth-Oriented Investors: Funds like Bandhan Small Cap and Motilal Oswal Small Cap with high returns and strong small-cap exposure are attractive.
• Diversification Seekers: Nippon India Small Cap stands out with its large AUM, high holdings count, and balanced portfolio.
• Value-Oriented Investors: Funds with lower P/E ratios, such as HDFC Small Cap, might appeal to those prioritizing valuation over aggressive growth.

Scheme-wise Analysis of Small-Cap Funds (as of November 26, 2024):

 1. Bandhan Small Cap Fund

• YTD Return: 39.46% (Highest among all funds).
• AUM: ₹8,716 Cr.
• Portfolio Allocation:
• Small-cap: 73.46%
• Mid-cap: 13.6%
• Large-cap: 5.7%
• P/E Ratio: 23.81 (Low).
• Strengths:
• Strong YTD performance indicates superior stock-picking.
• Relatively balanced exposure to mid-cap and large-cap reduces extreme small-cap concentration risks.
• Considerations: Suitable for investors looking for aggressive growth with moderate diversification.

 

2. Motilal Oswal Small Cap Fund

• YTD Return: 38.02%.
• AUM: ₹2,832 Cr (Small-sized fund).
• Portfolio Allocation:
• Small-cap: 75.18%
• Mid-cap: 11.9%
• Large-cap: 3.92%
• P/E Ratio: 42.36 (Highest, indicating expensive valuations).
• Strengths:
• High YTD return suggests active management in growth-oriented sectors.
• Considerations:
• High concentration risk (43 holdings).
• Expensive portfolio based on P/E ratio.

 

3. Nippon India Small Cap Fund

• YTD Return: 24.88%.
• AUM: ₹61,027 Cr (Largest in the category).
• Portfolio Allocation:
• Small-cap: 68.94%
• Mid-cap: 14.7%
• Large-cap: 11.13%.
• P/E Ratio: 27.78 (Reasonable).
• Strengths:
• Diversified portfolio with 224 holdings.
• Balanced allocation reduces risk.
• Considerations: Suitable for investors seeking stability and consistent returns in the small-cap space.

 

4. SBI Small Cap Fund

• YTD Return: 23.98%.
• AUM: ₹33,107 Cr.
• Portfolio Allocation:
• Small-cap: 80.91%
• Mid-cap: 7.53%
• Large-cap: 5.77%.
• P/E Ratio: 37.28.
• Strengths:
• High small-cap exposure for aggressive growth potential.
• Strong fund house reputation.
• Considerations: Best suited for risk-tolerant investors who prefer high exposure to small caps.

 

5. Quant Small Cap Fund

• YTD Return: 23.89%.
• AUM: ₹26,331 Cr.
• Portfolio Allocation:
• Small-cap: 66.92%
• Mid-cap: 11.95%
• Large-cap: 22.13%.
• P/E Ratio: 35.06.
• Strengths:
• Unique for having the highest large-cap allocation among small-cap funds.
• Lower small-cap exposure provides downside protection.
• Considerations: Suitable for conservative investors wanting exposure to small caps with reduced volatility.

 

6. Axis Small Cap Fund

• YTD Return: 22.44%.
• AUM: ₹23,952 Cr.
• Portfolio Allocation:
• Small-cap: 62.84%
• Mid-cap: 20.17%
• Large-cap: 3.94%.
• P/E Ratio: 36.88.
• Strengths:
• High mid-cap allocation provides better liquidity.
• Considerations: A balanced fund with moderate small-cap exposure for risk-averse investors.

 

7. UTI Small Cap Fund

• YTD Return: 23.91%.
• AUM: ₹4,538 Cr.
• Portfolio Allocation:
• Small-cap: 83.86% (Highest small-cap exposure).
• Mid-cap: 13.47%.
• Large-cap: None.
• P/E Ratio: 35.18.
• Strengths:
• Ideal for investors looking for pure small-cap exposure.
• Considerations: Higher risk due to concentrated small-cap allocation.

 

8. HDFC Small Cap Fund

• YTD Return: 18.91%.
• AUM: ₹33,504 Cr.
• Portfolio Allocation:
• Small-cap: 81.29%.
• Mid-cap: 8.03%.
• Large-cap: 3.89%.
• P/E Ratio: 24.95 (Among the lowest).
• Strengths:
• Lower P/E ratio suggests relatively undervalued portfolio.
• Considerations: Suitable for value-focused investors seeking growth with a lower risk premium.

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9. PGIM India Small Cap Fund

• YTD Return: 19.23%.
• AUM: ₹1,565 Cr.
• Portfolio Allocation:
• Small-cap: 81.08%.
• Mid-cap: 13.6%.
• Large-cap: None.
• P/E Ratio: 48.54 (Expensive).
• Strengths:
• Focused exposure to small-cap stocks.
• Considerations: Higher valuation risk due to elevated P/E ratio.

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10. Sundaram Small Cap Fund

• YTD Return: 17.36%.
• AUM: ₹3,450 Cr.
• Portfolio Allocation:
• Small-cap: 85.31% (Second-highest).
• Mid-cap: 6.85%.
• Large-cap: 3.84%.
• P/E Ratio: 28.38.
• Strengths:
• Strong focus on small-cap with relatively low P/E ratio.
• Considerations: Suitable for growth-focused investors comfortable with higher volatility.

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Summary Table: Fund Highlights

Fund Name	Best for	Key Strength	Risk Consideration
Bandhan Small Cap	Aggressive investors	High YTD return, balanced focus	Mid-cap and large-cap exposure
Nippon India Small Cap	Stability	Largest AUM, well-diversified	Lower small-cap allocation
SBI Small Cap	High small-cap exposure	Strong returns, reputed AMC	Small-cap risk
HDFC Small Cap	Value investors	Low P/E ratio	Moderate small-cap exposure
UTI Small Cap	Pure small-cap investors	Highest small-cap allocation	High concentration risk
Axis Small Cap	Conservative investors	Higher mid-cap exposure	Lower small-cap allocation

This analysis provides insights into fund performance and allocation strategies to help investors choose based on their goals and risk tolerance. Small-cap funds are generally high-risk, high-reward investments. In the current scenario, funds like Bandhan Small Cap and Nippon India Small Cap stand out due to strong returns and diversified strategies. However, the choice of fund should align with the investor's risk appetite, investment horizon, and financial goals.

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Growth Accelerates, but Inflation Concerns Persist: A Balancing Act for the Indian Economy

 

India’s economy continues to show strong momentum, but persistent inflationary pressures are casting a shadow on hopes for monetary easing. The HSBC Flash Purchasing Managers Index (PMI) for November reveals accelerating growth alongside mounting core inflation, painting a complex picture for policymakers and the Reserve Bank of India (RBI).

Inflation at a Multi-Year High

The sharp rise in retail inflation to 6.2% in October already dimmed hopes of a rate cut at the RBI’s December meeting. The PMI survey’s findings reinforce this narrative, with selling price inflation reaching its highest in nearly 12 years. Input costs have surged, driven by escalating raw material and food prices, and companies across the private sector are passing these costs on to consumers. Service providers, in particular, attribute higher wage bills to rising food costs. These second-order effects are corroborated by the RBI’s State of the Economy report, which flags increasing prices in processed foods, household services, and essential staples like cereals and edible oils.

Such persistent inflationary pressures, especially in core components, signal the potential for further cost-of-living increases, intensifying the burden on households and complicating the RBI’s policy calculus.

A Growth Story in Full Swing

Despite inflationary concerns, India’s growth trajectory remains robust. The November Flash Composite PMI climbed to 59.5, up from October’s 59.1, indicating sustained expansion in both manufacturing and services sectors. This growth is underpinned by strong domestic demand, with festival spending in Q3 providing a significant boost to real activity. The RBI’s Economic Activity Index estimates Q2 GDP growth at 6.7%, with Q3 growth projected at 7.6%, signaling a rebound from earlier slackness.

Encouragingly, the PMI data points to strong growth in new orders and a notable uptick in hiring, marking the steepest rate of job creation since composite data tracking began in 2005. This surge in workforce expansion, coupled with improved business confidence, suggests that businesses are optimistic about sustained demand, paving the way for long-awaited corporate capital expenditure.

The Tug-of-War: Growth vs Inflation

The juxtaposition of accelerating growth and rising inflation presents a challenging scenario for the RBI. On the one hand, strong growth and high capacity utilization signal economic vitality, bolstering investor sentiment and potentially driving capex. On the other hand, stubbornly high inflation, particularly in core areas, limits the scope for monetary easing, as rate cuts could exacerbate price pressures.

Moreover, while the PMI reflects the health of leading firms, its limited scope means the broader economy, especially smaller businesses and rural sectors, may not share the same optimism. The divergence between top-tier firms and the rest of the economy highlights the need for nuanced policy interventions that address inflation without stifling growth momentum.

Implications for Policy and Markets

The PMI findings have significant implications for the stock market, which often mirrors the performance of leading firms. With growth indicators strong, investor confidence remains buoyant. However, elevated inflation could temper market exuberance if it leads to tighter monetary policy.

For the RBI, the task ahead is clear but arduous. Containing inflation while sustaining growth requires a careful balancing act, likely involving a mix of supply-side measures to address food price pressures and calibrated monetary policies to anchor inflation expectations without dampening the economic recovery.

Conclusion:

India’s economic landscape is characterized by robust growth tempered by persistent inflationary concerns. While the outlook remains positive, the road ahead demands prudent policymaking to ensure that growth is not derailed by inflationary pressures, striking a balance that fosters sustainable economic prosperity.

 

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Does Indian Banks Getting under pressure?

 

The  NBFC-MFI (Non-Banking Financial Company-Microfinance Institution) sector is projected to face significant challenges in FY25 and potentially beyond. These challenges are expected to stem from asset quality issues, funding constraints, and structural shifts in business practices. On the other hand, Private banks are raising concerns over the ambitious targets under the Pradhan Mantri Mudra Yojana (PMMY), particularly in light of the sector's growing stress and rising risks in the micro, small, and medium enterprise (MSME) portfolio. This comes as the government increases its focus on lending to MSMEs to stimulate economic growth and job creation.

Private banks argue that the newly prescribed Mudra targets exceed their MSME lending capacity, with some claiming the targets are 10–15 times higher than in the previous fiscal year. This disproportionate increase, compounded by the new provision to lend up to ₹20 lakh under the Tarun Plus category, places considerable strain on banks' risk management frameworks. For smaller private banks, achieving these targets might necessitate restructuring their lending strategies, often at the expense of profitability and asset quality.

Key Highlights:

1. Growth Challenges:
• Loan book growth is expected to flatten or decline in FY25.
• Focus may shift from growth to managing asset quality, potentially shrinking loan books across the sector.
• Performance in FY26 is also likely to remain muted unless asset quality issues stabilize.
2. Asset Quality and Funding Risks:
• Elevated asset quality risks could lead to stricter covenants with debt lenders.
• Liquidity buffers may need to be strengthened to mitigate risks of debt recall.
• Any significant deterioration in asset quality for a single NBFC-MFI could create cascading risks for the entire sector.
3. Funding Constraints:
• Incremental funding is likely to remain tight due to concerns over collection efficiency and rising costs.
• Lenders may reassess their exposure to the sector, impacting disbursements, particularly in the typically strong second half of the financial year.
4. Regulatory and Structural Challenges:
• Recent regulatory actions on loan pricing and risk-weight adjustments have further constrained disbursements.
• Discussions around the practice of providing top-up loans in Joint Liability Groups (JLGs) could lead to business model disruptions, with potential asset quality implications.
5. Capital Raising Difficulties:
• Moderate leverage ratios and short-term liquidity buffers exist but could be insufficient without additional capital infusion.
• Rising borrower overleveraging and inflationary pressures, especially due to food inflation, may exacerbate repayment challenges.

Rising Risks in the MSME Sector

One of the key challenges to meeting these targets is the rising stress within the MSME loan portfolio. According to a Ficci-IBA survey, non-performing assets (NPAs) in MSME loans are expected to rise by 38% in the next six months, driven by high interest rates, inflationary pressures, and global economic uncertainties. While Mudra loans have shown a declining NPA trend among public sector banks—falling to 3.4% in FY24—private banks remain cautious, fearing that indiscriminate lending could lead to elevated risks.

The practice of setting uniform lending targets without accounting for differences in lender size, geography, and portfolio structure undermines the feasibility of achieving these goals. Private banks are pushing for a more nuanced approach, where targets are aligned with their total MSME portfolio or growth potential.

Additionally, the government's push for collateral-free loans under Mudra raises questions about risk mitigation. Alternative credit risk assessment models, such as cash-flow-based lending, while promising, are still evolving and may not provide immediate solutions to the systemic challenges of unsecured lending.

Conclusion

The government and private banks may need to engage in a dialogue to balance the ambitious Mudra targets with practical lending capacities while ensuring the broader financial health of the MSME sector. In the medium term, the sector’s ability to navigate these challenges will largely depend on support from promoters, regulatory clarity, and improvements in macroeconomic conditions, including inflation and borrower repayment capacity.

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The Gift of the Electoral Win will come Soon to market

 

By the time you reach the middle of the article, I should have made lots of enemies and fewer friends as of now.

The BJP win builds confidence and enthusiasm within the market to scale new highs. Well, nothing has changed in between except that the political strength and confidence of people get reflected by such great wins. Maharashtra plays a pivotal role in India in all segments. The market will form a plateau over here where corrections will get stalled for a couple of weeks.  The nifty might regain 25000 levels and the bugle of valuation has become reasonable and correction is over etc will sound again. But the truth is that we lack fundamentals and we are living in Alice in Wonderland.

On the other hand, Adani's bugle will keep sounding and will continue which will slowly now fade away under the trumpet of BJP WIN.  Buy at cheap has now turned cheaper. Once it turns cheapest buyers will be lost out of funds to invest. Frankly speaking, we are in the desperation of searching for rationales to justify the retail inflow that keeps coming. Even when Mr. Trump got elected we were in desperation to search positive analytical stories favouring India. Well, that is only true in Alice in Wonderland.

We are just 2 months away from the Budget of 2025-26 and this win will get new tax surprises for the market and most of them over the last few budgets were not conducive for the common people. The gift of the win will be delivered on 1^st Feb 2025.  The winning confidence will only boost the message that common people are happy with the current tax model, where the truth is that salaried segments are the biggest suffers. The corporate sector will be awarded with projects and tax benefits since they have contributed to the win more. Be ready for the gift.

The retail market in India is still searching for optimism and the same is missing as government spending has come down in H1 which got reflected in quarterly results. Most of the companies were surprised by their H1 performance, particularly Q2 FY25. Festive cheers have disappeared now and the market is looking desperately for some dope of optimism so that retail inflows can be kept intact.  The biggest question as of now is when FII’s will come back and if they don’t come back how long the gross SIP number will be Rs.25000 cr. In India when the market falls people stop their SIP hence this behavioural aspect is now under test. Foreign investors currently own 17.5 per cent of Indian equities, while some of its EM peers have as much as 58 per cent foreign ownership.

On the other PMS is also trying day& night to find the reason for optimism and keep the inflow intact. On the other hand, the IPO market is also scouting for strong rationales for listing gains and unfortunately, the grey market is not supporting.  Further, all the IPOs are dependent on the service sector and have little to do with capex hence post returns and prospects of the IPOs are also lacklustre now. Most of the IPOs came up for repayment of debt rather than building new capacities which all add ancillary growth to the Indian GDP.

Why we are trying so hard to search for optimism and keep the retail inflow coming? We want to keep the momentum of easy money-making from the market alive and active as it has since covid lows. We want to keep the notion of easy money-making from the market alive for those 17.5cr new demat account holders who joined the market.

The BFSI sector has been the only boon to survive the weak results of the Q2 of FY-25. (BFSI) sector to prop up overall earnings, with the sector’s share in India Inc. profits reaching 38.2 per cent in the July-September 2024 quarter (Q2FY25), the highest since 2012. This was also significantly higher than the sector’s 23.6 per cent average contribution to overall corporate profits in the past 10 years, excluding the Covid-19 period when the BFSI share rose sharply amid a shutdown of most nonfinancial economic activities. For context, the sector accounted for 57.2 per cent of all corporate profits in the April-June 2020 quarter (Q1FY21). During Q2FY25, while the combined profit of the sector rose 15.3 per cent year-on-year from ~1.08 trillion to ~1.24 trillion, that of non-BFSI companies declined 4.2 per cent Y-o-Y from ~2.1 trillion to ~2.01 trillion.

India is the only country on the world map where EPS is linked to GDP.   We have been driving growth by consumption and government spending. This is not a sustainable model and will not last for longer.  Food inflation is worrisome and the F&O restrictions and other rules which are getting kicked in at different times will have a slow poison impact on the market which is now getting reflected. When will FIIs come back? Well, after Mr. Trump won there are brighter opportunities for growth and prospects in the US compared to investing in emerging markets.  Stronger dollar, proposed tax cuts & higher tariffs make U.S markets the best market for CY 2025. Hence FII’s coming back to India will take time and is dependent on various factors which are yet to get shape or rather take birth.

Well, investing and making money from the market will not be easy as we lack fundamentals. Further, with Mr. Trump now coming up we have to live by his tweets and so as the market. It's time to accept that asset allocation is important and getting back to basics is important now. Quick listing gains and short-term trading turnover will take a hit which will actually benefit the investor's portfolios. It's a time of quality and not quantity. We might be in desperation to search for good momentum news but its now time for a real show of analytical minds to make money and grow wealth.

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Indian AIF Industry 30% growth YoY -Rs 12lakh cr

 

In continuation to my previous article on which AIF performed last month we now have come up with detailed insights on the growth of the 3 categories of AIF starting from 2013 to till date. The Industry has witnessed significant growth and product penetration has increased significantly with a multi-product strategy where unlisted, factor investing, momentum-based rebalancing, unlisted stocks, and pre-IPO placement products have found a new growth path for the AIF industry. Indian AIF industry has grown 10X in the last decade and is worth Rs. 12.3 lakh crore . Cat II AIFs include private credit funds that grew the most during this period at 37%.

Category I AIFs

These funds are designed to provide social and economic benefits, focusing on areas like startups, infrastructure, and venture capital.

• Commitments:
• Grew significantly from ₹1,417 Cr in Sep 2013 to ₹83,493 Cr in Sep 2024, reflecting strong investor confidence.
• The last 12 months alone saw notable growth, indicating sustained interest in socially impactful investments.
• Fund Raise:
• Increased from ₹235 Cr in Sep 2013 to ₹45,797 Cr in Sep 2024.
• The steady rise suggests better execution and an expanding base of investors.
• Investments:
• Investments rose from ₹197 Cr in Sep 2013 to ₹39,115 Cr in Sep 2024, reflecting substantial capital deployment in relevant projects.

 

2. Category II AIFs

Focused on private equity funds, debt funds, and other unleveraged strategies.

• Commitments:
• Jumped from ₹2,101 Cr in Sep 2013 to ₹9,76,045 Cr in Sep 2024—a massive expansion indicating a strong preference for this category.
• Fund Raise:
• Surged from ₹907 Cr in Sep 2013 to ₹3,44,474 Cr in Sep 2024, demonstrating consistent traction in attracting investors.
• Investments:
• Climbed from ₹717 Cr in Sep 2013 to ₹2,86,959 Cr in Sep 2024.
• This significant increase showcases robust demand for private equity and debt funding opportunities.

 

3. Category III AIFs

These funds employ complex strategies, such as hedge funds or long-short equity, aiming for higher returns.

• Commitments:
• Grew from ₹308 Cr in Sep 2013 to ₹1,83,545 Cr in Sep 2024, signaling gradual investor acceptance of high-risk, high-reward strategies.
• Fund Raise:
• Rose from ₹225 Cr in Sep 2013 to ₹1,11,232 Cr in Sep 2024, with a sharp increase over the past 5 years.
• Investments:
• Grew from ₹145 Cr in Sep 2013 to ₹1,23,310 Cr in Sep 2024, reflecting growing confidence in leveraging alternative strategies for portfolio diversification.

 

4. Overall AIF Market (Total)

• Commitments:
• Increased from ₹3,826 Cr in Sep 2013 to ₹12,43,083 Cr in Sep 2024, with over 30% growth in the past 12 months alone.
• The rapid growth highlights a booming AIF market, driven by structural reforms and investor interest.
• Fund Raise:
• Jumped from ₹1,367 Cr in Sep 2013 to ₹5,01,503 Cr in Sep 2024, reflecting increasing institutional and retail participation.
• Investments:
• Climbed from ₹1,059 Cr in Sep 2013 to ₹4,49,384 Cr in Sep 2024, showcasing successful deployment of raised funds into diverse opportunities.

30% YoY Growth: The last 12 months highlight the robustness of India’s AIF sector, despite global economic uncertainties.

1. Exponential Growth:
• The AIF industry has seen tremendous growth across all categories, underlining its emergence as a key player in India's financial ecosystem.
2. Category II Dominance:

Category II dominates the AIF landscape with the highest commitments, fundraises, and investments, driven by private equity and debt fund strategies.  Accounts for 78% of total commitments, driven by private equity and debt funds.

1 YEAR GROWTH STORY

September 2023

• YoY Growth:
• Commitments (Total): +36% (₹9,54,397 Cr)
• Fund Raise (Total): +16% (₹3,88,537 Cr)
• Investments (Total): +15% (₹3,53,353 Cr)

Strong growth is driven by continued confidence in Category II, which accounted for 82% of total commitments.

12. September 2024

• YoY Growth:
• Commitments (Total): +30% (₹12,43,083 Cr)
• Fund Raise (Total): +29% (₹5,01,503 Cr)
• Investments (Total): +27% (₹4,49,384 Cr)

India’s AIF market crossed the ₹12 lakh crore mark, driven by all categories:

• Category II commitments grew by 25% YoY to ₹9,76,045 Cr.

• Category III investments surged by 56% YoY, reflecting rising sophistication among investors.

·        The overall 30% YoY growth in commitments reaffirms India’s position as a promising market for alternative investments.

Conclusion:

Further As India crosses critical economic milestones, such as achieving a per capita GDP of $2000, its population’s consumption and investment habits are entering a super cycle. By 2031, the nation is poised to see monumental changes in its financial behaviour, driven by an expanding middle class, rising incomes, and increasing sophistication in investment strategies. By 2031, India is projected to have 360 million households with a per capita GDP exceeding $2200. This milestone will significantly alter the nation’s financial ecosystem. Furthermore, the number of households with an annual income exceeding $35,000 is expected to grow by 350% from 2021 to 2031, creating a vast pool of high-net-worth individuals.

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