The Nifty 50 has dropped about 25% compared to February’s height. Bonds, on the other hand, provided a positive return for investors.
How have Indian private investors responded to the increased market volatility resulting from Covid-19 and the spread between equity and bond yields? Although there has certainly been a flight to safety in terms of preserving assets and improving liquidity, interest rates have been somewhat mixed.
It is interesting to note that net inflows into investment funds and listed funds (ETFs) showed the strongest growth relative to other asset classes in the three months from February to April. The net inflow in this period was about ₹49 600 Kroor, compared to ₹32 700 Kroor for the same period a year ago, which means an increase of 55%.
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The flows through the systematic investment plans were sticky, with an average of about ₹8 500 crores per month this year. And, importantly, the number of redemptions is not as high as some feared because of the volatility of the stock market.
Employment contracts generally take time to adapt to economic shocks and the pain of redundancies and wage adjustments may not yet be fully understood. On an aggregate level, households are therefore likely to build up a surplus of liquidity and costs have fallen significantly during the blockade. Some of this excess liquidity, as well as the tendency of some investors to make conflicting decisions when shares are good, could be behind the increase in mutual fund allocations, says Tarun Ramadorai, professor of finance at Imperial College London, who is interested in household finance research.
It is useful for investors to be aware of the growing uncertainty surrounding investment decisions. Small investors may be tempted to rush where others dare not; but since the economic impact of the crisis has not yet become clear, it may be wise to focus on less risky investments, since their labour income has certainly become riskier, Ramadorai adds.
In fact, this growing attachment to stocks has been exacerbated by a massive flight to safe investments. According to the Reserve Bank of India, the volume of term deposits increased from the end of January to 24 January. April on ₹3.57 trillion. The inflow of term deposits amounted to ₹2.68 trillion in the same period of the previous year and ₹2.48 trillion in the previous year. The growth in term deposit flows this year is much higher, 33%, than the growth of 8% in 2019. Term deposits consist mainly of term deposits and part of savings deposits, which are considered to be sticky.
The desire for term deposits can be partly explained by the fear of credit losses related to debt instruments other than liquidity. Access to a bank’s money during a lockout is relatively easier to see than, for example, a debt fund during a lockout, says Jayant R. It is easier to see a bank’s money during a lockout than, for example, a debt fund during a lockout. Varma, professor of finance at the Indian Institute of Management, who is interested in the financial markets.
Ashutosh Hajuriya, executive director and chief financial officer of the Bundesbank, said People cannot spend more than they need and the extra money is in their accounts. Given the uncertainty, parking in secure short-term bank deposits, which provide a stable income, is also preferable,
Of course, investors with bank deposits can earn lower returns than other asset classes. The risk of large investments in term deposits is kept at low interest rates, especially when inflation is surprisingly high, Varma explains. But it is clear that many households are interested in the return on capital, not the return on capital.
Speaking of the desire for liquidity, the money has grown in the last three months with the population of ₹2,06 trillion, which is an unusually large increase compared to the growth of ₹1,08 trillion a year ago. While the inflow of funds into bank deposits and investment funds has increased, there has been a huge outflow of funds from investment funds. Liquidity and money market funds saw an outflow of ₹1.1 trillion dollars. And so you don’t think this usually happens at the end of the fiscal year, note that these funds had a net inflow of ₹20.300 crores in February and April last year.
There has also been an outflow of debt money (excluding gold-plated silver) on ₹82.000 crores in the past three months compared to an inflow of ₹15.400 crores a year ago. Although the returns of most debt funds were much higher than those of equity funds, the sudden closure of six debt funds by Franklin Templeton exacerbated the perception of Indian debt funds. The outflow of funds took place in fund categories where the credit risk is relatively higher.
The blockade has also had an impact on new money flows from insurance companies. New business life insurance premium fell by 39% compared with the previous year to ₹18,000 kronor in the past three months. Gold purchases in January-March also fell by around 36% as a result of the restrictions. The demand for investment gold has increased. Real estate transactions are almost at a standstill.
Aggregated flow data hide the fact that trends differ by income category. According to alarming reports, ₹8 000 crores have been removed from the government’s austerity programmes since closure. That’s ten times the usual withdrawal amount. This can partly be explained by the need to maintain liquidity; however, for some households the covid-19 already forces them to save for their retirement. For them, it’s more a struggle for survival than a flight to safety.
(Aparna Ayer contributed to this story).
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