The report highlights that diminishing returns over the past 12 months, coupled with negative performance in the last six months, may dampen retail investor enthusiasm and reduce inflows into domestic mutual funds.
Declining Returns Dampen Investor Sentiment
Kotak’s analysis reveals that the 12-month returns of key indices have fallen significantly, with the NSE-50 Index, Nifty Midcap 100 Index, and Nifty Smallcap 100 Index delivering returns of just 5%, 3%, and (-)3%, respectively. Over the past six months, these indices have posted negative returns of 5%, 12%, and 15%, reflecting a challenging environment for equity investors.“A period of low trailing returns could dampen return expectations among retail investors and inflows into domestic mutual funds,” the report stated.This trend is particularly concerning given the significant role retail investors have played in supporting the market amid foreign portfolio investor (FPI) outflows over the past year.
Also Read: Mutual fund SIP inflows top Rs 26,000 crore mark for second straight month
FPIs Remain Cautious, DIIs Step Up Buying
The report also highlights the ongoing divergence between foreign and domestic institutional investors. While FPIs have maintained a cautious stance due to a challenging global investment environment for emerging markets (EMs), domestic institutional investors (DIIs) have been aggressively deploying capital. This is largely driven by high cash positions with mutual funds and strong inflows from retail investors.
However, Kotak warns that the retail-driven inflows into mutual funds may not sustain if market performance remains lackluster. “The battle between FPIs and DIIs will likely continue in the next few months, but retail investor participation could taper if returns fail to improve,” the report noted.
Macro and Micro Challenges Add to Concerns
Kotak’s cautious outlook is further supported by emerging challenges in both the macroeconomic environment and corporate earnings. On the macro front, India faces a slowdown in consumption demand, particularly for basic staple items, reflecting income and inflation pressures on low-income households.
What Should Investors Do?
Kotak’s report underscores the need for caution in the current market environment. With valuations remaining rich across most sectors and stocks, and earnings downgrades likely in the coming quarters, investors may need to temper their return expectations.
For retail investors, the declining trailing returns serve as a reminder of the importance of a long-term perspective and disciplined investing. While the market may face near-term headwinds, staying invested in high-quality companies with strong fundamentals could yield better outcomes over time.
As Kotak Institutional Equities aptly puts it, “The Indian market may stay lackluster in the near term, weighed down by rich valuations, potential earnings downgrades, and a higher-for-longer global interest rate environment.”
Disclaimer: This article is based on a report by Kotak Institutional Equities and is for informational purposes only. Investors are advised to conduct their own research or consult a financial advisor before making investment decisions.
(ET Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
