ETFs bail out markets from funds’ sale

The rally in the domestic equity market over the past two months was supported largely by investments made by passive funds like the global exchange traded funds (ETF). This has helped the Indian markets to offset the impact of outflow from active funds.

According to Kotak Insti-tutional Equities Rese-arch, active funds dried up regionally and locally during April 2016 while ETF activity remained positive throughout the region.

What differentiates an active fund from a passive fund is their investment strategy. Active portfolio management focuses on outperforming the market through their superior stock selection strategy whereas passive funds creates a portfolio which mirrors the components of stock index like the Sensex or Nifty. The return would be same as the chosen index.

Data from Kotak Institutional Equity (KIE) showed that active India dedicated funds pulled out $260 million from domestic equities while India dedicated ETFs pumped in $119 million in April.

Similarly, among the emerging market funds, active funds offloaded shares worth $113 million while ETFs bought $274 million worth of stocks. The trend is almost similar for the last three months with passive funds occupying the space vacated by active funds.

KIE highlighted that the allocations to India and China constitute more than one-third of the average Asia ex-Japan’s fund’s portfolio. According to it, global emerging market funds are allocating 11.5 per cent of their assets to India while Asia ex-Japan fund allocations to India stood at 13.5 per cent.

“Risk assets across the globe continued to rally for the third straight month in April. We continue to believe that the current rally in Indian equities is largely attributed to this global risk-off trade and a mean reversion process from the excessive selling by foreign portfolio investors (FPIs) during the January-February period. The US Federal Reserve maintained a dovish stance in the April 2016 policy meet, which further strengthened the global rally but Bank of Japan’s (BoJ) decision to hold back on further stimulus came as a negative surprise thereby acting as a stumbling block to the emerging market rally. We do not expect FPI flows to India to reverse meaningfully in the short term although medium term outlook continues to re-main uncertain,” said analysts at ICICI Securities.

FPIs continued buying equities in April while do-mestic institutional inve-stors and mutual funds sold equities to tune of $351 million and $27 million respectively. Mutual funds witnessed net redemptions of $0.5 billion in March post 23 months of positive inflows.