Calendar year 2024 has been truly a coming of age for domestic investors vis-a-vis the FPI investors. In the early years, the impact of FPI flows was very evident and our markets swayed due to their inflows and outflows. Consistent investment by domestic investors, either directly or through mutual funds/insurance or pension funds, has now made domestic equity markets resilient and solely dependent on local micro fundamentals, rather than being subject to global macros and the resultant FPI flows.

Nifty 50 has delivered a positive return of almost 10 per cent; the Midcap 100 and Smallcap 100 have delivered a positive 24 per cent return for 2024. This is despite negligible FPI inflows in the primary and secondary market, and despite fresh issuances as well as promoter and PE sales aggregating to more than ₹6 lakh crore. Truly a reflection of the robust domestic investors’ faith in the long-term growth of the Indian economy and deeper penetration of the equity cult across the length and breadth of the country.

Traditional investment avenues of real estate, fixed deposits and debt funds seem to have lost favour among domestic investors. FPI investors are primarily driven by weightages in MSCI Global Index, where India’s weightage is not more than 2 per cent as against the US’ weightage of close to 80 per cent. However, India’s weightage in the MSCI Emerging Market Index has gone up from single digit a decade ago to accounting for 20 per cent in 2024.

I believe this trend of waning FPI flows impact on the domestic markets will continue in the coming years.

The retail participation in the equity markets has grown manifold in the last four-five years as reflected in the robust retail inflows in domestic mutual funds, direct equity purchases and massive increase of retail volumes in the futures and options (F&O) segment of the equity markets. Retail investor wealth has increased manifold in their MF and direct equity holdings. Unfortunately, these retail investors have not been successful in the F&O segment and have mostly incurred losses.

The regulators have introduced various measures to tighten the participation of retail investors in the F&O segment of the market. In the last few months, we have seen some impact on the retail volumes, but it is difficult to say whether it is solely due to these new regulations, less-than-impressive Q2 corporate performance or the overall expensive valuations of the broader market. We believe that broking volumes will consolidate in the next few quarters as the impact of new regulations play out and overall valuations of the market become more attractive.

Overall, the penetration of the retail investors is still very low as evidenced by the low ratio of demat accounts in operation versus the addressable investor universe. We have seen over the last few decades that broking volumes have grown manifold with increasing market cap, more and more companies being listed, and more categories of investors and traders becoming active in the markets. Most brokers have become well-rounded firms with broking being only one of the revenue streams.

In every market, every year, the challenges remain the same. It is all about getting the right balance between valuations and growth outlook while not overpaying or holding on to stocks which are overvalued. However, on a more specific basis, investors would do well to forget the robust returns of 2024 and be extra vigilant and careful in their portfolio decision making. It is like a batsman taking fresh guard after scoring a century and remotivating oneself than being carried away in the euphoria.

For MF investors, it is important that they focus on their long-term objectives and continue to hold on to their investments, than be disheartened, if the short-term returns are below expectations.

Like always, focus on stock-specific fundamentals rather than being carried away by global macros, most of which we have no control over anyway. Q2 corporate performance has been weak, and in the short term, it would be very important as to how quickly corporate India is able to get back its growth momentum.

Capital market investors have enjoyed massive growth in the last three-four years and no FM would miss the opportunity to raise more resources to fund various growth initiatives.

The breadth and depth of the MF industry has grown manifold in the last three-four years with progressively more retail investors investing in mutual funds, and with direct plans and online investing platforms. MF schemes, which have delivered superior returns, have been able to get a bigger share of the incremental flows. In the earlier years, it was the brand and distribution might which played a bigger role than the performance.

We believe that the overall size of the MF industry will grow across active and passive products, and hence, many new players are entering the market. At the same time, as retail first-time investors mature and their investible surplus grows, there will be a huge demand for customisation through alternates like PMS/AIFs in public and unlisted stocks. We are currently focusing on ramping up our offerings in the alternate space, where we believe, we have an edge when compared with mass products like mutual funds.

It is human nature to be optimistic and for investors to hope for bumper gains. On a broad basis, it is very difficult to imagine a big uptick in the markets, though some fund managers and investors can show massive outperformance, based on some sector and stock selections delivering robust returns. Basically, this year should be a stock pickers’ market than that of taking sectoral bets.