Retail flows into equity mutual funds have historically followed a predictable pattern. Flows rise when the markets are doing well, and they fall when the markets are correcting. And in what is a clear reflection of the investment time horizon in this category, the key yardstick that is followed is the past one-year return of equity mutual funds. Whenever one-year returns are poor for successive months, flows dry up and there are even net outflows from equity mutual funds, as was witnessed in early 2014 and 2016.
But the correction in the vast majority of stocks this year has had a different response from retail mutual fund investors. While returns have been negative in a large number of equity funds, flows have remained fairly strong, thanks to the growing popularity of systematic investment plans (SIPs). This has brought the Indian stock market into a realm it has never been to before, and one that is having interesting effects on stock valuations.
