Mutual funds, direct stock investments, and equity-linked insurance plans are among the investment channels where Indian households are showing unprecedented enthusiasm for the stock market, as per analysts at Bernstein in a note dated Thursday.
In the first half of FY2025 alone, mutual fund inflows reached $64 billion, surpassing the total recorded for all of FY2024.
This surge suggests robust household confidence in the stock market, even amid a softer economic backdrop.
If this momentum persists, the total allocation to equities, both in absolute figures and as a share of household savings, could reach new highs in FY2025.
A significant portion of these inflows is directed toward active-equity mutual funds, which saw net inflows of $34 billion in H1 FY2025, a remarkable increase from the previous fiscal year.
SIPs are also contributing to the inflows, now pulling in around $3 billion per month.
Additionally, lump-sum investments have surged, comprising approximately 52% of the mutual fund industry's net inflows in H1 FY2025.
This heavy reliance on household funds has allowed domestic investors to counterbalance foreign investor sell-offs, but such inflows may not be sustainable if economic conditions deteriorate.
However, Bernstein’s analysts express concerns that sustaining this level of investment might be challenging.
The current economic backdrop, while encouraging for now, could hinder the continuation of high household inflows as economic growth slows and consumer sentiment potentially weakens.
If household flows decelerate, mutual funds might reduce their purchasing, impacting overall market demand from the domestic front.
The analysts are closely monitoring upcoming flow data for October and November, which could indicate if this cooling has begun to set in.
Additionally, asset management companies’ stocks have performed robustly, reflecting the strength of these household flows despite a recent market cool-off.
While the broader market has dropped around 7%-8% from peak levels, some asset manager stocks have held up or even improved, suggesting market confidence in continued fund inflows.
Yet, if the pace of household investments slows, valuations that are currently supported by these inflows could become vulnerable, particularly as mark-to-market gains become less predictable in the months ahead.