January 14, 2019

The dangers of high mutual fund inflows

...Equity mutual funds now receive around ₹8,000 crore monthly through a steady stream called systematic investment plans (SIPs). It works out to nearly ₹1 trillion a year.

“In a sense, this is like a pyramid scheme or a game of musical chairs,” says Sanjay Bakshi, finance professor at Management Development Institute, Gurgaon. “The weight of the money coming in is causing a rise in asset prices, which in turn is drawing more flows that then chase the same assets. History shows that this seemingly endless cycle will reverse one day; and when the tide turns, there will be a quick transition from euphoria to hysteria.”

The problem of plenty, in terms of flows, is exacerbated by a problem of scarcity as far as quality stocks go. It’s the classic “too much money chasing too few goods” problem.

Venkatesh Panchapagesan, associate professor of finance at IIM Bangalore, says: “The limited universe of investible stocks for institutions is a problem, and the fact that the markets regulator isn’t doing anything to broaden the universe just makes things worse. So we end up with a situation where mutual funds are forced to buy stocks that they already own.”

Read more at https://www.livemint.com/Money/rTkzp1j8bF5UES4wZz9VyJ/The-dangers-of-high-mutual-fund-inflows.html

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