Higher index levels and equity inflows have a direct relationship.

By late October 2008, precisely 14 years back, Nifty had already corrected by 60% in the wake of the ‘Global Financial Crisis’ (or GFC as it is called). Earlier that year (in 2008) in January, the Nifty made its all-time high. Around the same time, in the two months of January and February 2008, various mutual fund schemes witnessed record inflows of close to Rs.20,000 crores, almost Rs.9,000 crores of which was garnered by the 6 different NFOs (new fund offers) launched by different AMCs. Thereafter, such equity inflows index were witnessed only a decade later, in 2017.

As per a recent article published in the Mint, an analysis of the net inflow into equity mutual funds in a given month versus the high the Sensex reached during that particular month, from April 2019 onwards, shows that after Sensex having crashed in March 2020 (start of pandemic phase), investors withdrew money from euity mutual funds between July 2020 and February 2021. Only after the Sensex crossed the 50,000 points, did the inflows started coming back into equity mutual funds.

The total inflows over the last one year amounted to Rs.1,84,000 crores, while the Sensex touched its all-time high of 62,245 points in October 2021. Simultaneously, as the Sensex has gone higher in the last two years, the number of demat accounts opened has also gone up at a fast pace. In September 2020, the number of demat accounts stood at 46.6 million. Two years later i.e. in Spetember 2022 the number had more than doubled to 102.6 million.

In both the above two instances the inflows into equities followed the rising index levels. This investor trait has been captured very well by the author Morgan Housel, in his book ‘The Psychology of Money’, wherein he states that ‘investors generally carry a notion that assets have one rational price even though different investors have different goals and time horizons’. He argues that when it comes to paying the price for an investment, it should depend on ‘who’ the investor is. “Prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to, are very different.”

He further states that, “an iron rule of finance is that money chases returns to the greatest extent that it can. If an asset has momentum i.e. it’s been moving consistently up for a period of time, then it’s not crazy for a group of short-term traders to assume it will keep moving up.

Momentum attracts short-term traders in a reasonable way. Bubbles form when the momentum of short term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.” He further reasons that, “Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short term traders enter the playing field. Bubbles do their damage when the long term investors playing one game start taking their cues from the short term traders playing another.”

Having a clear, well thought and a written mission statement puts things in a perspective for you, making it possible for you to focus on things relevant to your plan and to the game you are playing, and also to ignore whatever is unrelated, not even the Index levels!

Source: Mint/ Psychology of Money/ Equitymaster