Increasingly equity markets are all about flows. Where the money is coming from and where it is going matters a lot. The velocity of flows also adds another layer to it. Now we see that money from FIIs is coming into India. Clearly, this money seems to be moving more towards top-down investing. It is reasonable to expect that this money will move towards larger companies.

Domestic flows seem to be slowing down. Indicators from the mutual fund industry show that lumpsum investments have distinctly slowed down from domestic investors. It is possible that domestic investors are channelling lumpsum investments through direct equity and not mutual funds. This trend could also reflect the retail investors’ aspiration to participate directly in equities.

The SIP books of Mutual funds are at an all-time high and there is a trend to channel more money into small and mid-cap funds. This is distorting valuations in both those spaces. One on hand, mid-cap valuations refuse to moderate and on the other hand small cap valuations are accelerating upwards. In contrast, large-cap valuations are softer and not showing adequate strength. This makes for an interesting setting.

From here flows will matter more. If money moves out, it will impact the more overvalued parts of the market and it would further soften on large-cap companies. If money moves in, it will find it more difficult to participate at higher valuations in small and mid-caps. By extension, investors should seek more opportunities in large caps. Deployment compulsions may well prevail. It will be interesting to see where the money goes from here.

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