Tata Mutual Fund has launched Tata Nifty Capital Markets Index Fund. The NFO will be open till October 21. The index tracking fund will be benchmarked to Nifty Capital Markets Index. The index’s sector constituents as on September 24 include Exchange and Data Platform (34.8 per cent), AMCs (24 per cent), Depositories (21.5 per cent), and Stockbroking and allied (17.4 per cent). The top five stocks are BSE (18.4), HDFC AMC (16), MCE (10.6), CDSL (9.4), and CAMS (7.8).

Financialisation of savings is the primary underlying theme for the fund/ index. As Indians use avenues other than direct gold, real estate and bank deposits to diversify their savings, the capital markets industry should benefit. But having run up significantly in the last four years post-Covid, a phase of consolidation from top-down can be expected – the return metrics, rally in retail participation and even the underlying index. We recommend investors watch the fund performance and the industry parameters in the short term before investing, even as long-term drivers are encouraging for the industry.

Rising financial participation

Shares and debentures account for 7 per cent of household savings and this has risen from 2 per cent in 2011-12. The majority even today is invested in bank deposits, but its share has shrunk from 69 per cent to 45 per cent now. According to Statista, US households invest more than 50 per cent in equities, which implies a long runway for the domestic investor. Despite a rush of demat accounts and multiple accounts per head, demat penetration in India stands at 8 per cent compared with 32 per cent in the US and 14 per cent in China.

Despite Indian GDP being the fast-growing large economy, MFs account for only 16 per cent of the GDP compared with China’s 19 per cent, Brazil’s 67 per cent or global average of 74 per cent.

While under-penetration is the larger theme in India in any product/ service, capital markets industry will benefit more so from the current low base in the long run. The stable macro indicators including regulation, domestic politics and increasing middle class will support the growth, which should support the capital markets industry.

Consolidation phase

Investors should also consider the rapid growth in Indian capital markets, that was especially pronounced in the last four years, which should imply a consolidation phase in the short term.

Demat accounts, while underpenetrated, have risen four-fold in the last four years — from four crore demat accounts in March 2020 to 16 crore by September 2024. The MF AUM has more than doubled from ₹22-lakh crore in March 2020 to ₹53-lakh crore in March 2024. Considering the sluggish pace of growth earlier and the rapid transformation now, the industry can grow at a slower pace from here in the short term. The current flux in global markets will also have an impact on domestic participation.

A consolidation phase is expected in the Nifty Capital Markets index as well. The index has returned 27 per cent CAGR since its inception in April 2019 compared with Nifty 50’s 15 per cent CAGR. The inflection came in April 2023 as the index returned 120 per cent CAGR since then compared with Nifty’s 26 per cent CAGR in the period. The index PE at 46 times is nearly double the Nifty 50 PE of 24 times as well. The index is heavily concentrated as well. Even as the index allows for 20 holdings, currently it has only 15 stocks as part of the index, which increases the concentration risk.

Trading at such elevated multiples and after a strong rally in the last year, the index may consolidate in the short term. Investors with an eye on longer-term financialisation theme, should wait for better entry point in the fund.

Key theme
Financialisation of savings away from traditional asset classes of real estate and gold can help capital markets industry.
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