* Indian equities rise sharply as retail buyers pile in
* Government encourages stock purchases through mutual funds
* Modi government keen to wean Indians off property and gold
* Some analysts warn markets are frothy, valuations too high
By Rafael Nam and Abhirup Roy
MUMBAI, May 4 With red-and-white headphones
draped around her neck, 22-year-old Indian IT security
consultant Abdhija Sharma looks like she would be more at home
discussing the latest music or Bollywood movies than compound
returns on equity investments.
But at an office in a Mumbai suburb one recent Saturday,
surrounded by banners urging them to "Create Wealth", she and 60
others listened intently as finance professional Alpa Shah
explained terms like "the power of compounding."
Tens of thousands of Indians like Sharma are attending
presentations promoting mutual funds, such as this one organised
jointly by Suresh Rathi and Birla Sun Life, and investing in
stocks for the first time, many through monthly plans.
Their investments have helped send indexes to record highs;
the NSE index is the best performer in Asia this year
with gains of around 14 percent.
The rally is partly the result of a drive by Prime Minister
Narendra Modi's government to wean people off property and gold
and channel savings into stocks through mutual funds.
The gains have led to soaring valuations, in particular in
the telecoms sector, which some analysts believe are
unsustainable and could lead to volatile price swings.
Sharma got interested in stocks after hearing her boss boast
about how much money he made from the initial public offering of
supermarket operator Avenue Supermarts Ltd.
That stock has more than doubled since listing in March,
and, to the concern of some brokers, become the second most
expensive food retailer in the world, according to Thomson
But Sharma, who plans to invest 5,000 rupees ($78) a month,
believes stocks will beat property and gold in the long run.
"There are risks in everything," she said. "Fund managers
won't let millions of people lose money. They will protect our
Since May 2014, when Modi came to power, Deutsche Bank
estimates retail investors ploughed a record $31 billion into
Indian equities through mutual funds, more than the estimated
$21 billion overall by foreign investors over the same period.
As a result, assets under management have more than doubled
to 17.55 trillion rupees ($274 billion).
Many new investors are buying stocks through monthly plans
at mutual funds, or systematic investment plans (SIPs), of as
low as 500 rupees per month.
"SKIP THE PIZZA"
It is part of a push by mutual funds to woo retail
investors. Hundreds of presentations are held each month across
the country, as well as major marketing campaigns.
The government is keen on the idea, as home prices in big
cities have become unaffordable to large segments of the
population, while imports of bullion, another favourite among
savers, have led to persistent current account deficits.
"The retail investors should ideally come to the stock
market via mutual funds and exchange-traded funds," said a
senior finance ministry official of the trend.
The Securities and Exchange Board of India (SEBI) has
steered investors to mutual funds, strengthening oversight of
the sector and warning against Ponzi schemes in TV commercials.
Yet the proportion of equity investments as part of total
savings remains in the low single digits, compared with around
10 percent in China or 40 percent in the United States.
Indian mutual funds promise juicy returns: Suresh Rathi's
brochure says someone investing 5,000 rupees a month in stocks
over 20 years could expect 4.9 million rupees in final returns;
a four-fold increase assuming about 12 percent gains a year in
As the educator Shah put it: "Skip one Domino's pizza a
month and put that money into a SIP, and over 20-30 years you
will get both wealth and health."
Gains of around 12 percent are not seen as unrealistic in a
high-growth emerging market like India, but analysts warn such
projections mask major risks, including stretched valuations.
The benchmark BSE index is trading at a 12-month
forward price-to-earnings ratio of 20.51 compared with a 5-year
average of 17.91, Thomson Reuters data show.
Some sectors are especially high. The MSCI India telecoms
sector, for example, is trading at a forward P/E of 62.3, nearly
triple its five-year average of 22.2.
Some analysts justify high valuations given earnings largely
performed poorly since mid-2014, leaving plenty of upside. But
others warn the gains were being driven not by fundamentals, but
by fund managers buying stocks for retail investors.
"Valuations are becoming unrealistic," said Arun Kejriwal,
founder of investment services firm Kris Research.
Valuations are seen as especially stretched among mid- and
small-caps in sectors such as health care and consumer goods.
Avenue Supermarts attracted strong domestic investment and
is now trading at a P/E of 58.3, making it the second most
expensive food retailer in the world by that measure, according
to Thomson Reuters data.
The valuation spurred major broker Kotak Institutional
Equities to issue a rare "sell" recommendation on the company.
Indian markets have been traditionally volatile; since 1980,
the BSE has gained or fallen by double digits in 29 of the last
That raises the question of how retail investors would react
if products they have been primed to believe were mostly safe
suddenly lurched lower, or if property prices started to recover
after under-performing in recent months.
India experienced a retail boom in the previous decade, but
the 2008 global financial crisis wiped out many investors,
leading to a mass exit from stocks that only started to reverse
Vishal Modi, a 42-year-old businessman, is old enough to
remember the market downturns, so at first he was sceptical. But
now he believes SIPs are a safe bet.
"It's so transparent that actually a fund house has to make
a very big mistake to actually lose money."
($1 = 64.1300 Indian rupees)
(Additional reporting by Gaurav Dogra in BENGALURU; Editing by