Capital shifting from secondary market to ₹5 trillion IPO pipeline: Madhu Lunawat

Capital is actively shifting from the secondary market into a massive ₹5 trillion primary market pipeline, as investors reallocate liquidity toward initial public offerings (IPOs) and qualified institutional placements (QIPs) amid a subdued broader market, according to Madhu Lunawat, founder of The Wealth Company Mutual Fund.

Speaking to Mint, Lunawat noted that while retail investors are chasing small- and mid-cap stocks to beat a perceived personal inflation rate of 10-12%, foreign institutional investors (FIIs) remain cautious due to elevated valuations, currency depreciation, and heavy existing exposure to private banks.

On the lack of significant foreign institutional investor (FII) inflows into India, Lunawat said foreign investors are struggling to find high-quality Indian companies that offer reasonable valuations and sustainable growth, noting that companies growing at 60-70% are relatively rare in the Indian market.

Here are some edited excerpts from the interview.

Global AI and tech stocks are seeing a correction, but we are not seeing a meaningful shift in FII flows towards India. Why is that, and could this trend change?

The Indian market is highly polarized. Some high-quality stocks are available at attractive valuations, but investors are largely ignoring them. At the same time, certain expensive stocks continue to attract significant interest, even when their valuations are difficult to justify.

In India, companies growing at 60-70% are far less common. Those that do achieve such growth may be loss-making or trade at extremely high valuations.

For foreign investors, the challenge is finding high-quality Indian companies that are reasonably valued and capable of sustaining strong growth. They also need to account for currency depreciation, which can erode returns. The rupee has depreciated by around 4-5% over the past year, making valuations even more important.

Foreign investors are already heavily invested in sectors such as private banking, leaving limited room for additional allocations to areas where they have built substantial positions historically. Until they find more attractive investment opportunities in India, there is little reason for them to increase their exposure significantly.

We are already facing inflationary pressures because of high crude prices and the possibility of El Niño affecting agricultural output. Do you see inflation as a major risk for the markets right now, or are there bigger issues to address?

Supply-side shocks do not necessarily cause structural inflation. They are often temporary and tend to correct over time. The more important structural issue is currency depreciation. Supply-side inflation can ease relatively quickly. Commodity prices may rise sharply and subsequently correct, but that is not necessarily the underlying structural problem.

How do you see these factors affecting the markets?

The impact is not fully reflected in the market because yields have not risen proportionately. Individuals may feel that their personal inflation rate is around 10-12%, while yields are closer to 7%. As a result, investment returns may not adequately compensate them for the inflation they experience.

This also helps explain the substantial flows into small- and mid-cap funds. Investors seeking higher returns may find that large-cap companies are not delivering sufficient growth to justify significant price appreciation. Small- and mid-cap companies, on the other hand, offer greater perceived growth opportunities, attracting capital even at higher valuations.

How do you view the current IPO pipeline? We have seen strong subscription numbers for large IPOs recently, even though the broader market has been relatively subdued. What explains this contrast?

The amount of money in the system is relatively fixed, although it may be growing by around 5-7%. Capital is simply moving from one pocket to another. Money is flowing out of the secondary market and into the primary market through IPOs, QIPs and other fundraising activities. Investors are reallocating capital from listed stocks, which can be sold relatively easily, into other segments of the market. This assumes significance as there are nearly ₹2 trillion worth of Sebi-approved IPOs in the pipeline. Then there are nearly 130 IPOs worth over ₹3 trillion that have been filed with Sebi and are waiting for approval.

It has been more than a year since you began operations. What have you seen so far?

When we started, we were clear that we would follow the distributor-led model rather than the direct route. We have not faced the redemption concerns that often come up in the industry because our distributors take care of clients. During uncertain times, like now, investors need someone to guide them and this model has worked well for us.

Initially, we were hesitant about setting up offices, but we realised that tier 2 and tier 3 locations require a strong local presence and personal interaction. Opening offices in smaller cities has helped us build scale. Also, we launched a dozen mutual fund schemes in our first year along with a specialized investment fund (SIF).

You have been encouraging people to become mutual fund distributors. How does participation look now?

We have trained 20,000 distributors so far. It is still low in the total pool of MFDs but it will increase. When we started training them we realized 90% of the distributors did not have websites or a LinkedIn account. Most relied primarily on Facebook. These training programmes helped them build their digital presence.

We also launched a ‘Lite’ course for certified financial planners. The traditional CFP programme typically takes 18-24 months to complete and can be expensive for smaller distributors. Our programme focuses on practical skills that are often not covered in the NISM (National Institute of Securities Markets) curriculum, such as conducting portfolio reviews and implementing asset-allocation strategies. We are actively working towards improving various aspects related to MFDs, including reach, penetration, skillset and service quality that would finally benefit the vast investor community.