Abhisek Roy Choudhury sees more glitter in Indian stock funds than in gold.

The 33-year-old resident of Kolkata, who saves about Rs26 000 ($409) a month, says he will invest it all in equity funds over the coming months and also move into them his gold holdings valued at Rs75 000, as bullion no longer appeals to him. Record inflows of Rs370-billion into stock funds in the quarter ended June show he is not alone.

“I’d rather put it where I get a better return,” says Choudhury, a training manager in the financial services industry, who rarely buys stocks other than through mutual funds. “I’ll not buy any property for the next four years as corporate earnings are expected to revive by the year end.”

Individual investors like Choudhury are a force behind mutual funds’ growing heft in India’s investment landscape, as an economy that grew at an average annual rate of 6.4% in the past three fiscal years boosts incomes. Optimism that lower interest rates will help revive earnings growth is pulling investors toward stocks, which have traditionally been shunned in a country known for its penchant for gold.

The trend has gathered force since Prime Minister Narendra Modi’s Bharatiya Janata Party swept to power in May 2014. Indian equity funds attracted inflows of as much as Rs1.04-trillion ($16-billion) in the past 14 months, surpassing the Rs934-billion they received between January 2002 and April 2014.

Gold exchange-traded funds, meanwhile, had total outflows of Rs2.3-billion in the quarter to June, according to data from the Association of Mutual Funds of India, or AMFI. Gold prices in Indian rupees have dropped 7.2% over the past year, dulling investment appeal in a country that is the metal’s second-biggest consumer in the world.

The shift toward equities “is the beginning of a long-term secular trend”, says Navneet Munot, chief investment officer at SBI Funds Management, which has about $13.3 billion in assets. “Indian investors are significantly underweight domestic equities. Saving rates are likely to go up, and more savings are likely to flow into the financial markets.”

The inflows equity funds received last quarter are more than four times the amount they received in the same period a year ago, according to AMFI data. Purchases made with those funds helped counter net sales of Rs11.7-billion during the period by foreign funds, which are a bigger constituent of the local market than mutual funds.

External Factors

The S&P BSE Sensex, this year’s worst performer among benchmark indexes in the four largest emerging markets, dropped 0.6% in the three months ended June 30.

Overseas investors owned more than a quarter of the companies on the S&P BSE 200 index as of March 31, while the ownership of Indian mutual funds and insurers was less than 10%, Kotak Institutional Equities said in a May report.

While purchases by local institutions have helped the Sensex rally 5% from a seven-month closing low on June 11, their ability to attract more funds may depend on factors over which domestic investors have little influence.

“Flows can taper off if monsoon rainfall is weak or global uncertainty, be it in Europe or the US, persists,” says V Balasubramanian, head of equities at Mumbai-based IDBI Asset Management, which has $880-million in assets.

Reserve Bank of India governor Raghuram Rajan cut borrowing costs for a third time this year on June 2, and said a further reduction would depend on whether rains can check food costs, which account for almost half of the nation’s consumer inflation. The June-to-September monsoon season brings most of India’s rainfall, on which some 830-million people depend for their livelihood.

$400-Billion

Sensex company earnings will also be watched after they declined for two straight quarters.

Even so, Morgan Stanley sees equity investments accelerating further, as local households’ stock holdings of $400-billion pale in comparison with the $1.1-trillion in fixed deposits at banks. Indian families will probably buy $300-billion in equities over the next decade, six times as much as they did in the past ten years, it said in a May report.

“Domestic investors seem to be gradually moving from physical assets to financial assets,” says Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments, which has $70-billion in assets. “We will see more inflows if growth comes back by the December quarter and if corporate earnings revive.”