Equity funds gain as MF industry looks up

The Indian mutual fund (MF) industry’s assets under management rose to 10.11 trillion in May 2014, up 7% from 9.45 trillion in April, according to the monthly numbers released by the Association of Mutual Funds in India. This has been on the back of strong sales in equity funds as well as rising equity markets this year.

Assets in equity funds rose to 1.89 trillion in May, up from 1.67 trillion a month ago. Inflows into equity funds worth 99.99 billion in May were the highest since March 2008. This increase was mainly due to new schemes launched and additional inflows in existing schemes. Inflows from new schemes were the highest in the past four years, while the inflows in existing schemes were highest since January 2008.

Six equity schemes were launched in May; the highest in a month so far this year.

Stock markets, too, have risen this year and touched new all-time highs this past week. The rise has mostly been driven by the expectations that the newly elected government will rekindle economic activity and growth.

Since the beginning of this year, the Sensex has gained 20.33%; foreign institutional investors have bought $9.18 billion worth of shares from local equity markets so far. The gains have been widespread as the S&P BSE 100, BSE 200 and BSE 500 indices also recorded new highs.

Most experts, however, claim that the number of retail investors in equity funds is still not enough. “This (10 trillion AUM mark) is just another statistic. Equity funds are just under 20% of the overall AUM. One would like to see it go up to 40% of the overall AUM,” said Arvind Sethi, chief executive officer, Tata Asset Management Co. Ltd.

Investors appear to have turned their back to gold exchange-traded funds (ETFs)—3.41 billion went out of this segment of MFs in May; the highest outflow in the past eight months. According to data released by the London-based World Gold Council, imports plunged 52% in the first quarter from a year earlier. This was due to a slump in in-bound shipments after the government increased the import tax thrice last year and introduced rules requiring importers to supply 20% of their import back for the purpose for export. These steps were taken to reduce a record current account deficit and reverse a slump in the rupee.

But does outflows from gold ETFs mean that investors are switching to equity funds? “Part of the money is finding its way into equity funds. Just like, say, money is moving out of long-term bond funds into short-term bond funds at present,” said Puneet Chaddha, chief executive officer, HSBC Asset Management (India) Pvt. Ltd.

A number like 10 trillion AUM may be nice to look at and a milestone from the MF industry’s point of view, but it doesn’t mean much to the retail investor. It is, however, a gentle reminder that equities can go in both directions, up and down. If the past six years were marred by extreme volatility, the buzz in the marketplace now suggests that good times lie ahead.

Retail investors, however, should not get swayed by the current market sentiment and stick to facts, one of which is that in the long run, equities deliver and outperform all other asset classes. Therefore, it’s best to have equity as part of your asset allocation.