Historically, flows into equity mutual funds have followed a predictable pattern. Whenever the markets are doing well, mutual fun inflows pick up and whenever one-year returns fall into negative territory, flows dry up and even turn negative.
However, unprecedented flows into systematic investment plans (SIPs) of mutual funds have resulted in a rewriting of history. Equity returns have been negative in the past four months. However, net inflows into equity mutual funds remained fairly strong at ₹6,606 crore and ₹6,158 crore in the past two months.
SIP investors, with contributions of a little more than ₹8,000 crore in each of these months, did all of the heavy lifting, while there were net outflows from other types of investors. Mutual fund SIP investments involve monthly contributions, for which investors provide a one-time standing instruction to their banks.
While the pace of increase in SIP flows declined, from about 52% year-on-year six months ago to 21% in January, flows remain strong and have helped support Indian equity prices, even at relatively high valuations.
It remains to be seen at what point this set of investors will finally budge. For now, it is clear that even a year of volatility in returns isn’t enough to unsettle SIP investors and cause them to review their steady stream of investments in Indian equities.