Asset management companies (AMCs) would wish their fortunes were not linked to the ebbs and flows of the market. In the past few months, inflows into mutual funds have ebbed, rather than flowed. As such, AMC stocks are meandering, undershooting the broader markets.

In the last four months, net inflows into equity funds have been shrinking. From more than 12,600 crore in October 2018, net equity inflows have dipped to around 5,100 crore. Inflows to equity funds depend largely on the performances of schemes and market sentiment.

Mutual fund performance in the past year has been all over the place. A few large-cap funds have clocked some gains, but most mid- and small-cap funds have seen negative returns. All but a handful failed to outstrip the bellwether indices. This raises concerns about inflows into equity funds, say analysts.

“Lump-sum investors like to take opportunistic shots at the market. Such opportunities have not been seen. Most investors who make bullet investments are redeeming at the moment. SIPs are structural investments by nature. There have been some cancellations here, but unless the market goes into a tail-spin it will not impact SIP inflows. That should keep the boat steady, but not enough to move the AUM throttle higher in a huge way," said an analyst on condition of anonymity. SIP is systematic investment plan and AUM is assets under management.

Second, exchange-traded funds (ETFs) and index funds, which are low-cost index trackers, have been gaining traction in the overall AUM sweepstakes. These funds made up about 14.46% of equity funds under management in February. Five years ago, that figure was 0.95%. If the trend gains momentum, the quantum of fees that fund houses make through managing active funds could shrink.

Lastly, a larger concern is the cut in the total expense ratio by the regulator, which kicks in from 1 April. Some bigger fund houses could see up to a 25% reduction in their asset management fees. Fund houses have the option of cutting distributor fees on their already built AUM books. However, much hinges on how much of the burden asset managers can actually pass on.

Nevertheless, there may be a bigger impact on new fund inflows. Equity funds are pushed products. Hence, higher distributor commissions actually drive equity fund penetration. With lower commissions, distributors may not be inclined to drive more equity fund sales.

To top it all, the challenging markets also leave fund flows susceptible to volatility. Analysts reckon that during the election season, investors may remain on the fence rather than invest in the market. As a result, they are worried that AMCs may not be able to hold on to their Ebitda (earnings before interest, tax, depreciation and amortization) margins.

Both HDFC Asset Management Co. Ltd and Reliance Nippon Life Asset Management Ltd have seen their price-earnings multiples correct marginally to 30.1 times and 21.26 times, respectively. However, analysts reckon these valuations could come further under the scanner, unless margins sustain on stable equity flows and fund management fees.