(Photo: iStockphoto)
(Photo: iStockphoto)

Reading mutual fund numbers right

  • In some rare cases monitoring month on month performance still serves
  • AMFI changed the format of releasing monthly figures in April this year owing to the re-categorisation of mutual fund schemes

MUMBAI : How often do you see a sharp downfall or uptrend in the monthly net-inflows of mutual fund schemes? In June this year, debt-oriented schemes witnessed an outflow of 1.71 lakh crore, of which 1.52 lakh crore was from liquid funds. “This is a usual quarter-end phenomena where the industry witnesses temporary redemptions from liquid funds," said NS Venkatesh, chief executive, Association of Mutual Funds in India (Amfi).

It’s not just this month but you might be coming across such numbers on a regular basis; but how should you read them? Here’s how you should look into the numbers:

Amfi changed the format of releasing monthly figures in April this year owing to the re-categorisation of mutual fund schemes. Securities and Exchange Board of India (Sebi) re-categorised the mutual fund categories allowing the funds only one scheme per category. Sebi specified 36 categories of mutual fund schemes—amcs were not allowed to offer two schemes with identical investment mandates under different names.

One category is allowed to have only one scheme. “This is helpful for investors as they can now have a proper assessment of performance of their investment vis-à-vis the benchmark index as well as the peer group," said Nitin Shanbhag, senior group vice president – investment products, Motilal Oswal Private Wealth Management. From April 2019, Amfi started releasing the data as per the categories specified by SEBI. “When it comes to looking at these numbers on a monthly or yearly basis from a decision-making point of view, it may be more significant for industry players in most cases than retail investors. What retail investors can look at is the size of the industry, how much of that is driven by market movement and how much by the flows," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

In some rare cases monitoring month on month performance still serves. “Month on month performance can be monitored if investments are being made for the short term which is less than a year, typically funds such as liquid funds, ultrashort term funds and arbitrage funds," said Shanbhag. Month-onmonth change may also be due to periodic factors. “A month-on-month fall or rise reflects a change in investor sentiment or change in seasonal factors such as tax saving investments that come towards the end of the financial year," said Jason Monteiro, VP - mutual funds research, Prabhudas Lilladher. He says, for example, equity fund inflows averaged just about 5,000 crore- 6,000 crore between May 2014 and October 2016. However, from November 2016 to October 2018, mutual funds inflows remained strong peaking to as much as 20,000 crore in August 2017 and averaging around 10,000 crore over the same period. This sudden rise in inflows, which can be noticed by looking at year on year numbers, can be attributed to the financialisation of savings due to demonetisation and AMFI’S campaign – ‘Mutual Funds Sahi Hai’, which was launched in March 2017, among other factors.

“Analysing y-o-y change in inflows can be highly volatile as it amplifies several variables like sentiment, increase or decrease in household savings, investor’s perception of risk, penetration of mutual funds etc. The impact of these variables is not very noticeable in the MoM change in inflows," said Monteiro.

Month-on-month trends reflect the trends that exist more in the shorter term. “We chart the numbers over a one-year period to see how the trend of inflows has changed. For example, under equity mutual funds, inflows have dropped from around 10,000 crore (May to October 2018) to about- 5,000 crore (February 2019May 2019) currently. This shows that investors are turned cautious of the market. However, on the positive side, inflows through SIPS has remained strong, rising to about 8,200 crore in May 2019 from 7,304 crore in May 2018," said Monteiro.

Even when comparing on a year on year basis, you may have to compare them within a particular time band if any major events had occurred. “It may not be prudent to compare year on year rise or fall or compare inflows within a particular time band. Over the years, we have observed that markets are driven largely by sentiments or major events in the short term. In such a scenario, it may be more advisable to compare inflows pre or post-election or pre/post NBFC crisis. Markets have different underlying factors at different point in time," said Devang Kakkad – head research, Equirus Wealth.

This data gets released every month but it comes with a month’s lag. “It is a lag indicator hence it may not be effective to decide your future," said Dhawan. However knowing how to read the numbers is still essential. “In the fixed income section, it is important for you to know that corporates and institutional investors dictate the inflow and outflow. So if there is a sudden volatile situation, you should know that it might be completely seasonal due to advance tax season, balance sheet publications or many others," he said.

For equity and hybrid schemes, there are two parts: SIP investments and lump sum. “SIP investments tend to be stable and give an indication that more and more investors are investing in them. When it comes to lump sum investments, such numbers act as contrarian indicators. For example, recently the inflows in small and mid-caps had risen but doesn’t mean you should invest in them too. It is always better to invest in the market when the market is cheaper and there is negative news flow," Dhawan added.

There might be many ways than one to interpret these numbers. It is always prudent to consult your advisor before making any investment decisions basis any trends or numbers.

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