(iStock)
(iStock)

Why mutual fund inflows are down even as the markets surge

With the liquidity crisis still unravelling at non-banking financial companies (NBFCs), Mint takes a look at investor preferences and the rationale behind those

Even as the benchmark Sensex touched a record 40,312.07 this month, net inflows into equity mutual funds (MFs) have not rebounded significantly from two-and-a-half-year lows. With the liquidity crisis still unravelling at non-banking financial companies, Mint takes a look at investor preferences and the rationale behind those.

How much inflow did equity MFs see in May?

Net inflows into equity schemes rose 17.5% to 4,968 crore in May from 4,229 crore in April. From a longer-term perspective, this is a low figure. April marked a 31-month low and the improvement in May doesn’t change the picture much. Systematic investment plan (SIP) flows stood at 8,183 crore, marginally lower than the 8,238 crore registered in April. The higher SIP figure compared to the net inflow figure implies that lump sum withdrawals are partially offsetting SIP flows. Industry experts said May did not include much of the post-poll flows. These may rise in the months ahead, especially after the budget in July.

Did investors pick large or small cap MFs?

Mid-cap, small cap and focused funds saw jumps in net inflows. Mid-cap funds saw net inflows of 1,273 crore, up from 491 crore in April; net inflows into small cap funds were 1,416 crore, compared to 956 crore in April. Focused funds saw net inflows of 1,200 crore. Large cap funds saw net inflows of just 53 crore, slightly higher than the meagre 48 crore seen in April. Motilal Oswal chief executive Aashish Sommaiyaa said the proportion of redemptions was higher in large cap funds than mid-cap and small cap funds, keeping the net inflows low. This was because people were booking profits in them.

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Did investors prefer active or passive funds?

Net inflows into index funds surged more than 12 times from 18 crore in April to 220 crore in May. After many years of outperforming benchmark indices, most active funds failed to beat their benchmark indices in the past year. Index funds simply track an index such as the Nifty or Sensex rather than try to beat it. As a result, they have much lower costs, which are known as expense ratios. Index funds have been slowly but steadily gaining popularity among Indian investors and the flow data suggests a potential acceleration in this trend.

What about debt fund flows?

Debt categories perceived as having higher credit risk saw outflows, while those considered “low credit risk" saw net inflows. In the credit risk category, net outflows more than tripled from 1,253 crore to 4,156 crore. Medium duration funds saw net outflows of 2,063 crore, almost four times the figure in April. Net inflows into overnight funds rose to 2,347 crore from 96 crore.

How did hybrid funds fare?

Hybrid funds saw net inflows of 1,266 crore, largely on account of arbitrage funds, in which net inflows were 4,554 crore. Arbitrage funds are mostly bought for their favourable tax position in the short term. Many of the other types of hybrid funds were sold as an avenue of getting regular income. But the failure of these funds to live up to this claim disenchanted a broad section of investors. This led to poor flows into these funds for months.

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