Equity Mutual Funds Witness Net Outflows In July

Equity mutual funds in India witnessed their first monthly net outflows in more than two years as investors continue to cash out to tide over the pandemic-related credit crunch even as the stock market looked past dire economic forecasts and mounting virus cases to jump 50% from its March low.

Equity and equity-linked schemes witnessed an outflow of Rs 2,480 crore in July compared with an inflow of Rs 241 crore in the previous month, according to data released by the Association of Mutual Funds in India. Net investments into such schemes have been declining for the last three months.

The outflows come despite a 7.5% jump in the Nifty 50 Index in July. Indian equity indices have recovered bulk of the losses after the March selloff, the worst in more than a decade, triggered by the virus freeze on hopes of a revival in the economy after lockdown curbs were eased and a Covid-19 vaccine.

“The uncertainty about the coming times and on-ground reality related to salary cuts, job losses, along with profit-booking and some loss of confidence continue to weigh on domestic equity funds,” said Prableen Bajpai, founder of FinFix—that specialises in financial research and wealth management.

“Nine out of the 10 equity fund categories witnessed net outflows compared to four in June. But international funds, reported separately, witnessed net inflows, which were double vis-à-vis June figures,” Bajpai said. “Although this segment has a small AUM, the trend does indicate that investors are somewhere looking to diversify into global markets, especially the U.S., with recency bias playing a part.”

According to Swarup Mohanty, chief executive officer and chief investment officer at Mirae Global Investment (India), majority of growth on the equity side happened during 2015-2017. Investors, according to him, would have come in with a long-term perspective but very few would have anticipated the kind of turmoil seen in March. “And we're seeing this complete one-way flight to safety. It's not the first time that this has happened in the industry, we've seen situations like this.”

All segments witnessed an outflow in July. While investors pulled out from large- and multi-cap schemes for the second straight month, mid and small caps witnessed their first ever outflow since AMFI started releasing granular data in April 2019.

Contribution through systematic investment plans remained below the Rs 8,000-crore-mark for the second straight month. Net investments into such schemes stood at Rs 7,831 crore in July compared with Rs 7,927.11 crore in June.

Still, the overall mutual fund industry witnessed a net inflow of Rs 89,813 crore across all segments in July compared with an inflow of Rs 7,266 crore in the previous month. That was mainly led by net investments in the liquid or money market category and the Rs 11,024 crore raised through the Bharat Bond Exchange-Traded Fund.

Investors pumped in Rs 14,055 crore into the schemes used by companies to park surplus cash for the short term. That compares with the Rs 44,226-crore outflow from such schemes in June.

Credit risk funds continued to witness an outflow. In July, investors pulled out Rs 670 crore. In April, credit risk funds witnessed the highest-ever monthly outflow after Franklin Templeton Mutual Fund wound up six such schemes citing redemption pressure.

Still, NS Venkatesh, chief executive officer at AMFI, said debt mutual fund schemes are an attractive proposition, with benign interest rate environment leading to better yields and superior risk management by the fund managers.

Agreed Harsh Jain, co-founder and chief operating officer at Groww. Under the debt category, ultra-short duration, low duration and short duration sub-categories have logged good inflows, he said. That shows investors have become comfortable investing in debt funds again after the big fiasco in April this year. The Reserve Bank of India’s measures to instill confidence in debt fund investors, he said, seem to be showing results even as equity and hybrid categories saw net redemptions in July.

Total assets under management rose 5% month-on-month to Rs 27.28 lakh crore in July. Total equity assets increased 6% to Rs 7.29 lakh crore in the reported month. That mainly came on the back of the stock market rally.

The outlook on the mutual fund flows for the rest of 2020-21, according to Venkatesh, will continue to be encouraging, with rising digital-driven inflows, accommodative stance on interest rates by the RBI, improving macroeconomic environment and a pickup in economic activity on the back of easing of lockdown.