Equity Mutual Funds See Outflows For Fifth Straight Month As Selling Intensifies
The portrait of Mahatma Gandhi is displayed on an Indian 50 rupee, left, and 2000 rupee banknotes. (Photographer: Brent Lewin/Bloomberg)

Equity Mutual Funds See Outflows For Fifth Straight Month As Selling Intensifies

Equity mutual funds witnessed an outflow for the fifth straight month as redemptions intensified on profit-booking despite benchmarks scaling lifetime highs.

Net outflow from equity and equity-linked mutual fund schemes stood at Rs 12,917.36 crore in November compared with an outflow of Rs 2,724.95 crore in October, according to data released by the Association of Mutual Funds in India. That’s the biggest outflow at least since April 2018, when the AMFI began compiling data in the current manner.

“This is mainly on account of profit-booking. People believe that there is a huge amount of movement in the equity markets and they are trying to take advantage and taking money off the table. The stock market has moved quite quickly upwards, so people are taking profits,” said NS Venkatesh, chief executive officer at AMFI.

First, fears of the impact of the Covid-19 pandemic on businesses and then investors booking profits dragged net investments into equity funds for the past few months. That too when equity markets soared. In November, the Nifty 50 gained 11.3%. The gauge even crossed the 13,000-mark for the first time, erasing all the pandemic-triggered losses, on hopes of a potential Covid-19 vaccine and quicker-than-expected economic recovery. Foreign investors have fuelled the surge, piling a record $9.6 billion into Indian shares in November. The Sensex, too, gained more than 11% last month.

“It’s understandable that people are pulling money out of equity-oriented schemes at this time. From a valuation standpoint, the equity markets look very highly rated. We’re currently at around 32 [times] PE for the Sensex,” said Harshvardhan Roongta, certified financial planner and founder of Roongta Securities. “We have people who called us asking whether to book profits. But our view is that if you don’t need money for the next three-four years, you should stay invested,” Roongta said.

Category-Wise Trend

All types of equity and equity-linked schemes saw outflows, the biggest since the AMFI started releasing granular data in April 2019.

Large caps saw the most outflows among funds. Investors pulled out close to Rs 3,300 crore on a net basis from large-cap funds during the reported month against Rs 550 crore withdrawn in October. These funds have now witnessed an outflow for six straight months.

The selling continued in multi, mid and small caps as well. While investors withdrew Rs 2,842.08 crore from multi-cap funds during the reported month, outflows from mid- and small-cap funds stood at Rs 1,317.15 crore and Rs 1031.23 crore, respectively.

SIP Flows

Contributions through systematic investment plans in November fell to Rs 7,302 crore in November—the lowest since April 2018—from Rs 7,800 crore in October.

“Nothing to worry—that’s because there were holidays towards the end of the month. And all the flows that would have been recorded on those days will be recorded in December. We believe that it would have been more or less close to Rs 7,800 crore if not for the holidays,” Venkatesh said. Mutual funds, he said, added 10.6 lakh new SIP accounts during the month and 7.2 lakh were closed, so there was a net addition of close to 3.4 lakh SIP accounts during the month.

Net Flows

Overall, the mutual fund industry saw a net inflow of Rs 27,194 crore, aided by heavy investments into debt-oriented mutual fund schemes in November. That even offset an outflow from liquid or money market schemes.

Liquid funds, used by companies to park short-term cash, saw outflows worth Rs 8,415 crore in November against an inflow of Rs 19,582.70 crore in October.

Credit risk funds witnessed outflows at least for 20 straight months, albeit at a slower pace. Investors in November withdrew a net of Rs 15.39 crore from such funds. In April 2020, credit risk funds witnessed the highest-ever monthly outflow after Franklin Templeton Mutual Fund wound up six such schemes citing redemption pressure.

With interest rates at record lows, yields especially on lower-tenor instruments are extremely unattractive, according to Roongta. “The returns on overnight and liquid schemes is below 3%, so naturally you’ll see a shift to the slightly higher yielding tenors,” he said. “There is also increased interest in corporate bond funds because there is now a perception that the outlook for credit risk has improved.”

Companies, Roongta said, are not likely to default on debt repayments at the rate that was expected when the pandemic began. As a result, there is a natural gravitation towards higher rated corporate debt because of the yields that are available in that segment.

Assets Under Management

Total industry assets under management increased 5.3% over preceding month to Rs 29.83 lakh crore in November. Equity AUM rose 6.3% month-on-month to Rs 8.3 lakh crore, reflecting the rise in equity markets during the month.

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