Inflows Into Equity Mutual Funds Fall By Nearly Half In April
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

Inflows Into Equity Mutual Funds Fall By Nearly Half In April

Investments into equity mutual funds fell to the lowest in four months even as the benchmark indices recovered from the worst plunge in more than a decade.

Net inflows into equity and equity-linked schemes declined 47 percent over the previous month to Rs 6,213 crore in April, according to data released by the Association of Mutual Funds in India. That snapped a three-month gaining streak.

This came even as Indian benchmark indices recorded their largest gains in more than a decade in April. The NSE Nifty 50 rose nearly 15 percent last month, the highest since May 2009, even as the nationwide lockdown to prevent spreading of the coronavirus pandemic stalled businesses. The gauge, however, has fallen more than 23 percent year-to-date.

“Despite subdued economic scenario, retail Investors are seen to be continuing with their goal-based investment discipline, displaying mature investment conduct, as seen from month-on-month rise in retail AUMs, as also marked rise in the number of SIP accounts,” said NS Venkatesh, chief executive officer at AMFI. “Slowing redemptions in retail and overall mutual fund schemes is indicative of rising investor preference for mutual funds as a long-term wealth creation.”

According to Sunil Subramaniam, managing director and CEO at Sundaram Mutual Fund, equity sales were down mainly due to the market correction and reduced distributors’ activity amid the lockdown.

Inflows into equity mid caps fell to the lowest since AMFI started releasing granular data from April 2019, while that into small caps jumped more than twofold. Net investments in multi and large-cap funds also fell.

“The net positive flow into equity funds is continuing primarily on the back of robust SIP flows. It’s a sign of maturity that there has been no panic redemption from investors in equity funds in spite of volatile markets,” G Pradeepkumar, CEO at Union Asset Management Company Pvt. Ltd., said.

“The redemption in fixed income funds, especially credit risk funds, was widely expected given the developments at one of the mutual funds,” Pradeepkumar said. But that, according to him, seems to have subsided on the back of prompt action from the regulators and the indications are that no large-scale redemption is likely in the immediate future.

Contribution through systematic investment plans fell 3 percent over the preceding month to Rs 8,376 crore in April. But investments into such schemes stayed above the Rs 8,000-crore mark for 17 straight months.

SIP book was down as new customer investment was hampered and maturing SIPs were not renewed, Subramaniam said. “But no panic pre-closures in evidence.”

“Also, arbitrage funds appear to be gaining popularity as a short-term investment option, given the relatively low risk and tax efficiency for those in the higher tax brackets,” Pradeepkumar said.

Overall, the industry, however, witnessed an inflow of Rs 45,999.5 crore compared with a net outflow of Rs 2.12 lakh crore across all schemes in March. That’s despite a sudden spike in redemptions after Franklin Templeton Mutual Fund wound up its six credit risk funds citing “illiquidity” caused by the pandemic.

Credit risk funds have been witnessing an outflow for at least a year. In April 2020, investors pulled out Rs 19,239 crore—the highest-ever monthly outflow.

“The debt market was rocked by a catastrophic event when Franklin Templeton closed six of its debt schemes. The implications of which are far deeper when compared to the IL&FS crisis which devoured lakhs of investments by Indian investors. The cascading effects of this closure can be seen in the debt category that has maximum exposure to credit risk securities,” Tarun Birani, founder and CEO at TBNG Capital Advisor, said. “A substantial jump in outflow for credit risk fund certainly proves the lack of faith of investors in credit risk securities.”

Subramaniam said while other fixed income schemes actually showed a net outflow of Rs 16,549 crore, this is actually less than the March number of Rs 35,155-crore outflow. “If you remove Franklin’s impact on the credit schemes, rest of the fixed income was actually positive. This was due to strong inflows into banking and PSU debt (Rs 6,561 crore) and corporate bond funds (Rs 4,169 crore), reflecting a flight to safety.”

According to AMFI’s Venkatesh, “In the prevailing scenario of low inflation, expected softer interest rate regime, mutual fund industry would see a heightened interest in fixed income schemes, especially low-duration schemes.”

The liquid funds—schemes are used by companies to park short-term cash—also witnessed an inflow of Rs 68,848 crore. That compares with a Rs 1.1-lakh-crore outflow in March.

The bounce back in liquid schemes, Subramaniam said, is due to a reversal of March year-end outflows.

Total assets under management fell to Rs 23.52 lakh crore in April from Rs 24.70 lakh crore in March. Total equity assets dropped to Rs 6.11 lakh crore from Rs 6.5 lakh crore in the preceding month.

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