Mid, smallcaps drive equity MFs in Dec. Why invest in mutual funds in current volatile markets?

Equity mutual funds recorded an inflow of over ₹7,300 crore in December driven by huge contributions from small-cap and mid-cap funds. On the other hand, the debt market recorded an outflow as liquid funds witnessed a heavy selloff. Overall, in the year 2022, the returns in the mutual funds market have been subdued to negative due to volatile markets. However, experts believe that the latest volatile market is a good opportunity for investing in mutual funds to hedge impressive returns in the next 3-5 years.

As per AMFI data, inflows in equity mutual funds stood at ₹7,303.39 crore in December. Major contributions were from small-caps and midcaps which recorded inflows of ₹2,244.77 crore and ₹1,962.26 crore respectively. In November, inflows in equity MFs were at ₹2,258.35 crore.

On equity MFs, Gopal Kavalireddi, Head of Research at FYERS said, "With persistent volatility in stock markets and the performance gap opening up between large-cap funds and small & midcap funds, investors are now opting for value plays. Smart investors continue to opt for index funds and ETFs to counter the volatile markets."

Meanwhile, Akhil Chaturvedi, Chief Business Officer, of Motilal Oswal Asset Management Company added, "Equity funds saw a jump in net inflows to 7.3k crores in December from 2.2k crores in November. This was led by increased flows in Mid & Small cap categories which after the recent fall have started to look attractive in terms of valuations. We are also seeing the highest inflows in our Midcap fund in line with the overall industry."

However, in December, debt-oriented schemes posted an outflow of ₹21,946.73 crore with liquid funds clocking an outflow of ₹13,852 crore. In November, the inflow in this market was around ₹3,668.59 crore with liquid funds registering an outflow of ₹34,276.44 crore.

On the other hand, hybrid schemes recorded an inflow of ₹2,255.26 crore driven by multi-asset allocation fund which saw an inflow of ₹1,711.42 crore.

Index funds and other ETFs recorded an inflow of ₹6,736.52 crore and ₹8,788.45 crore in December. While an inflow of ₹146.07 crore was recorded in funds of funds investing overseas. The Gold ETFs market saw an outflow of ₹273.19 crore --- expanding from an outflow of ₹194.74 crore in November. Overall other schemes garnered an inflow of ₹15,397.85 crore in December versus an inflow of ₹10,394.07 crore in the previous month.

Overall, the inflow in the mutual funds' industry stood at ₹4,491.47 crore in December ---- sharply down from an inflow of ₹13,263.56 crore in November. In December, strong inflows in equity MFs, index funds, and other ETFs contributed to the overall market.

On overall MF performance, Kavalireddi said, "this positivity was negated by net outflows of ₹21,946 crore from the debt category, possibly due to year-end advance tax payments and redemptions. Liquid funds saw a net outflow of Rs13,852 crore. 14 out of the 16 categories under the debt schemes witnessed negative net flows."

As of December 31, 2022, the asset under management (AUM) stood at ₹39,88,735.37 crore, an increase of 5.7% in the current year 2022.

On AUM, Kavalireddi said, "this low change can be attributed to uncertainty in stock markets, and changing interest rate scenarios affecting the business environment at large. Understandably, investors have been in step with these changes by reallocating their investments between equity, debt, and hybrid schemes.”

For the full year 2022, FYERS data showed that total net flows into all mutual funds came in at ₹71,443 crore, with positive inflows into equity schemes ( ₹1.61 lakh crore), Index funds & ETFs (Rs1.65 lakh crore) and negative inflows into debt schemes ( ₹2.5 lakh crore) collectively from the open and closed-ended categories.

Kavalireddi said, 2022 has been a year of price and time consolidation for stock markets; hence, the returns for many mutual funds would be subdued and even negative.

However, Kavalireddi suggests investors remain disciplined and continue with their investments in a systematic manner.

He added, "the current environment provides excellent entry points for passive and active investors to get excellent returns over the next three to five years."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.