Equity mutual funds drop to multi-year low even as net inflows at 3-year high. Full details

Inflows in the mutual funds' industry touched the highest level in three years to over ₹1.21 lakh crore in the first month of FY24. It would be a strong appetite for debt-oriented schemes that have driven the performance of the market with an inflow of a whopping ₹1.06 lakh crore in the month with 60% of the total coming from liquid funds. But the shocking part of April's performance would be the inflow in equity-oriented schemes which dropped by nearly 3 times on a month-on-month basis.

As per AMFI's data, debt-oriented schemes recorded an inflow of ₹1,06,677.36 crore in April 2023 compared to an outflow of ₹56,884.13 crore. Debt schemes witnessed an outflow for most of FY23.

Gopal Kavalireddi, Head of Research at FYERS said, "Debt mutual funds witnessed strong flows of Rs.1.06 lakh crore, with 60% of flows accounted by liquid schemes. Ultrashort and money market funds accounted for another Rs.24,500 crore."

The inflows in debt funds enabled the industry to cross ₹41 lakh crore mark for the first time.

Viraj Gandhi, CEO, of SAMCO MF said, this segment attracting such inflows despite LTCG being taken away in the previous month is a strong indication of what is lying ahead.

Gandhi added, "The current interest rate cycle showing signs of peaking out and inflation data showing some relief, must be the reason of such high traffic towards debt-oriented schemes."

Along similar lines, in case of the rise in debt funds, Himanshu Srivastava, Associate Director - Manager Research, Morningstar India explained, after meeting the tax liabilities of the last financial year in March, corporates would have parked their excess investible money in liquid fund and ultra-short duration fund categories, for a short period, thereby leading to huge inflows in these categories.

Moreover, Srivastava added, investors would have preferred to invest in categories with shorter maturity profiles such as low duration, money market, and short duration funds since there is still some degree of uncertainty over the direction that RBI could take with respect to interest rates going ahead. Floater funds also received good net inflows given their ability to withstand changing interest rates scenario.

On the other hand, equity-oriented schemes witnessed an inflow of a meager ₹6,480.29 crore in April, steeply lesser than an inflow of ₹20,534.21 crore. The latest inflow is an upside of 59% year-on-year but down by 68% quarter-on-quarter. This performance comes as a surprise as it is despite indices like Sensex and Nifty 50 moving up.

In April, Nifty surged by 3.92% while the broader Nifty 500 was up by 4.57%. Sensex as well gained by 3.6%.

On equity funds performance, Mayank Bhatnagar, Chief Operating Officer, FinEdge said, large-cap funds were hit the most, witnessing a drop from 911 Crores in March to just 53 Crores in April.

However, Gandhi added, nevertheless, midcap and Smallcap schemes showed YoY growth of 15% and 27% respectively, which was quite healthy compared to overall equity-linked schemes which degrew significantly.

Also, Srivastava said, though flows across equity categories have reduced since the turn of the year, none of the categories witnessed net outflows except the focussed equity category which saw ₹131 crore erode from its coffers. Given the sharp uptick in the markets seen recently, investors may have chosen to be on the sidelines and wait for a more opportune time to invest into equities.

But why have equity-oriented schemes taken a hit? Sriram BKR, Senior Investment Strategist at Geojit Financial Services explained that the dip in net flows could be attributed to a sharp drop in gross purchases month-on-month at -34% and a steady rise in redemptions at 9% month-on-month.

Geojit's strategist added, "The rise in valuations could have made investors stay away from fresh investments or take off some money to take advantage of the rally. Debt funds had a net inflow of Rs. 1.05 lakh crore, Debt ex-liquid & overnight had inflows of 36377 crore, 5th most in 3 years, and hybrid funds saw net inflows of ₹3,317 crore. Also, the data for Apr'23 shows that investors preferred fixed income as a preferred choice of investment than equity-oriented options."

Furthermore, hybrid schemes recorded an inflow of ₹3,316.99 crore in April 2023, while solution-oriented schemes saw an inflow of ₹193.57 crore, and other schemes posted an inflow of ₹6,945.22 crore.

Overall, the AUM industry saw an inflow of ₹1,21,434.81 crore. This is a strong start for FY24, considering in March month there was an outflow of ₹19,264.26 crore recorded.

As of April 30, 2023, AUMs net assets stood at ₹41,61,821.62 crore.

Going ahead, Srivastava said, "Conducive market environment during the month of April saw positive performance among the major indices. FIIs too have been buying into Indian equities thus contributing to the market performance. A steady decline in crude oil prices, earnings of major companies on expected lines, a potential pause on further interest rate hike and commentary by the IMF suggesting the Indian economy is expected to be grow at the fastest rate in the world were some of the positive drivers of the market during the month gone by."

For May month's performance, Kavalireddi said, " With the continued support of FIIs ( ₹12,265 crore inflow in just eight trading days) and retail, May could follow the previous month in delivering good returns to investors. While the Q4 earnings season is underway, with some companies continuing to experience lower demand and pricing pressure, the uptick is visible across many sectors."

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.