Covid-19 lockdown: MF equity flows could see a 10-15% dip in March

Participants say flows have shown resilience despite shutting of offline channels

The Rs 27-trillion mutual fund (MF) industry could see some slowdown in equity flows in March. Industry estimates (up to March 27 for 80 per cent industry assets) suggest equity flows for the industry dipping 10-15 per cent to Rs 9,100 crore to Rs 9,700 crore.

Industry players say flows have shown resilience in a highly volatile month, which also saw the closure of MF branch offices because of the coronavirus-induced lockdown.

Compared to the last 12-month average of Rs 6,984 crore, estimated equity flows are still 30-38 per cent higher.

Monthly flows for the industry are usually released with a lag of seven-10 days.

“The flows have been robust, even though there is some decline. The current sell-off has also given fund managers an opportune time to deploy cash in the markets, with several stocks in the mid- and small-cap segments trading at attractive valuations,” said a fund manager.

Further, industry participants suggest that flows have stayed strong even during the lockdown period, though offline channels were suddenly shut because of the countrywide lockdown. According to industry estimates, equity schemes garnered net flows of Rs 1,150 crore last week, when the three-week lockdown was made effective by the government.

“The digital channels have allowed flows to continue despite the challenges. Distributors, as well as individual investors, have efficiently used digital channels to make the investments,” said another fund manager.

 

 

Digital platforms have also seen increased traction. “We have seen lump sum flows increase. Existing investors have increased allocations in systematic investment plans on our platform. While a section of new investors coming from offline to online is limited, there has been pick-up in do-it-yourself investors, who want to track and take quick decisions online,” said Harsh Jain, co-founder, Groww, Bengaluru-based digital platform.
 

Experts say high net-worth investors could have heavily contributed to redemption requests to book losses in the year-end period for some relief on taxation.

Equity-linked saving schemes (ELSS) — which are used by investors for tax-related savings — saw sizeable flows of Rs 1,075 crore in March, rising 23.4 per cent over the previous month. Experts say ELSS could continue to see decent flows as the government has extended the deadline to complete investments till June 30, from March 31.

However, arbitrage funds could see Rs 25,000 crore to Rs 30,000 crore of net outflows in March. Experts say this can be attributed to futures starting to trade at discount to cash market prices due to higher market volatility.

“This temporary dislocation in the markets had weighed on the returns of arbitrage schemes,” said an executive of a fund house.

Meanwhile, debt schemes are likely to have seen much higher redemptions, with corporates looking to dip into their investments to deal with payment obligations as daily operations have been disrupted amid lockdown.

Redemption pressures had spiked in debt schemes with close to Rs 1 trillion of investments getting pulled in the week prior to the announcement of the lockdown.

The fear of redemption pressures in debt schemes was compounded due to the anticipation of flows in the quarter-end and year-end period. 

This had prompted the MF industry to write to the Reserve Bank of India (RBI) to provide liquidity support. The RBI last week announced Rs 3.74 trillion of liquidity enhancement measures, which entailed banks would also need to absorb the supply pressures coming into the corporate bond market by MFs and non-banking financial companies.

“This move should help fund houses to deal with redemptions. The debt market is now seeing improved liquidity, following the RBI’s intervention,” said a debt fund manager.