Large-cap MFs, Index Funds to attract flows as markets pick pace: Analysts

Gross inflows into active equity mutual fund (MF) schemes dipped 34% month-on-month (MoM) to Rs 25,400 crore in April

As markets navigate through global growth uncertainty, analysts expect flows into index funds or large-cap mutual funds to outpace other offerings in months ahead.

This could be due to the fundamental strength of such companies and cost-effectiveness of index funds, they said, adding that the overall inflows into mutual funds may remain mixed.

“Debt mutual funds, with maturities less than one year, will likely continue to attract flows, as will arbitrage and hybrid funds. In the equity mutual fund space, index funds are likely to remain attractive due to investors' preference for passive investment strategies and the cost-effectiveness of these funds,” said Sahil Kapoor, senior executive vice president, 360 ONE Wealth.

Gross inflows into active equity mutual fund (MF) schemes dipped 34 per cent month-on-month (MoM) -- to Rs 25,400 crore -- in April, pulling the net inflows to Rs 6,480 crore -- their lowest level since November 2022.

In March, the net inflows had scaled to a 12-month high of Rs 20,500 crore, while gross inflows stood at Rs 38,641 crore.

Segment-wise, large-cap MFs clocked inflows worth Rs 52.63 crore in April, down sharply from inflows worth Rs 911 crore in March.

On the contrary, small-cap MFs attracted a net inflow of Rs 2,182.44 crore and mid-cap MFs saw Rs 1,791 crore worth of investments.

“The month of March, typically, has huge inflows as it is the end of the financial year. However, MF inflows remain nervous due to global uncertainty, and high interest rates affecting debt assets,” said George Thomas, fund manager-equity, Quantum Mutual Fund.

Besides, analysts also attribute the decline to no new fund offers (NFOs) in April, flows in the ELSS category experiencing lower flows, some close-ended schemes maturing in April, and seasonally lean month period.

That said, total AUM for the MF industry rose 5.6 per cent MoM to Rs 41.6 trillion in April, led by a monthly increase in AUM for liquid (Rs 79,600 crore), equities (Rs 69,400 crore), income (Rs 36,300 crore), debt funds (Rs 1.06 trillion), and other ETF (Rs 17,900 crore) funds.

Going ahead, analysts believe the future trajectory of MF flows will largely depend on the performance of the market.

“If the markets remain stable, investors could gain confidence and may choose to hold on to their investments rather than engage in profit booking. A lot will, however, depend on how economic indicators and global events pan out,” said Sahil Kapoor of 360 ONE Wealth.

The underlying strength of the domestic economy, Thomas of Quantum MF said, will, however, weigh more than global events. Thus, a broader participation from investors could be in the offing after a couple of quiet months.

“Inflation has begun to moderate and interest rate peaks are behind us. We believe India Inc could see earnings upgrade during H2CY23 or early CY24. This would translate into decent market returns, bringing back flows into the mutual fund industry,” he added.

He prefers large-cap funds over peers as foreign portfolio investors (FPIs), who have significant shareholding in these companies, have returned to the India shores. Besides, the large-cap companies have better earnings visibility, enjoy diversified revenue base, have stable balance sheets, and offer better risk-reward, he said, adding that select mid-caps having similar traits, may do well too.