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High volatility and a sharp drop in stock prices have inhibited domestic retail investors, with net inflows into equity mutual funds (MFs) falling to a 20-month low in January 2016.
For the first month of this year, net inflow into equity MFs was Rs 2,914 crore. On an absolute basis, the flow is not small. But, it is less than 40 per cent of the monthly average inflow in 2015, which was about Rs 7,550 crore.
The inflow in equity MFs has been drying up amidst a meltdown in stock prices last month. The benchmark Sensex fell 4.8 per cent in January in its worst performance since August 2015.
Healthy inflow into mutual funds is critical, as they have been providing a strong counterbalance to the foreign investor sell-off.
So far this year, foreign institutional investors (FIIs) have pulled out Rs 11,000 crore from Indian markets. Mutual funds have softened the blow from such a sell-off by pouring in nearly Rs 6,500 crore into stocks during the same period.
However, if the pace of inflows continues to fall, fund managers’ legroom to invest in the stock markets may reduce.
“Inflows in equity segment have definitely slowed down as January was quite an unusual month with sharp volatility in the stock prices. During such times, it is a natural tendency of investors to pause for some time and hold back their investments,” said Milind Barve, managing director, HDFC Mutual Fund, the country’s largest fund house.
The fall in the market last month led to erosion of assets under management (AUM) of equity schemes. The equity AUM stood at Rs 3.84 lakh crore as on January 31, down from Rs 4.05 lakh crore at the end of previous month.
A lot of fund managers have been using the recent correction as a buying opportunity.
“The recent correction in the markets is due to FII selling. Our belief is crude oil prices may bottom in the near term. The fall has presented us with a good buying opportunity in equities as per our investing framework,” said S Naren, chief investment officer (CIO), ICICI Prudential Mutual Fund, the second-largest fund house in the country.
Gross redemptions from equity schemes remained high at about Rs 8,000 crore in January.
“The enthusiasm among retail investors about stock market investing has certainly taken a hit. Markets run on hopes and there is a decline in investors’ optimism over the last few months,” said Dhirendra Kumar, chief executive officer, Value Research, a fund mutual-tracking firm.
Industry players do not rule out further reduction in inflows, but say investments coming through systematic investment plans (SIPs) give them lot of comfort that flows don’t complete dry out.
“Flows through SIPs are quite steady and I do not think it will stop. Investors need to be patient and have an investment horizon of at least three years in equities,” said Barve.
