Debt outflows offset by equity boom: Mutual funds cross Rs 60 trillion mark

Within the equity fund category, multicap funds experienced 78% rise in inflows to Rs 4,708.57 crore, while investments into largecap funds increased by 46% to Rs 970.49 crore.

The Indian mutual fund industry witnessed a historic surge in June 2024, with net inflows into equity funds reaching a staggering Rs 40,608 crore. This record-breaking achievement, a 17% increase from the previous high in May, propelled the industry's total Assets Under Management (AUM) past the Rs 60 trillion mark for the first time ever.

This is the highest net inflows the asset class has witnessed over a monthly period surpassing last month’s net inflows which was the highest until now.  June also witnessed the launch of 14 new fund offerings which cumulatively garnered Rs 15,227 crore, of which 11 were in the equity-oriented asset class garnering Rs 14,370 crore.

 

"The substantial net inflows can be attributed to the election results announced earlier in the month. Initially, there were concerns that a smaller majority for the new government would hinder its ability to enact reforms and fund infrastructure projects. However, investors remained optimistic about policy continuity and anticipated reforms, expecting stability within the coalition government at the Centre. This optimism propelled markets to new all-time highs," said Melvyn Santarita, Analyst – Manager Research, Morningstar Investment Research India.

Key drivers for record inflows: 

Market Optimism: Positive investor sentiment following the national election results instilled confidence in the stability of the economy and future market growth.
 

New Fund Launches: The launch of 11 new equity-oriented funds in June, collectively raising a robust Rs 14,370 crore, further contributed to the inflow surge.
 

Systematic Investment Plans (SIPs): Gross inflows from SIPs reached a new high of Rs 21,262 crore, demonstrating investors' commitment to disciplined and long-term investing through SIPs.
 

Strategic Lump Sum Investments: Investors also strategically employed lump sum investments during market corrections, like the one witnessed on June 4, to capitalize on buying opportunities.

“The record inflows in equity funds for June were driven by steady SIP flows, robust NFO collections, and lump sum purchases during corrections. Investors shrugged off election results-related volatility and as the uncertainty over government formation cleared, they used the correction to add to their exposures,” said Akhil Chaturvedi, executive director & chief business officer, Motilal Oswal AMC.

Thematic funds are the flavour of the month: 

Sector/thematic funds continue to attract investor attention as they witnessed highest net inflows of Rs 22,351 crore during the month, which is the highest the category has witnessed over a month. The category was aided by the launch of 9 new fund offerings (NFOs) which cumulatively garnered Rs 12,974 crore. The multi-cap category witnessed the second highest net inflows in June 2024 among the equity-oriented categories amounting to Rs 4,708.5 crore, which was its 3rd highest net inflows ever over a monthly period. The category was also aided by the launch of Motilal Oswal Multicap fund in June which garnered Rs 1,051 crore.

Investor Preferences:

Large-Cap Focus: Investors seem to be favoring large-cap focused categories like Large & Mid Cap, Flexi Cap, and Value due to potentially more favorable valuations compared to mid and small-cap segments.

Mid & Small-Cap Persistence: Despite concerns about overvaluation, investors continue to invest in mid and small-cap funds, attracted by their historical high returns. However, it's crucial to remember the inherent volatility associated with these segments.

"The returns generated by mid and small cap segment over the last few years haven’t got unnoticed. Hence, the categories having substantial exposure in these two segments have witnessed strong net inflows. It is important to note that mid and small cap segments are highly volatile. While they can give exceptionally high return in up markets, they can fall equally hard in down markets. It’s important for investors to take exposure in these funds in line with their risk appetite," said Santarita.

Additionally, the contra or value category has attracted strong inflows, signaling investor confidence in these segments. Conversely, while sectoral and thematic investments experienced high inflows earlier in June, their growth has recently slowed. Notably, despite leading in inflows over the past year, small-cap investments have seen a moderation in investor interest this month. 

Categories which are biased towards the large-caps segment like Large & Midcaps (Rs 2,912 crore), Flexicap (Rs 3,058 crore) and Value (Rs 2,027 crore) saw robust inflows during the month. While markets have been in a prolonged bull run, there are concerns about overvaluations in certain areas, particularly in the mid and small-cap segments. Consequently, investors may be opting to invest in large-cap segments, where valuations are more favorable. Notably, the value/contra category experienced its second-highest net inflows on a monthly basis.

Investment Cautions:

ELSS & Focused Fund Outflows: Equity Linked Saving Schemes (ELSS) and Focused Funds witnessed net outflows for the third consecutive month, indicating a potential shift in investor preferences.

At the end of June, the AUM of the Mutual Fund industry  stood at Rs 61.3 trillion, up 3.8 per cent month-on-month (M-o-M) despite the Rs 1-trillion outflow from debt funds.

Key benchmark indices — Nifty50 and Sensex — gained over 6.5 per cent in June despite correcting nearly 6 per cent on the day of election results (June 4).

The industry has added Rs 10 trillion to its AUM in just six months.

Hybrids and passives bought a net Rs 8,855 crore and Rs 14,602 crore, respectively.

MFs’ equity fund inflow tally in the first three months of 2024-25 (FY25) is already half of the total inflows in FY24.

Equity MFs raked in Rs 94,222 crore in the April-June period vis-a-vis Rs 1.84 trillion net inflows in FY24.

Debt outflows:

With June being quarter end month, debt-oriented schemes, as expected, witnessed a net outflow of Rs 107,357.62 crore. Maximum net outflows were witnessed in Liquid Fund and Overnight Fund categories.  Here's a breakdown of the primary reasons behind this:

1. Quarter-End Advance Tax Payments:

Companies have to pay advance tax on their profits throughout the year, with a larger payment due at the end of each quarter. To meet this obligation, many corporates redeem their investments in debt funds, particularly liquid funds and overnight funds, which offer high liquidity and immediate access to cash. This explains the maximum outflows observed in these categories.

2. Investor Shift Towards Equity Markets:

The strong performance of the stock market, reaching all-time highs after the election results, likely prompted some investors to shift their focus towards equity funds in anticipation of higher returns. This is supported by a decrease in the number of debt fund folios (investor accounts) between May and June.

3. Interest Rate Uncertainty:

The lack of clarity on when the interest rate cut cycle might begin is making investors cautious. Debt funds, especially those in categories like dynamic bond funds and gilt funds, are more sensitive to interest rate fluctuations.

This uncertainty has led some investors to adopt a "wait and watch" approach, staying away from interest rate-sensitive debt categories.

4. Preference for Shorter-Term Debt:

In the absence of clear interest rate signals, investors seem to be favoring debt fund categories with shorter durations (less than a year), like low-duration and money market funds. These funds offer lower returns but are less susceptible to interest rate changes.

What should investors do? 

"Despite major events like the year-end earnings, General Elections, the release of GDP and other economic data, and Rs.75,000 crore of FII outflows, Q1FY25 saw Rs.94,222 crore in equity fund inflows, underscoring the resilience and confidence of investors in the Indian stock markets. However, with valuations stretched and some sectors appearing expensive, investors should consider being more cautious with fresh direct equity investments, especially with the upcoming Union Budget on July 23rd. Due to valuation concerns and the challenge of deploying funds at high prices, AMCs have had to restrict the flow of lump-sum investments into certain schemes. For long-term investors using mutual funds, the journey remains steady, supported by rupee cost averaging," said Gopal Kavalireddi, Vice President of Research at FYERS.