Return of debt funds, preference for hybrid funds: MF trends in April 2024

Equity funds, particularly actively managed ones, saw renewed interest due to the good market performance.

 In March, a lot of money (Rs 1.98 trillion) flowed out of the "debt fund" buckets, which hold investments in bonds and similar things. But in April, a massive amount of money (Rs 1.90 trillion) flowed back into debt funds, almost refilling those buckets. This was especially true for "liquid funds" which are like easily accessible savings accounts within debt funds.

Liquid funds see the most inflows
"Liquid funds saw the highest net inflows for the month to the tune of Rs 1,02,751.50 crore, representing 54% of the overall inflow. This was followed by the money market funds that attracted Rs 34,084.11 crore and overnight funds which witnessed a net inflow of Rs 21,195.42 crore. This is a natural and expected phenomenon at the beginning of the financial year. After settling their tax liabilities for the previous financial year in March, corporates deposit their surplus investible funds for a short period. Liquid funds and money market funds are favored choices for such investments," explained Nehal Meshram, Senior Analyst – Manager Research, Morningstar.

 

Last month too, outflows were broad based, with all categories except three experiencing net outflows. Investors also showed a preference for categories with shorter maturity profiles, such as ultra short term and low duration funds, for temporary parking of funds. There was also notable investor interest in the active duration strategy, resulting in significant inflows. Gilt funds specifically garnered a net inflow of Rs 5,210.24, which was its highest ever over a monthly period in the last five years.

Overall, people invested a lot of new money (Rs 2.39 Trillion) in mutual funds in April. Most went into debt funds, but some went into stock market funds (equity) and balanced funds (mix of debt and stocks).

Here's the surprising part: Money going into all types of stock market funds actually increased in April, even though it had been slowing down lately. This might be because the stock market was doing well, so people became more interested in stock-based funds managed by professionals (active equity).

Another interesting trend is that regular investment plans (SIPs), where you put in a fixed amount every month, became even more popular in April with a record inflow of Rs 20,371 Crore. There weren't many new fund offerings (NFOs) launching in April, so existing plans like SIPs drove most of the money going into stock market funds.

Even though a lot of new money came in April, the total value of all the money invested in mutual funds (AUM) actually went down slightly from the previous month. As of the close of April 2024, net MF AUM stood at a record level of Rs 57.26 trillion; 7.23 per cent lower on a month-on-month basis.

Only two equity NFO launches in April 2024 

Equity oriented funds commenced the new financial year FY25 on a positive note with robust net inflows of Rs 18,917.09 crore, marking it the 38th consecutive month of net inflows. The net inflows witnessed in April 2024 was lower by 16.4% than the net flows seen in March 2024 (Rs 22,633.1 crore). The equity segment was also aided by two new fund launches during the month which cumulatively garnered Rs 1,219 crore. Bandhan Innovation Fund and TRUSTMF Flexi Cap Fund launched in April 2024 garnered Rs 707 crore and Rs 512 crore, respectively.

Among the equity asset class, the Sectoral/Thematic Funds category saw the highest inflows to the tune of Rs 5,166 crores followed by the multi-cap category which witnessed net inflows of Rs 2,723.8 crore.

Small-cap outflows reverse

The small cap category witnessed net outflows of Rs 94 crores in March 2024 bounced back with net inflow of Rs 2,208.7 crore in April. Similarly, the mid cap category too which witnessed a dip in net inflows in March 2024 saw an uptick of net flows in April- Rs 1,793 crore. 

"Both the mid and small cap segment witnessed minor corrections in March 2024, which was perhaps capitalized on by investors in the subsequent month with fresh purchases. Favorable market conditions over the last couple of years saw investors getting high returns in these segments and consequently, investors have also flocked to these categories with ever increasing flows," said Melvyn Santarita, Analyst,  Morningstar Investment Research.

The Large and Midcap category saw the third-highest flows during the month among the equity categories

"While the large cap category didn’t witness cumulative net outflows, it saw a massive dip in net inflows in April whereby it garnered only Rs 357 crore as compared to Rs 2,127.7 crore in March 2024. This could be due to investors opting to invest in this segment via passive funds and/or investors opting to invest in relatively riskier categories whilst being biased to the large cap segment viz flexi cap category and large & midcap category," added Santarita.

Investors are putting more money into hybrid funds that mix debt and equity investments
This is likely because these funds offer a balance between risk and return. Here's a breakdown:

• Hybrid and solution funds saw a big increase in inflows in April compared to March.
• Arbitrage funds, a type of hybrid fund, were especially popular.
• Equity funds overall have seen slower inflows lately, perhaps due to caution about smaller companies.
• Passive funds, which track indexes, had a so-so month. This might be because the stock market has been doing well, making actively managed equity funds more attractive.

"The combination of hybrid funds and solution funds got net inflows of Rs 20,110 crore, nearly 4-times the inflows in March 2024. In the hybrid category, net inflows into arbitrage funds dominated at Rs 13,901 Crore as it is emerging as an alternative to liquid funds. Among others; multi-asset allocation funds saw net inflows of Rs 3,313 Crore, dynamic asset allocation funds (BAFs) at Rs 1,345 Crore, and equity savings funds saw net inflows of Rs 1,295 Crore, said IIFL in a note.

Passive funds had a relatively tepid month in April 2024 with net inflows at Rs 11,505 crore; lower than last month. This was driven by inflows of Rs 6,524 Crore into index funds, and Rs 5,747 Crore into index ETFs. Flows into gold funds and international fund of funds (FOFs) were negative, although it was more due to regulatory reasons. 
 

Here are some quick takeaways by IIFL Securities:

•  Debt funds continue to follow the cycle of sharp inflows immediately after the end of a quarter. However, the bulk of the debt fund inflows are still going towards debt funds at the short end of the yield curve. 
• Equity fund inflows have been gradually waning over the last 3 months, but that could be attributed to the SEBI stricture on mid-cap and small cap funds. 
• In the last one year, the big story has been the rapid emergence of hybrid funds as a smart asset allocation option.

"Broadly, there are three insights we gathered from the mutual fund flows data for April 2024. Firstly, the debt funds continue to be in search of a narrative to appeal to retail investors, as treasury cycles continue to drive flows. Secondly, on equity funds, there has been a slowdown in flows overall in the last 2 months and that could be attributed to the caution on mid-cap and small cap funds. Finally, the big story is the preference shown by mutual fund investors for the asset allocation funds withing the hybrid category. That is not surprising since asset allocation drives nearly 80% of the portfolio swings," the brokerage said in a note.