Sectoral funds see highest inflows in September: What should investors do?

Equity-oriented funds witnessed a slowdown in net inflows in September due to increased redemptions from smallcap and midcap schemes, according to data from the Association of Mutual Funds in India (Amfi).

Equity funds witnessed net inflows of Rs 14,091.2 crore in September 2023, lower than Rs 20,456 crore in August 2023. 

"“In the month of September, the equity markets experienced a notable shift towards a risk-off sentiment, following the all-time high of 20,200 points, said Akhil Chaturvedi, Chief Business Officer, Motilal Oswal AMO Asset Managementsset Management Company.

"Net investments into actively managed equity schemes declined 30.4% over the previous month to Rs 14,091.3 crore in September due to the decline in the inflows in the small-cap and mid-cap funds. We believe the decline has happened because of the high valuations in the market. So investors have pulled out some parts as profit booking in the market. Meanwhile, the sectors that are overvalued might see less inflows in the upcoming months and will see investors participating more in the undervalued sectors via investments in mutual funds," said Palka Arora Chopra, Director at Master Capital Services.

Sixteen NFOs were launched in September, with 5 hybrid categories garnering Rs.5,233 crore, followed by 6 equity-oriented schemes with Rs.2503 crore and Rs59 crore in other schemes.

 

Among the equity asset class, the sectoral/thematic funds saw the highest inflows to the tune of Rs 3,146.8 crores during the month. Thematic funds are designed around specific themes or trends, such as clean energy, technology, or healthcare. The core objective of thematic funds is to invest in companies related to the chosen theme, with the aim of capitalising on growth opportunities and generating robust returns for investors. 

"The spike in the flows of this category could also be attributed to the fact that there were four new fund launches in this category, which cumulatively garnered Rs 1,629 crore during the month of September," said Melvyn Santarita, Analyst – analyst-manager research, Morningstar Investment Adviser India.

 In August 2023 too, this category saw the highest flows of Rs 4,805.81 crores aided by 5 new fund launches.

The quantum of net flows in both the small-cap and the midcap as a category saw a dip compared to the previous months, but they were still among the highest recipient of net inflows in September with the midcap category receiving Rs 2000.8 crore and the small-cap category receiving Rs 2,678.4 crore. 

Investors redeemed Rs 4,200 crore from smallcap schemes in September, the highest since January 2020. 

"The dip in the net flows of these categories could be attributed to some bit of profit booking by investors coupled with concerns regarding inflated valuations in some of these segments," said Santaria.

The multi-cap category also witnessed a spike in its flows buoyed by the launch of a new fund (WhiteOak Capital Multi Cap Fund) in September. The category saw net inflows of Rs 2,234.5 crore, of which WhiteOak Capital Multicap Fund garnered Rs 411 crore.

"While overall net flows experienced a dip in various categories, it's noteworthy that thematic/sectoral funds extended their positive trend into the current month, attracting the highest net inflows. Following closely were smallcap funds and multicap funds. However, small-cap flows did witness a decline month on month, which can be attributed to certain fund houses temporarily halting inflows, possibly due to concerns about rich valuations in the mid and small-cap space.

Hybrid funds have received a net inflow of Rs.18,650.45, the highest ever in over two years mainly due to the continuance of rising interest in arbitrage funds 

Hybrid funds experienced an uptick in net inflows on a month-on-month basis. This trend reflects the prevalent risk-off sentiment in the market, with investors seeking to diversify their investments while maintaining a focus on capital protection," said Chaturvedi.

The only categories which saw net outflows were ELSS (Rs 141.15 crore) and Largecap (Rs 110.6 crore). This was the fifth consecutive month where the large cap witnessed net outflows. Active large cap funds have been finding it increasingly difficult to beat passive funds and therefore some investors could be choosing to exit active funds in this category and opting for the passive route. 

Both the mid-cap and the small-cap indexes have seen a sharp rally over the last six months and one year. 

"Consequently, investors have also flocked to this category with ever-increasing flows. Investors should note that while both the midcap and the small-cap categories have the potential to deliver good returns, these categories inherently are volatile with sharp drawdown risks. Therefore, investors should have a long-term time horizon while investing in these categories. Opting to invest in these categories via the SIP route is a good way by which investors can ride the volatility whilst dollar cost averaging over long periods," said Santaria.

"The valuation of the market is not cheap and investors are waiting on the sidelines to use any downside to increase allocation. Investors are now going slow on small cap at  the current valuation, and the flow will increase if any correction happens the market. Investors should remain cautious in the short term as the market may remain volatile in the short term due to Israel-Gaja conflicts, US data and election. One should rebalance their portfolio as the equity run-up must have changed their original plan of asset allocation," said Mukesh Kochar, National Head of Wealth at AUM Capital.

Passive funds as a category (Index and ETFs) continue to see healthy net inflows every month.

The quantum of net flows in Gold ETFs fell to Rs 175.29 crore in September from Rs  1,028.06 crore it witnessed in August. Interestingly, the net flows witnessed by Gold ETFs in August 2023 were the highest in over 17 months. 

"With the continued hike in interest rates in the US, inflation still higher than expectations, and growth rate slowing down, the appeal of gold as a safe haven and hedge against inflation is expected to continue. Moreover, Gold prices in recent times have come-off from its all-time high levels, thereby providing some buying opportunity, particularly after a sharp rally it witnessed since March this year," said Santarita.

Fixed Income:

Debt-oriented schemes witnessed net outflows for the second consecutive month to the tune of Rs 101,512 crore in September. The segment witnessed a net outflow of Rs 25,873 crores in August. 

"The huge net outflow in September could be attributed to the advance tax requirement that corporates need to meet with it being the quarter end. Expectedly, liquid funds witnessed the highest net outflows during the month," said Morningstar in a note.

Investor sentiment towards debt investments was largely muted.

Except for Long Duration and Gilt Fund Categories, all the other categories witnessed net outflows. These two categories have been finding favour with investors for some time in anticipation of a change in the interest rate cycle.

Moreover, some correction in the equity markets towards the later part of September could also have prompted investors to shift towards equity with the expectation of better returns. 

Corporate bond funds as a category witnessed net outflows of Rs 2,459.5) crore for the first time in over eight months.