Where's the money going? 74% of total NFO flows in Aug were thematic MFs

Equity funds witnessed net inflows of Rs. 38,239 crore, the second-highest monthly figure ever recorded.

Equity oriented funds witnessed  net inflows of Rs 38,239 crore in August 2024, which was around 3.3% higher than inflows of Rs 37,113 crore witnessed in July 2024.This marks the 42nd consecutive month of net inflows, highlighting the growing popularity of mutual funds as an investment avenue in India.

Key Highlights:

• Record-Breaking Inflows: The August inflows were the second-highest monthly inflows ever recorded, surpassed only by June 2024.
• Increasing Folios: The number of mutual fund folios rose by 3.16% to 14.3 crore in August, indicating a growing investor base.
• New Fund Launches: Six new funds were launched during the month, raising a total of Rs 11,067 crore.
• Sectoral Focus: Sectoral and thematic funds continued to be popular, attracting Rs 18,117 crore in August.
• Large Cap Revival: The large-cap category witnessed a resurgence in inflows, driven by valuation considerations and a desire for stability

Thematic equity funds maintained their lead in August too. These funds, which focus on specific sectors or themes, attracted a significant inflow of Rs 18,117 crore, marking the second consecutive month of strong performance.

 

NFO Success: New fund offers (NFOs) in the thematic equity category garnered Rs. 10,202 crore, indicating strong investor interest.

Growing Folios: The number of mutual fund folios reached a new high of 20.45 crore in August, reflecting increased investor confidence. 

STORY OF SIPS AND NFOS IN AUGUST 2024

Over the last few months, the SIP flows and the NFO flows have been the major swing factors for equity fund inflows. For  August 2024, the gross SIP flows were at a record level of Rs 23,547 crore, which is 0.92% higher than the SIP flows in July 2024. In FY25, SIP flows have been well above Rs 20,000 crore in all the five months; averaging Rs 21,883 Crore; which is about 31.8% higher than the average monthly flows in the previous year. 

"In a sense, the SIP flows are reflective of the financialization of savings and the financial planning approach that investors are increasingly taking with respect to managing their monies. Let us now turn our attention to the other big swing factor; the new fund offerings (NFOs).

For August 2024, mutual funds saw NFO flows of Rs 13,815 crore across 18 NFOs; compared to Rs 16,565 crore across 15 NFOs in the month of July 2024. Out of these 18 NFOs in August 2024, 5 NFOs from thematic funds and 1 NFO from large cap funds. The thematic funds alone accounted  for accounted for 73.8% of the total NFO flows in the month of August 2024. That is reflected in the monthly net inflows into equity funds; which has again been dominated by sectoral / thematic funds. The other NFOs in the month pertained to Dynamic Asset Allocation Funds (BAFs), index funds, index ETFs and ultra short duration funds," noted IIFL in a note.

"The launch of Sector/Thematic funds continue unabated. Of the 6 new funds launched during the month, 5 were sector/thematic funds which cumulatively garnered Rs 10,202 crore. This helped the category to accumulate net inflow of Rs 18,117 crores in August, the highest among all the equity-oriented categories. Besides these five funds, Bajaj Finserv Large Cap Fund was also launched in the large cap category, and it accumulated net inflow of Rs 865 crore," said Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India.

"“Pure active equity schemes have crossed 30 lakh crores in AUM across the industry during the month of August 2024. Equity flows for the month of August 2024 has been a mix of SIP flows, NFOs and existing schemes. Thematic Funds still top the charts, while other categories like Large cap Fund, Multi cap Fund, Large & Midcap Fund and Midcap Fund have also seen good net flows," said Madhu Nair, Chief Executive Officer at Union Mutual Fund.

The robust net inflows into NFOs points towards their continued appeal among investors. However, investor should be cautious while selecting funds specially from the sector/thematic category. 

"Such funds offer a very high-risk high return investment proposition and may not fit in the portfolio of every investor. Either investors should themselves understand the dynamics of the underlying sector or theme to take a prudent investment decision, or they should have a strong advice available to them, who can help them take the right decision. In addition to that, they should approach new funds after careful deliberation and comparison with similar existing offerings and ensuring their aptness in the portfolio," said Srivastava.

There is also no stopping the launch of passive strategies. In August, 10 passive funds were launched (5 each from index and other ETF segments). These funds combined garnered Rs 884 crore.

Except for ELSS and focused categories, all the other equity-oriented categories have witnessed strong net inflows during the month. Flexi Cap, Large & Mid Cap, Mid Cap and Small Cap categories continue to attract huge net inflows.

The other fund categories that saw net inflows in August 2024 include; flexi cap/ multi-cap funds at Rs 5,988 Crore, Large & Mid Cap funds at Rs 3,294 Crore, Small Cap Funds at Rs 3,209 Crore, mid-cap funds at Rs 3,055 Crore, Large cap funds Rs 2,637 Crore, and value funds at Rs 1,728 crore. ELSS funds and Focused funds continued to see negative flows in August 2024.

"The correction in the markets in the initial part of August provided investors a good buying opportunity. This is reflected in the strong net inflow numbers for August across the equity categories. After a rather subdued net inflow numbers over the last few months, there has been a re-emergence of net inflows in the Large Cap category. With large cap segment faring relatively better from valuation point of view, investors would have focused their attention towards this category. Besides, large cap funds do add stability to the portfolio during the times of market volatility and this could be another reason for investors to invest in these funds given heightened volatility observed in the markets in the recent times. Additionally, with the valuation high in the mid and small cap segments, some shift towards large caps is not surprising," said Srivastava.

Here are the takeaways from the AMFI data as per IIFL 

•  Firstly, the debt fund flows have been robust for 4 of the last 5 months, but continues to focus at the short end of the yield curve. 
• Secondly, equity funds are seeing a lot of interest in sectoral and thematic funds; but that is more due to the restrictions on the number of other funds that the AMC can have. However, the dominance of thematic flows has always been a risk. 
• Thirdly, SIP flows have been steadily growing for over a year now and shows the coming of age of the Indian mutual fund investor. 
• Finally, investors are selecting hybrid funds with focus on asset allocation; which is a good sign. Of course, one must not forget that the appetite for passive funds is robust once again!