Neutral Q4FY23 quarter for MF flows on active debt fund stress

Overall, the net inflows in the quarter were Rs1,684 crore as active debt fund outflows offset the heavy inflows into active equity funds and passive funds.

As of the close of March 2023 quarter, net AUM of Indian mutual funds stood at Rs39.42 trillion, a slight drop over the December 2022 quarter; mainly due to lower valuations. Although the flows into equity funds and passive funds were positive, these gains were largely neutralized by the volatility in the equity market returns. 

Equity funds saw net inflows in the March 2023 quarter on the back of a combination of robust SIP flows and a surge in NFOs. While the mutual fund industry is seeing static overall AUMs, there is a silent consolidation happening with more power and AUM shifting into the top 12 fund houses in India.

Debt fund flows in March 2023 quarter?

Indian debt funds saw net redemptions of Rs81,015 crore in the March 2023 quarter, which is largely consistent with the sell-offs seen in the previous five quarters. The net outflows for March 2023 quarter were also driven by treasury outflows, but there were also inflows into long dated debt funds on the hopes of locking into higher yields and making the most of the LTCG benefits on debt funds expiring this fiscal. This trend was more evident in March 2023.

Let us look at key flow drivers and start with inflows? Corporate bond funds saw inflows in the quarter of  Rs13,955 crore. Among other inflows in the quarter, dynamic bond funds saw inflows of Rs6,216 crore, long duration funds Rs5,259 crore, banking & PSU funds Rs5,063 crore and gilt funds Rs4,824 crore. Most of the other categories of debt funds saw outflows in the quarter.

The March 2023 quarter story of debt fund flows once again veered towards broad-based redemptions. Liquid Funds saw outflows of (Rs73,270 crore), overnight funds (Rs8,880 crore), ultra-short duration funds (Rs8,859 crore), floater funds (Rs6,801 crore), money market funds (Rs5,504 crore) and short duration Funds (Rs3,766 crore). There were other redemption candidates too, but they were relatively smaller in size and intensity.

Total AUM of all active debt funds at the close of the March 2023 quarter stood at Rs11.82 trillion with its overall share of MF AUM lower sequentially at 29.98%. This is the first time in the last 5 years that the share of debt funds has dipped below 30% of overall AUM. In the last one year, the big story has been the way, the equity fund AUM and the passive fund AUM have grown sizably at the cost of active debt fund AUM.

Equity fund flows in March 2023 quarter

Equity fund flows in the March 2023 quarter bounced to Rs48,766 crore compared to just Rs18,952 crore in the December 2022 quarter. This has been largely driven by the spike in SIP flow numbers as well as the number of NFOs raising fresh funds. Unlike in the previous quarter, all categories of equity funds once again saw net inflows in March 2023 quarter.

Before we get into specific equity fund flows in the March 2023 quarter, let us look at some interesting themes. For example, the thrust of the flows is moving more towards alpha hunting. That is the reason you find flows gravitating towards mid-cap funds, small cap funds and sector / thematic funds. One reason for the interest in thematic funds has also been the predominance of NFOs, as there are no limits on the number of thematic IPOs.

The positive flows into equity funds were a lot more affirmative in the March 2023 quarter. Multi-cap / Flexi-cap funds led the way with flows of Rs8,382 crore followed by small cap funds Rs6,932 crore, mid-cap funds at Rs5,574 crore, large & mid-cap funds Rs5,172 crore, ELSS Rs5,082 crore, Dividend yield funds Rs3,767 crore and value funds Rs2,520 crore. There was not a single category of equity funds witnessing net outflows in March 2023 quarter.

The total AUM of equity funds at the end of the March 2023 quarter stood at Rs15.17 trillion with a decisive market share of 38.48% marking a big shift in last one year. In the March 2023 quarter 2 trends were visible. Firstly, there was a shift out of active funds into passive funds. Secondly, within the active funds, there was a shift from large index players into small and mid-cap stocks. Equity investors are either looking for alpha or they would prefer passive funds.

Hybrid fund flows in March 2023 quarter

In March 2023 quarter, hybrid fund once again saw net outflows, like in the previous quarter, and this can be largely attributed to selling in arbitrage funds as well as investors getting disillusioned with balanced advantage funds (BAFs). NFOs driving record collection by BAFs were conspicuous by their absence. However, one category of fund that did attract buying interest in the quarter were the multi-asset allocation funds.

Let us look at the inflows into hybrid funds first. Only multi-asset allocation funds saw meaningful net inflows of Rs3,165 crore in the March 2023 quarter. Aggressive hybrid funds and conservative hybrid funds saw combined net inflows of Rs851 crore while Arbitrage Funds saw net outflows of Rs(10,038) crore in March 2023 quarter, due to treasury considerations. Equity savings funds also saw net outflows of Rs794 crore while Balanced Advantage Funds (BAFs) saw outflows to the tune of Rs604 crore. Total AUM of all hybrid funds at the end of March 2023 quarter stood at Rs4.79 trillion, even as its AUM share in March 2023 quarter has fallen marginally to 12.15%.

Passive fund flows in March 2023 quarter

Passive funds had another fantastic quarter in Q4FY23 with net inflow of Rs37,247 crore, almost at par with the robust inflows in the last three quarters on an average. There was traction in index funds. Index Funds/ETFs saw inflows of Rs39,286 crore while other ETFs saw outflows of Rs2,011 crore. Gold funds saw minor outflows of Rs301 crore while FOFs saw inflows of Rs272 crore. Passive funds now contribute a whopping 17.69% of total MF AUM. With most of the NFOs being dominated by passive funds, AUM growth is understandable and only likely to intensify in coming quarters.

To summarize the March 2023 quarter, 4 trends emerge.

• Today, the fund with the largest AUM is not a debt fund but an index ETF that manages around Rs4.84 trillion. Liquid funds AUM is just Rs3.32 trillion.

   

• Closed-ended FTPs (largely through NFOs) have seen good traction in the March 2023 quarter due to the exit of LTCG benefits from FY24.

   

• There are two trends in equities. Firstly, there is a shift out of active into passive assets. Within active assets, preference is for aggressive alpha hunting.

   

• Finally, it is the alternatives that have emerged bigger than active debt funds with 30% market share. That is probably the road ahead.