Debt funds see heavy outflows but SIPs save the day for equity funds

The month of March 2020 has seen the overall AUM of the mutual funds segment fall sharply to around Rs24.83 trillion on an average basis and Rs22.38 trillion on a year-end basis.

Apr 13, 2020 11:04 IST India Infoline News Service

It is quite ironic that domestic funds have continued to be buyers in the equity market despite heavy outflows from mutual funds during the month of March 2020. If you look at the graphic below, the highest monthly outflows of Rs2.12 trillion were seen in the month of March. This trend was despite equity funds continuing to see net inflows. Most of the selling was seen in the short end debt and treasury management funds.

Data Source: AMFI

The month of March 2020 has seen the overall AUM of the mutual funds segment fall sharply to around Rs24.83 trillion on an average basis and Rs22.38 trillion on a year-end basis. Average AUMs of the mutual fund segment had touched a peak level of over Rs28.5 trillion in January 2020. This sharp fall in AUM has been due to a combination of net outflows in debt and the sharp correction in price of equities.

How the debt and liquid funds fared?
Debt funds overall saw outflows to the tune of Rs195,000cr in the month of March. More than 50% of the selling happened in liquid funds followed by ultra short duration, money market funds and short duration funds. Clearly, institutional investors and HNIs did not want to take any chances with their short term treasury requirements and preferred to sit on cash. The COVID-19 lockdown only added to the cash flow pressures on corporates and institutions. Even the traditional favourites like the Banking and PSU debt funds saw outflows. Overnight funds were the only ones that saw serious inflows during the month.

Arbitrage fund outflows put pressure on hybrids
Hybrid funds saw outflows to the tune of Rs.36,500 crore but this was largely driven by nearly Rs.33,800 crore of outflows in arbitrage funds. Kotak and Prudential had stopped fresh inflows into their arbitrage funds due to the squeezing of spreads. With the 75 bps repo rate cut and the huge volatility in the equity markets, arbitrage funds were becoming too risky forcing a huge redemption pressure from institutional investors. Even the conservative and aggressive hybrid funds saw outflows but such outflows were marginal.

Equity funds surprise positively with inflows
Ironically, in a month when the debt funds saw the highest selling during the year, the equity funds saw robust inflows of Rs.11,723 crore as shown in the chart below.

Data Source: AMFI

Interestingly, the month of March 2020 saw inflows across all the key categories of equity funds. Multi cap funds, large cap funds, focused funds, thematic funds and ELSS funds accounted for a bulk of the inflows into the equity funds category. However, if you look at the above chart, the equity fund flows are being driven not by bulk investments but by systematic investment plans (SIPs). In fact, the above chart clearly indicates that the stability of equity fund flows has been largely contingent on robust SIP flows. Even in the month of March, despite the carnage in the markets, SIPs logged a record Rs8,641cr of net inflows. While SIPs can technically be on any fund, past experience has been that bulk of the SIP inflows come into equity funds and ELSS where the rupee cost averaging works most favourably for investors.

Passive funds continue to see interest
Thanks to the government’s divestment efforts through the ETF route, Indian investors have woken up to the benefits of passive investing. For the month of March, passive flows were nearly Rs7000cr predominantly coming from index ETFs and index funds. Clearly, a lot of investors have been trying to adopt the strategy of buying into index ETFs to capitalize on lower levels of the index. That helps them play the bounce back at a very low cost with limited downside risk. Surprisingly, gold ETFs are not really seeing traction, despite the global shift towards global ETFs. Passive AUM at Rs1.65 trillion is about 7% of overall AUM, which is much lower than global standards. But, that segment has surely been growing.

In a nutshell, flow story depends on SIPs
With over 3 crore SIP accounts and over Rs300,000cr in SIP AUM, these systematic investment plans are driving over 40% of overall equity AUM. That has been the big difference between the Indian mutual fund industry in 2014 and 2020. Back in 2014, the overall AUM of the MF industry was about Rs.8,00,000 crore and that has since grown three-fold. This growth has been largely driven by SIPs on the equity side. Over the last few years, there has been an accretion to SIPs each month. With COVID-19 gradually translating into job losses, income losses and loss of purchasing power, it would be a testing time for equity SIPs. The future of MF flows could, therefore, largely predicate on how people to react to the pressures of COVID-19 vis-a-vis their SIP investments.

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