Equity fund flows bounce in June 2023, led by small cap funds

11 Jul 2023 , 10:13 AM

That was not surprising since June 2023 happens to be the end of the quarter and that is the time that most of the debt funds see outflows to take care of the treasury needs. The quarter end is when advance tax payments come up and most of the corporates are normally invested in these liquid and overnight funds. Hence, the net selling in debt funds in the month of June 2023 is not too surprising.

However, equity funds flows bounced back in the month of June 2023 more than doubling on a sequential basis to Rs8,638 crore. That could also be attributed to the NFOs, since most of the new fund offerings were dominated by equity funds during the month. Out of the Rs3,228 crore raised through NFOs during the month of June 2023, a sum of Rs3,038 crore came from NFO flows into equity funds. Bulk of the NFO collections in the month went into the Baroda BNP Paribas Value Fund and the HDFC Defence Fund NFO.

Debt funds see outflows, but equity fund flows bounce in June 2023

Here is a quick look at how the monthly flows across fund categories panned out for the last 13 months. Solutions funds are merged into hybrid funds.

Month	Debt Fund  Flows (Rs crore)	Equity Fund  Flows (Rs crore)	Hybrid Fund  Flows (Rs crore)	Passive Fund  Flows (Rs crore)	Total MF Flows (Rs crore)
Jun-22	(92,248)	15,498	(2,142)	13,110	(69,853)
Jul-22	4,930	8,898	(5,035)	14,271	23,605
Aug-22	49,164	6,120	(6,509)	15,069	65,077
Sep-22	(65,372)	14,100	(2,475)	13,623	(41,404)
Oct-22	(2,818)	9,390	(2,647)	10,261	14,047
Nov-22	3,669	2,258	(6,385)	10,394	13,264
Dec-22	(21,947)	7,303	2,418	15,398	4,491
Jan-23	(10,316)	12,547	4,681	3,955	11,373
Feb-23	(13,815)	15,686	630	6,488	9,575
Mar-23	(56,884)	20,534	(12,148)	26,804	(19,264)
Apr-23	106,677	6,480	3,511	6,945	121,435
May-23	45,959	3,240	6,193	4,487	57,420
Jun-23	(14,136)	8,638	4,611	2,057	(2,022)

Data Source: AMFI

Here are some quick takeaways. After 2 months of net inflows, the debt funds saw net outflows due to treasury redemption pressure from corporates. This led to MFs seeing net selling on an overall basis. Flows into equity funds and passive funds continued to be positive in each of the last 13 months. Hybrid fund flows have seen gyrations, in line with the quasi-debt fund product, arbitrage funds. Flows into arbitrage funds continued to dominate the hybrid funds story in the month of June 2023 also.

New fund offerings were moderate with total collections at just about Rs3,228 core, largely dominated by the equity fund NFO. One good thing is that the gross SIP flows during the month of June 2023 stayed elevated almost at the same level as the previous month. In fact, June marked the fourth consecutive month of SIP flows above Rs14,000 crore per month.

How the overall AUM mix evolved in June 2023?

The month of June 2023 once again witnessed a sharp spike in the overall AUM, which went up 2.8% over May at Rs44.39 trillion. In fact, since the start of this fiscal year FY24, the AUM of mutual funds is up 12.6%, largely explained by the frenetic rally in equities. This also marks a new high for mutual funds AUM. While the AUM of debt funds remained constant over last month, the boost to equity fund AUM came from the rally in the market. The growth in overall AUM is largely explained by the growth in active equity fund AUM and alternate fund AUM, for the month of June 2023.

Month	Debt AUM  (Rs trillion)	Equity AUM   (Rs trillion)	Alternate AUM  (Rs trillion)	Total AUM  (Rs trillion)
Jun-22	12.34	12.86	10.20	35.64
Jul-22	12.46	14.16	10.88	37.75
Aug-22	13.03	14.78	11.26	39.34
Sep-22	12.42	14.63	11.12	38.42
Oct-22	12.45	15.22	11.58	39.50
Nov-22	12.57	15.58	11.93	40.38
Dec-22	12.42	15.25	11.92	39.89
Jan-23	12.38	15.06	11.87	39.62
Feb-23	12.30	15.02	11.83	39.46
Mar-23	11.82	15.17	12.09	39.42
Apr-23	12.99	15.85	12.47	41.62
May-23	13.49	16.57	12.85	43.20
Jun-23	13.48	17.43	13.22	44.39

Data Source AMFI

In a sense, the mix of the AUM shows a clear bias towards equities and alternatives in the last one year at the expense of the debt funds AUM. After reversing in favour of debt in April 2023 and May 2023, the equations are once again favouring the equity and alternate funds in June. However, July and August will give a better picture of debt fund flows, sans the treasury pressures. Here are the relative shares for the last 3 months.

Month	Active Debt Funds	Active Equity Funds	Hybrid  Funds	Passive Funds	Solution Funds	Close-ended Funds
Apr-23	31.21%	38.07%	11.88%	17.27%	0.81%	0.77%
May-23	31.23%	38.34%	11.80%	17.14%	0.81%	0.69%
Jun-23	30.35%	39.27%	11.84%	17.13%	0.81%	0.59%

June 2023 was when the domination came to equity funds after a gap of 2 months. While flows into equity funds have been steady, at best, the real boost to the AUM is coming from the price appreciation. Only active equity funds enhanced their market share while others were either static or ended lower on a sequential basis over May 2023.

Active Debt funds: Treasury pressures show in June 2023

Debt funds saw net outflows of Rs14,136 crore in June 2023. After the sharp inflows into debt funds in April and May 2023, the treasury pressures again showed up in June. However, there were several categories of debt funds that saw big inflows in June 2023. Money Market funds saw inflows of Rs6,827 crore, Overnight funds Rs4,628 crore, Low Duration Funds Rs3,358 crore and Floater Funds Rs1,827 crore. 

Among the categories that saw net outflows in June 2023 was dominated by Liquid Funds at Rs28,545 crore and ultra-short duration funds Rs1,287 crore. The selling action in June has also been focused at the short end of the curve, especially in liquid funds, which is normally used for treasury operations. Although it is a bet on interest rates topping out, there was not much of demand for longer tenure and longer duration debt funds.

Active Equity Funds: net inflows more than double in June 2023

For a number of months, all categories of equity funds saw net inflows. That has changed as investors get more selective at elevated levels of the market. Let us look at the equity fund categories that saw net inflows. Overall, equity fund saw net inflows of Rs8,638 crore in June 2023. In terms of key categories seeing inflows; Small Cap funds saw inflows of Rs5,472 crore, value funds Rs2,239 crore, mid-cap funds Rs1,749 crore and large & mid cap funds Rs1,147 crore.  

However, several categories saw net outflows also. For example, large cap funds saw net outflows of Rs2,050 crore in June 2023. Among other categories, focused funds saw net outflows of Rs1,018 crore and ELSS Funds Rs475 crore. One reason could be the limited contribution of NFOs. One trend is the preference for alpha generating small cap and mid-cap funds while investors avoid large cap funds in favour of index funds. That has now led a number of small cap funds halting fresh inflows into their funds in the absence of adequate investment opportunities in that space.

Hybrid flows positive, passive flows modestly positive

Overall, the combination of hybrid funds and solution funds got net inflows of Rs4,737 crore. However, the macro picture glosses over the fact that the one fund category that determined the total flows was the arbitrage funds. In terms of net inflows, arbitrage funds saw net inflows of Rs3,366 crore while multi-asset allocation funds saw healthy inflows of Rs1,323 crore. However, Aggressive Hybrid Funds saw net outflows of Rs389 crore while the Balanced Advantage Funds (BAFs) saw net outflows of Rs215 crore. 

Passive funds again had a relatively modest month in June 2023 with net inflows of Rs2,057 crore. This was driven by inflows of Rs3,402 crore into index ETFs, which includes the equity and debt index ETFs. Flows into other categories of passive funds were relatively muted, with index funds seeing net outflows of Rs906 crore.

How do we sum up the mutual fund flow story for June 2023? For debt fund flows it was a return to the treasury pressure reality. However, the next 2 months will give a more secular picture. On the equity side, investors are just getting a little more neutral on equities, especially with the market cap scaling new highs. However, demand for small caps remains robust. SIP flows for June 2023 stayed above the Rs14,000 crore mark but the big story was about how the rally in markets had boosted MF AUM by 12.6% in FY24.