For the first time in almost four years, the net flows into equity funds were negative in July 2020. The net selling was not much; just about Rs2480cr. But the real story may be slightly more worrying. For the month of July 2020, the net inflows into SIPs were Rs7830cr. This is lower than the levels of SIP inflows we saw in the last few months but it is still a very healthy number. It means that if net equity flows have been negative despite consistent SIP inflows, the lump sum flows are really flowing out of equity funds.
There were some positive cues in July with the average AUM of the mutual fund industry getting closer to the all time high levels. In fact, since the lows of Apr-20, the mutual fund AUM has seen an overall accretion of Rs3.75 trillion. However, less than Rs10,000cr has come as net equity flows. That means; the accretion in AUM has almost entirely happened due to net flows into debt and appreciation in equity funds due to the 40% rally in Nifty.
Debt funds see inflows across the board
For the month of July 2020, the debt funds saw combined net inflows of Rs93,392cr, which is at par with the previous month. All categories of debt funds saw net inflows with credit risk funds being the only debt category to see net outflows in Jul-20. However, the net outflows at Rs670cr from credit risk funds was nowhere close to what we have seen in the last few months since Templeton opted to shut down six of its debt funds in Apr-20.
In terms of categories of debt funds, overnight funds and liquid fund saw net inflows of Rs18,700cr in Jul-20, while ultra short duration funds and low duration funds saw net inflows of Rs23,500cr. Other categories of debt funds that saw significant inflows included money market funds (Rs9067cr), short duration funds (Rs11,510cr), corporate bond fund (Rs11,910cr), Banking & PSU Funds (Rs6323cr), Gilt Fund (Rs3396cr) and floater funds (Rs4713 crore). Overall, flows into debt funds remained robust in the month of July 2020.
Equity funds see net outflows for first time in 4 years
The news on the equity funds front was not too encouraging with the category reporting negative net flows for the first time since 2016. Clearly, the pandemic and the volatility in the markets have been making equity fund investors wary. The SIP flows have fallen below the Rs8000cr level but considering the uncertain market conditions, they have certainly remained robust. A quick glance at the chart above would tell you that, had it not been for SIP flows, the actual equity flows would have been deeply negative in the last four months.
The net selling in equity funds was across the board hinting at small investors and even HNIs using the bounce in the market to take money off the table. Barring ELSS funds and focused funds, all the other categories of funds have seen negative net flows in the month of Jul-20.
Selling in hybrid fund was sharper, but passive interest rising
The net selling in hybrid funds was much sharper than in equity funds with Rs7301 crore of net selling. There was predominant selling of nearly Rs6000cr in aggressive allocation funds and arbitrage funds. The other categories like conservative allocation and dynamic allocation funds also saw net outflows.
The net inflows into passive funds were strong at Rs14,265cr. However, this was predominantly on account of the Rs13,125cr of inflows into the Bharat Bond ETF which concluded its issue managed by Edelweiss Mutual Fund. Gold funds saw inflows of Rs921cr but the flows into index mutual funds were negative. The Bharat Bond fund has seen a lot of interest from investors and that was the key driver in Jul-20.
SIP flows in Jul-20 touches a multi-year low
Net SIP inflows in Jul-20 stood at Rs7830 crore, the second month in succession it has been below Rs8000cr. In the month of June the average new SIPs registered crossed the 9 lakh crore marks and that tally has been repeated in the month of Jul-20 also. While the net SIP flows have tapered, the number of new SIP accounts is quite encouraging. The gross selling in equity funds at over Rs16,300cr in July has been a signal that investors are looking to take profits at higher levels.
There is a distinct risk for mutual fund flows that cannot be ignored. In the last 3 months, Indian households have withdrawn Rs30,000cr from their employee provident fund (EPF) accounts. Clearly, there is financial stress and this could spill on to mutual funds too. That is the key thing to watch out for. The momentum of mutual fund AUM consistently growing since 2014 has to be sustained in the coming quarters too.