Debt fund accretion: Clear shift to safety
Debt funds overall saw total inflows of Rs51,428cr for the month of November. However, some vulnerable debt fund categories continued to see outflows in November. For example, Medium duration funds, which had seen asset quality problems, continued to see outflows in November. Similarly, credit risk funds and dynamic funds put together, saw outflows to the tune of nearly Rs20,000cr. The bulk of the inflows into debt funds happened at the shorter end of the yield curve. Thus, overnight funds, liquid funds and money market funds put together saw inflows of nearly Rs32,723cr. This was a mix of flight to safety and also parking of liquid funds. Interestingly, there was a big demand for low duration funds with short and low duration funds attracting over Rs8,000cr in the month. The Banking and PSU funds saw sustained inflows of over Rs7230cr. For a change, floater funds also saw inflows, which could be a bet on RBI going slow on rate cuts leading to rise in bond yields.
Balanced funds: Continue to see loss of traction
Balanced funds have been losing traction for the last few months with investors getting cautious about the debt and equity component. All classes of balanced funds (conservative to aggressive) saw outflows of nearly Rs5500cr in the month of November. The net impact on the balanced funds was not too material since there was an equivalent inflow of Rs5353cr into arbitrage funds. Arbitrage funds give that extra kicker to post-tax yields since they are classified as equity funds due to their 65%+ exposure to equities, despite having the structure of a debt funds. The volatility in the markets had widened the arbitrage spreads leading to many mutual funds marketing these funds aggressively to institutional clients.
Equity flows: lump-sum tapers but SIPs stay robust
Net equity fund inflows during the month of November fell by 78% on a MOM basis. Equity fund inflows for the month were just about Rs1312cr and the concerns were visible in the light of higher volatility, richer valuations and concerns over GDP growth and other high frequency indicators. This has seriously impacted the lump sum investors in equity funds and they appear to have taken a back seat, notwithstanding the fact that SIPs continued to see sustained inflows during the month of November and stayed above the Rs8000cr per month for the 12th month in succession.
With strong SIP inflows (these are typically retail and equity related) and tepid overall equity fund numbers, it is clear that lump sum outflows have been quite heavy. In the overall equity fund inflows, SIP flows saved the day. If you look at the break up of equity funds during the month of November, the bulk of the inflows came into large cap funds and mid cap funds; both with very clearly segregated target audiences. However, other categories of equity funds like dividend yield funds, value funds, contra funds, sector funds and thematic funds; saw negative flows in November. The preference is clearly for the diversified plays and investors are not too interested in any type of risk concentration.
The good news on the equity front is that the SIP flows have sustained and that is positive for the long term undertone of the mutual funds segment. With over 3.1 crore SIP accounts and close to Rs314,000cr under SIP AUM, the systematic method of investing is surely here to stay.
Finally, a word on the passive story
The passive investment style consisting of ETFs and index funds has certainly come of age in the last few years. There has been one clear reason. Active management and alpha creation is becoming increasing tough. That is why investors are beginning to prefer the predictability of passive index funds and ETFs. Check the graphic below, which shows how the passive AUM has grown over 30-fold in five years.
A good part of the passive story was driven by the CPSE ETFs consisting of PSU equity. Going ahead, the Bharat Bond ETFs could also drive a lot of serious money into passive debt indices. But the three big takeaways from November are; investors are playing safe on debt funds, preferring the power of SIPs in equity funds and passive are really in business.