Mutual funds had a number of reasons to celebrate in March 2021 in terms of flows, but we will come to that later. The total Average AUM of mutual funds as on 31 March stood at Rs32.17 trillion. The MF AUM was predominated by open-ended Income Funds at 43.15% and open-ended equity funds at 30.54%. In addition, hybrid funds (including arbitrage funds) accounted for 10.95% of the total AUM while passive and solution oriented funds accounted for another 10.76%. The residual 4.60% were close-ended funds, largely in the debt segment. That is where the Indian mutual fund segment stands as of the end of FY21.
The overall AUM as on 31 March 2021 grew 41.2% yoy from Rs22.26 trillion to Rs31.43 trillion. The equity fund contribution has come predominantly from capital appreciation as the indices gained nearly 70% during FY21.
The NFO trend has also been quite tepid in the past few months. If you look at Mar-21, the Rs4,539cr of NFO inflows can be largely attributed to close-ended debt fund flows and flows into international Fund of Funds (FOFs), which have been the flavour of the season.
Debt funds see deep redemptions on March effect
Debt fund flows have been erratic as they work in liquidity cycles. The month of Jan-21 saw outflows of Rs33,409cr while Feb-21 was more neutral with net inflows of Rs1,735cr into debt funds. However, March 2021 saw net outflows of Rs52,528cr from debt funds on the back of liquidity adjustments by corporate and institutional customers to meet year-end advance tax and GST shortfalls. That was expected.
Let us talk about debt fund inflows first. Overnight funds saw net inflows of Rs5,027cr while floater funds saw inflows of Rs3,229cr. Among other major categories of debt funds that saw inflows were Corporate Bond Funds Rs2,554cr and Dynamic Bond Funds Rs1,825cr. The preference for floater funds was on the back of expectations that interest rates would spike in tandem with rising bond yields.
Most categories of debt funds saw heavy outflows; predominantly in funds at the shorter end of the yield curve. For example, Liquid funds saw outflows of Rs19,384cr, low-duration funds Rs15,487cr, short-duration funds Rs9,025cr, money market funds Rs7,038cr and ultra-short duration funds Rs6,731cr. Outflows at the short end were for liquidity adjustments for tax payments. The exception was Banking and PSU funds that saw outflows of Rs6,508cr. In this case, outflows were on the back of apprehensions that the new AT-1 bond regulations proposed by SEBI would lead to huge write-offs that drove institutional investors in these funds to exit as a safety measure.
After 8 months of outflows, equity funds saw inflows in Mar-21
Equity funds had presented a strange paradox. Between Jul-20 and Feb-21, total net outflows from equity funds were Rs46,790cr but, during the same period, SIPs infused Rs62,480cr into mutual funds. SIPs represent flows into equity funds and ELSS. While SIPs were robust, lumpsum outflows were much bigger. That situation changed in March as equity funds saw net inflows of Rs.9,115 crore after 8 consecutive months of net outflows.
Multi-cap funds and contra funds were the only categories to register negative flows and that was also less than Rs400cr in aggregate. Most categories of equity funds saw sharp inflows in Mar-21 including sectoral funds Rs2,009cr, ELSS Funds Rs1,552cr, mid-cap funds Rs1,502cr, flexi-cap funds Rs1,386cr and focused funds Rs1,027cr. Even large cap funds saw steady inflows after a long gap.
Till the previous month, equity fund investors were seen taking profits off mutual funds as they saw limited scope for alpha at elevated levels of the Nifty. This had induced a number of younger and more adventurous investors to seriously consider direct equities. That was reflected in the spurt in demat accounts and trading accounts last fiscal. Mar-21 appears to have belied that story, but it may be too early to say if this shift will sustain.
Arbitrage funds and passive ETFs see strong inflows
There was a pleasant surprise with hybrid fund seeing net inflows of Rs6,210cr and passive ETFs seeing inflows of a healthy Rs8,197cr. Within hybrid funds, dynamic funds saw inflows of Rs2,711cr while arbitrage funds had another bumper month with Rs3,088cr inflows. Arbitrage funds are being viewed as an alternative to low yields on liquid funds.
In the passive pack, index funds and ETFs saw inflows of Rs2,126cr while bond ETFs saw inflows of Rs3,088cr. Among the other categories, gold funds saw muted inflows of Rs662cr while international FOFs were once again robust with inflows of Rs1,776cr.
SIPs register record inflows of Rs9182cr in Mar-21
SIP inflows at Rs9,182cr was an all-time record flow in a single month. SIPs already account for nearly 38% of the total equity fund AUM and that is a good signal for long term robustness of equity funds. But, March may have finally given mutual funds dual reasons to celebrate with positive equity fund flows and record SIP infusion!