There are two ways mutual fund AUMexpands. The first is through surge in net inflows into equity and debt funds. While debt funds have seen inflows, money is consistently flowing out of equity funds. That trend has repeated in Nov-20 also;we shall get to that later. The second way AUM grows is through value accretion. With the Nifty gaining 14% in Nov-20, that has been substantially responsible for the overall MF AUM crossing Rs30 trillion. Of course, debt fund inflows have helped but the momentum has clearly come from an unprecedented rally in large-cap, mid-cap and small-cap stocks.
As can be seen in the above chart, the AUM of the Indian mutual fund industry has grown 35% since the lows of March 2020. That growth has predominantly come from the 75% rally in the Nifty and Sensex.
Debt fund flows remain robust in Nov-20
If the inflow of Rs110,500cr into debt funds in Oct-20 was the prelude, the trend has been accentuated with net inflows of Rs44,984cr in November. A couple of things worked in favour of robust debt fund flows. Firstly, the sharp recovery in the macros and GDP growth indicates that solvency may not be a big risk for Indian corporates. Secondly, RBI has reiterated in recent policies that accommodative stance shall stay. That is a major source of comfort for longer duration investors in debt funds.
Let us look at the colour of flows into specific categories of debt funds. In Nov-20, all categories of funds other than liquid and overnight funds saw inflows. For example, overnight funds saw outflows of Rs15,548cr while liquid funds saw outflows of Rs8,415cr. Inflows were visible in relatively longer duration. Low duration and short duration funds saw Rs40,000cr of inflows, while ultra short duration funds saw Rs5,374cr of inflows. With the interest rate scenario turning more dovish, investors see merit in moving up the duration curve for higher yields even at slightly higher risk.
Corporate Bond funds saw net inflows of Rs11,093cr in Nov-20 while Banking & PSU funds saw Rs3,875cr of net inflows. Even floater funds saw net inflows of Rs2,500cr in Nov-20. However, investors continue to be cautious on credit risk funds even 8 months after the Templeton fiasco.
Nov-20was the fifth month of outflows for equity funds
The equity fund net outflowscontinued for the fifthmonth in succession. The last time we saw such prolonged outflows was prior to 2014 when the equity fund outflows remained negative for 4 years in succession. The overall net outflows in the last five months from equity funds have been Rs22,856cr of which nearly 57% happened only in Nov-20. Considering SIPs continue to remain robust around Rs7,800cr each month, the effective lump-sum outflows from equity funds would be closer to Rs62,000cr.
In terms of specific fund categories, every single category of equity fund saw outflows in November 2020. Among the major categories that saw outflows; multi-cap funds saw outflows to the tune of Rs2,842cr. That is partly due to the investment restrictions announced by SEBI and hopes of the flexi cap coming in soon. Among other categories, there were outflows to the tune of Rs3,289cr from large cap funds, Rs2,400cr from mid cap and small-cap funds and Rs1,323cr from value funds. Surprisingly, even ELSS funds saw outflows of Rs804cr during the month of November 2020. The overall equity fund selling of Rs12,917cr in Nov-20 was more than the combined selling in the previous 4 months.
Equity rubs off on hybrid funds too; even as passive funds remains subdued
The concern over equity as an asset class at such high valuations reflected in the colour of flows into hybrid funds also. The hybrid funds overall saw outflows of Rs5,249 crore; largely dominated by outflows of Rs.3,731cr from aggressive hybrid funds. Dynamic discretion based funds and even equity savings funds saw outflows to the tune of Rs1,100cr while arbitrage funds saw outflows due to low interest rates and a dovish cum accommodative stance underlined by the RBI. That has squeezed arbitrage spreads in recent months.
Passive fund were relatively quiet with CPSE ETFs and FOFs / International funds attracting some inflows due to a concentration of NFOs. However, traditional index funds and gold funds saw outflows. Gold funds faced outflows on the back of a sharp fall in gold prices.
Three things to ponder over
The November 2020 mutual fund flow data leaves us with three key issues to ponder over. Firstly, how would equity fund flows look like if SIPs begin to dry up? Secondly, would debt funds see inflows if the RBI was to hint at a change in stance. Lastly, how much longer can the mutual fund AUM be driven by market appreciation alone? In the middle of these 3 questions, there is the undeniable reality that MF AUM has actually crossed the Rs30 trillion thresholds for the first time. For now, we can surely raise a toast to the India MF story!