Major trends in equity fund flows
No prizes for guessing but the flows into active equity funds have fallen sharply in the last one year. Between October 2018 and October 2019, the equity fund net collections fell from Rs12,622cr a month to Rs6,037cr a month. This trend has continued despite the minor spurt in the middle of the year around the election results. How exactly do the specific heads of equity funds stack up?
The trend of multi-cap funds attracting the maximum flows in the equity category has continued. In the last few months, there has been a clear preference for multi-cap funds even as large cap and mid cap funds also continued to get significant flows. The attraction of multi-cap funds is not hard to understand. Since it gives the fund manager the flexibility to toggle between large caps, mid caps and small caps; it provides the perfect balance between safety, stability and alpha.
But the real trend worth noting was the sizable inflows into passive index ETFs. For the month of October, index ETFs saw net inflows of Rs5,906cr, which is almost equal to the total active equity fund flows in the same month. Does that mean that there is a shift from active to passive among retail investors? It may be too early to say but it is clear that investors are finding the simplicity and low costs of ETFs attractive. Remember, the total index ETF AUM in India has touched $23 billlion. One can argue that this is still small compared to the global ETF AUM of $5.8 trillion but ETFs and indexing are certainly catching up in India. That seems to be the big story.
SIP flows continue to remain steady
There are some significant shifts that have happened in the last few years as far as retail flows into mutual funds are concerned. As of October, retail investors account for 55% of the overall mutual fund AUM with institutions accounting for the balance. This growth has been largely led by systematic investment plans (SIP).
Over the past one year, the net inflows into SIPs have been consistently above the Rs8,000cr levels. Generally, SIPs represent retail money and they are largely allocated to active equity funds and ELSS tax saving schemes. The reason these flows are important is because they represent stable flows as they are normally a part of the long term financial plans of households. However, the risk here is that despite a total 3 crore SIP accounts, the overall monthly SIP collections are not really showing a sharp upturn. That will be essential for continued retail trust in the capital markets.
Debt fund flows made the quantum difference
If you take the debt fund category overall, the net inflows for October were to the tune of Rs121,000cr. Nearly Rs108,000cr worth of inflows were accounted for by liquid funds, overnight funds and money market funds. Among the other categories of debt funds, there was a clear shift to safety with Bank/PSU funds and corporate bond funds attracting positive flows. These were largely on the back of positive cues from likely interest rate cuts by the RBI. However, the traditional aversion to some of the vulnerable categories of debt funds continued in the month of October too. For example, credit risk funds and medium duration funds saw negative flows in October.
Clearly, the measures taken by SEBI in terms of minimum 20% in cash equivalents for liquid funds and 30-day cut-off for MTM has helped to make the debt and liquid funds more transparent and predictable. That is evident in the surge in debt fund flows. Of course, with the memories of IL&FS and Essel Group still fresh, the risk aversion continues. In fact, the risk aversion has been so high that even the aggressive and balanced hybrid funds saw net outflows.
Overall, the AUM of the mutual fund segment in October 2019 increased by 7% on a MOM basis to Rs26,22,000cr. The big news was certainly on the surge in ETF inflows and debt funds getting back in the reckoning.