Prima facie, it does looks like all is well and the AUM is almost back to the peak levels of Dec-19. However, it does not tell you that a big part of this AUM increase has come from price appreciation. Indian mutual funds are substantially invested in handful of stocks like Reliance, TCS, Infosys, Bharti and HUL, which have outperformed through the pandemic. Here is how various categories of mutual funds fared in terms of flows and redemptions.
Strange but true; debt funds saw outflows in Aug-20
For the month of Aug-20, debt funds saw combined net outflows of Rs3,908cr. In the last 2 months, there was a lot of institutional money (including Reliance Jio flows) contributing to debt funds inflows. Most of the major categories of debt funds witnessed outflows in Aug-20. There was an element of caution among the institutional investors after the Templeton freeze, but that was with respect to funds with credit risk. In the month of August, the liquidity crunch faced by Indian institutions came to the fore as we saw redemptions in short term funds.
In terms of categories; overnight funds, liquid fund and gilt funds saw net outflows to the tune ofnearly Rs27,200cr in Aug-20. The other categories, apart from credit risk funds, saw inflows. Categories of debt funds that saw significant inflows included Ultra Short Term Duration Funds(Rs5,428cr), low duration funds (Rs5,369cr), Money Market Funds (Rs7,911cr) and corporate bond funds (Rs1,955cr).Additionally, dynamic bond funds and medium duration funds also saw inflows. The rush to redeem short term funds was more a signal of the liquidity stress in the system.
Equity funds see second consecutive month of net outflows
Barring sectoral funds, which saw positive flows in Aug-20, other major categories of equity funds witnessed outflows. The overall outflows were Rs4,000cr. Multi-cap funds and large cap funds saw combined outflows of Rs2,700cr. Value funds and other mid cap and small cap fund saw net outflows of around Rs1650cr. This is the second consecutive month of equity funds outflows. But that may not really be the crux of the story.
If you look at the chart above, the SIP flows in Aug-20 stood at Rs7,791cr. This is the third consecutive month when the monthly SIP flows have been below Rs8,000cr. Since, SIPs are predominantly equity funds and ELSS, it hints at bulk selling of Rs11,500cr in equity funds. Equity funds saw outflows of Rs4,000cr despite SIP flows of Rs7,791cr.
Arbitrage funds lose sheen; ETFs continue to attract interest
Volatility is taking its toll on hybrid fund flows. Aggressive hybrid funds saw outflows to the tune of Rs2.355cr. With the volatility index (VIX) falling sharply towards the 20 levels, the spreads generated by arbitrage funds were narrowing. This led to Rs2,555cr of outflows from arbitrage funds too. Closed ended fixed term plans (FMP) saw outflows of Rs4,281cr in Aug-20 as investors were unwilling to commit to debt in a volatile interest rate scenario.
Passive assets continued to attract interest for the month of August also; as has been the trend in the last few quarters. Passive funds saw net inflows of Rs3,188cr, a rare luxury, in a mutual fund scenario dominated by net redemptions. Inflows in passive funds were dominated by index ETFs and gold ETFs, which continues to attract safe haven money.
SIP flows in Aug-20 lag for 3 month in a row
Net SIP inflows in Aug-20 stood at Rs7,791cr, the third month in succession it has been below Rs8000cr. SIPs have been one of the biggest growth story of the last four years and that is beginning to taper off as income uncertainty rises and the pressure is showing in investable surplus. The gross selling in equity funds at over Rs18,600cr in August is a signal that investors are taking profits as markets get closer to the previous peak.
For the mutual fund AUM to grow, excluding capital appreciation in equities, what is needed is a steady flow of new fund offerings or NFOs. Normally, NFOs are relevant when there is a new AMC coming into the market or when there is a new idea being presented to investors. In the last 12 months, the big NFO surge has been visible only in 3 months. But the 3 tall towers have been driven by the government aggressively pushing its debt ETF products. The big gap in MFs is the absence of a steady flow of new investment themes in the market. That is food for thought!