Passive funds lead net MF inflows in December 2022 quarter

30 Jan 2023 , 09:21 AM

It shows strong positive inflows across equity and passive funds, but outflows from active debt funds and hybrid funds. This replicates the trend seen in the September 2022 quarter. 

December 2022 marks the fifth consecutive quarter that active debt fund flows have been negative. This is indicative of the pressure of higher bond yields and diminishing attractiveness compared to alternatives. The December 2022 quarter showed a substantial bias in favour of passive funds followed by active equity funds.

As of the close of December 2022 quarter, net AUM of Indian mutual funds stood at Rs39.89 trillion, a gain of 3.81% over the September 2022 quarter. Although the flows into equity funds and passive funds were clearly positive, these gains were largely neutralized by the volatility in the equity market despite persistent FPI buying in the December quarter. 

The equity fund AUM accretion in the December 2022 quarter was triggered by net inflows. Despite the bounce in markets in October and November, the volatility of December put some pressure on equity fund AUM. Here is the story of mutual fund AUM in the December 2022 quarter and how the flows into specific categories of mutual funds panned out.

Debt fund flows in December 2022 quarter?

Flows into Debt Funds in the Dec-22 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-22
Rs23.44 trillion	Rs23.65 trillion	Rs(0.21) trillion	Rs12.42 trillion

Indian debt funds saw net redemptions of Rs21,096 crore in the December 2022 quarter, which is much lower than the massive sell-offs seen March 2022 and the June 2022 quarter. The net outflows for December 2022 quarter appeared to stabilize and taper after the rates had been hiked by 225 basis points by the RBI and most of the downside risks were factored into bond prices. 

Let us look at key flow drivers and start with inflows? Only liquid funds saw substantial inflows in the quarter of  Rs39,509 crore. Among smaller inflows in the quarter, money market funds saw inflows of Rs2,030 crore, corporate bond funds Rs1,220 crore, long duration funds Rs559 crore and gilt funds Rs344 crore. Most of the other categories of debt funds saw either flat flows or strong outflows in the quarter.

The December 2022 quarter story of debt fund flows once again veered towards broad-based redemptions. Overnight Funds saw outflows of (Rs40,688 crore), Short Duration funds (Rs5,163 crore), Floater funds (Rs5,004 crore), Banking & PSU funds (Rs4,755 crore), Low Duration Funds (Rs3,148 crore), Medium Duration Funds (Rs2,618 crore) and ultra-short duration Funds (Rs2,290 crore). There were other redemption candidates like medium to long duration funds and credit risk funds, but they were relatively smaller.

Total AUM of all debt funds at the close of the December 2022 quarter stood at Rs12.42 trillion with its overall share of MF AUM lower sequentially at 31.82%. In the last one year, the big story has been the way, the equity fund AUM and the passive fund AUM have grown sizably at the cost of active debt fund AUM.

Equity fund flows in December 2022 quarter

Flows into Equity Funds in the Dec-22 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-22
Rs83,583cr	Rs64,631cr	Rs18,952cr	Rs15.25 trillion

After robust inflows of around Rs50,000 crore in each of the last few quarters, December 2022 quarter saw net equity inflows tapering to Rs18,952 crore. This is despite a sharp spike in the SIP flow numbers as well as the number of NFOs raising fresh funds. Unlike in the previous few quarters, several equity fund categories saw net outflows in the December quarter. 

This is despite steady flows from systematic investment plans (SIPs) and from new fund offerings (NFOs). One interesting trend that is visible in the December quarter is the general resistance among people in buying large cap funds as they are scouting for alpha in the mid-cap and small cap space. For the December quarter, large cap funds saw outflows of Rs(892) crore while dividend yield funds and focused funds also saw minor fund outflows.

The positive contributors to equity funds were a lot more affirmative. The search for Alpha has been more pronounced this time. Small cap funds led the quarter with net inflows of Rs5,205 crore, followed by mid-cap funds at Rs4,524 crore. Among other categories seeing positive net flows in the December 2022 quarter were sectoral & thematic funds at Rs3,862 crore, large & mid cap funds Rs2,972 crore, multi-cap plus flexi-cap funds Rs1,741 crore, value funds Rs1,173 crore and ELSS funds Rs696 crore. 

The total AUM of equity funds at the end of the December 2022 quarter stood at Rs15.25 trillion with a decisive market share of 37.81% marking a big shift in the last one year. In the December 2022 quarter 2 trends were visible. Firstly, there was a shift out of active funds into passive funds. Even within active, there was a shift from large index players into small and mid-cap stocks. However, equity funds have maintained the share lead over debt funds and widened the lead further in the December quarter.

Hybrid fund flows in December 2022 quarter

Flows into Hybrid Funds in the Dec-22 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-22
Rs34,962cr	Rs42,004cr	Rs(7,042)cr	Rs4.91 trillion

In December 2022 quarter, hybrid fund saw outflows after several quarters of net inflows and this can be largely attributed to selling in arbitrage funds as well as investors getting disillusioned with balanced advantage funds (BAFs). However, the NFOs that were driving record collection by BAFs were conspicuous by their absence. This resulted in the absence of incremental NFO flows into the Balanced Advantage Funds (BAF). 

Let us look at the inflows into hybrid funds first. Only multi-asset allocation funds saw net inflows of Rs1,884 crore in the December 2022 quarter. However, Arbitrage Funds saw net outflows of Rs(5,661) crore in December 2022 quarter, due to treasury considerations. Balanced Advantage Funds (BAFs) also saw outflows to the tune of Rs2,462 crore. Total AUM of all hybrid funds at the end of December 2022 quarter stood at Rs4.91 trillion, even as its AUM share in December 2022 has actually fallen marginally to 12.47%.

Passive fund flows in December 2022 quarter

Flows into Passive Funds in the Dec-22 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-22
Rs68,824cr	Rs32,771cr	Rs36,053cr	Rs6.68 trillion

Passive funds had another fantastic December 2022 quarter with net inflow of Rs36,053 crore, almost at par with the robust inflows in the last three quarters. There was traction across passive categories. Index Funds/ETFs saw inflows of Rs20,414 crore and other ETFs Rs15,600 crore. Gold funds saw tepid outflows of Rs321 crore while FOFs saw inflows of Rs359 crore. Passive funds now contribute a whopping 16.36% of total MF AUM. With most of the NFOs being dominated by passive funds, AUM growth is understandable.

To summarize the trend of the quarter, 4 trends emerge.

• Today, the fund with the largest AUM is not a debt fund but an index ETF that manages around Rs4.97 trillion. Liquid funds AUM is just Rs3.98 trillion.
• Closed-ended FTPs (largely through NFOs) have seen good traction in the December quarter as savvy investors rush to lock higher yields.
• There are two trends in equities. Firstly, there is a shift out of active into passive assets. Even in active assets, preference is for small and mid-cap stocks.
• Finally, it is the alternatives that have now emerged stronger with 30% market share. That is probably the road ahead.