Passive funds save the day for MF flows in July 2022

9 Aug 2022 , 10:11 AM

For the month of July 2022, inflows into equity funds and debt funds stayed positive. However, the strength of flows into active funds were relatively tepid. That was more than compensated by the strong inflows into passive funds during the month. However, selling pressure was visible in hybrid funds, especially arbitrage funds.

However, there were 2 stories to savour in the month of July. Firstly, despite the volatility, SIP flows in July 2022, was almost stable at Rs12,140 crore. The second good news was that NFOs reopened after a 2 month hiatus. However, as of end July 2022, a number of NFOs are still open so a clearer picture of NFO flows should emerge when we get the August data.

The overall MF AUM in July 2022 bounced sharply to Rs37.75 trillion. This was on the back of a sharp bounced in the markets and a rally across the board. The Nifty and the Sensex have bounced more than 12% from the recent lows and that has driven a lot of value in equity fund AUMs. However, overall AUM is still short of the peak.

Data Source: AMFI

Overall MF net inflows for July 2022 stood at Rs23,605 crore. This was driven by open ended debt fund inflows of Rs4,930 crore, open ended equity fund inflows of Rs8,898 crore and passive fund inflows of Rs14,271 crore. However, hybrid funds saw outflows of Rs(5,146) crore. Closed ended funds saw net inflows of Rs599 crore in July 2022, largely on the strength of Fixed Term Plan NFOs. The current AUM mix is; Income Funds (33.02%), equity funds (37.50%), hybrid funds (12.86%) and passive & solution funds (15.95%). The residual 0.67% was accounted for by close-ended funds.

It may be recollected that in March 2022, the AUM of active equity funds had decisively crossed that of debt funds. That lead has been sustained since and in the month of July, that lead has sharpened due to the sharp rally in the market. Debt funds have been facing pressure due to redemptions as well as due to the price impact of rising bond yields. Overall MF AUM grew just 5.18% yoy from Rs35.89 trillion in July 2021 to Rs37.75 trillion in July 2022. Hybrids, solution funds and passive funds account for 28.81% of the total AUM.

Debt fund flows cautious in July 2022 amidst rising yields

In the last 5 months, debt funds saw sharp outflows in March, May and June. April was the sole exception and now there are marginal net inflows into debt funds in July 2022. The outflows in the recent past could be attributed to treasury pressures from corporate funds and fear of rising yields. Debt funds inflows were fairly subdued with most of the inflows coming into Overnight funds. Overall open-ended debt fund inflows were Rs4,930 crore in July 2022. The selling was prominent across low duration, long duration and even floater funds in the month of July 2022.

Here we first look at the debt fund inflows in July 2022. The funds that saw substantive positive inflows include Overnight funds Rs19,919 crore, Ultra Short Duration Funds Rs3,728 crore and Money Market Funds Rs2,639 crore. The net inflows clearly betray a sense of bond buyers playing it safe by staying at the short end of the yield curve to avoid price risk.

We now turn to the category of debt funds that saw outflows in July 2022. Big selling was visible in Liquid funds Rs7,693 crore, Floater Funds Rs4,682 crore, Banking and PSU funds Rs2,810 crore, Corporate Bond Funds Rs2,582 crore, short duration funds Rs1,872 crore and low duration funds Rs646 crore. Surprisingly, even floater funds are seeing selling, despite the bond yields moving up closer to 7.4% on the 10-year benchmark.

NFOs return, but SIPs boost equity fund flows in July 2022

In the month of July 2022, the sharp rise in the indices and the FPI inflows gave a lot of confidence to mutual fund investors to buy into equity funds. However, the big story of the month was still the persistency of SIP flows, which stayed robust at Rs12,140 crore. The NFOs have just restarted in July 2022 and the impact should be visible in this quarter. Overall equity fund inflows at Rs8,898 crore may not be exciting but the big takeaway is that, once again, not a single category of equity fund saw net outflows in July 2022.

Let us turn to specific category-wise inflows. During July 2022, Multi-cap funds plus flexi-cap funds led the way with inflows of Rs1,906 crore. Small Cap funds collected Rs1,780 crore, mid cap funds got inflows of Rs1,245 crore, large & mid cap funds saw inflows of Rs1,120 crore and large cap funds attracted flows of Rs1,091 crore. Among others, focussed funds saw inflows of Rs773 crore, contra funds Rs427 crore and ELSS funds Rs328 crore. The order of preference appears to be shifting in favour of small and mid-cap funds for alpha gains.

One parameter that tells you the story of sustainability of equity fund flows is folio accretion. Folios are MF investor accounts and give a good idea of the retail spread of demand. As of the close of July 2022, equity folios touched an all-time high of 902.53 lakh folios out of total mutual fund folios of 1,355.74 lakhs; or 66.57% share of overall folios.

Same story; Hybrid funds see outflows, passive funds come out trumps

Hybrid funds saw outflows of Rs5,146 crore in July 2022. This is similar to the trend that we have seen in last few months. Two factors worked against hybrid funds in July 2022. Firstly, NFOs have just started but we are yet to see the popular BAF funds, as the focus is currently on passive funds NFOs. Secondly, arbitrage funds saw heavy outflows of Rs6,408 crore. Other hybrid categories like aggressive hybrids and BAFs saw net inflows in July 2022.

Passive funds were the big story of July 2022. These passive funds saw healthy inflows of Rs14,271 crore as investors looked for lower cost alpha. The passive surge was led by equity & debt index ETFs at Rs7,635 crore followed by index funds at Rs6,779 crore. Index ETFs got a boost from the NFO rush. Gold ETFs saw outflows in July while the international FOFs saw net inflows in the month. Most NFOs tend to gravitate towards passive funds since these funds do not have product level limits. For passive funds, NFOs could be the next big story.

Mutual fund flows have de-coupled from market gyrations

On an overall basis, mutual funds saw net inflows of Rs23,605 crore in July 2022, largely on account of strong inflows into passive funds followed by active equity funds. Despite the domestic and global uncertainty, SIP flows were stable at Rs12,140 crore in July 2022. So, would it be fair to say that mutual fund flows have de-coupled from market gyrations. A few swallows, do not make a summer; but Indian mutual funds may be gradually getting there.