Q1FY24 sees robust MF flows, led by active debt funds

11 Jul 2023 , 10:05 AM

Overall, the net inflows in the quarter were Rs176,833 crore as active debt fund inflows led the way for the quarter with smaller contributions from active equity funds and other hybrid and passive fund categories.

As of the close of June 2023 quarter, net AUM of Indian mutual funds stood at Rs44.39 trillion, higher by nearly 12.6% compared to the close of the March 2023 quarter; mainly due to spike in valuations. Although the flows into equity funds and passive funds were positive, the real boost to the AUM came from value accretion of equities.

Equity funds saw net inflows in the June 2023 quarter on the back of a combination of robust SIP flows and a surge in NFOs. However, the real story of the quarter was debt funds which saw a sharp spike in demand for funds at the shorter end of the yield curve, even as there was selective picking in longer duration funds on hopes of yields tapering with the RBI looking likely to shift its stance more to the dovish side.

Debt fund flows in June 2023 quarter?

Flows into Debt Funds in the Jun-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Jun-23
Rs24.43 trillion	Rs23.04 trillion	Rs1.39 trillion	Rs13.47 trillion

Indian debt funds saw net inflows of Rs138,501 crore in the June 2023 quarter, which is a sharp contrast to the quarterly sell-off seen in debt funds in the last 6 quarters. The net inflows for June 2023 quarter were largely driven by reversal of treasury outflows, as well as investors locking into long dated debt funds on the hopes of making the most of locking into higher yields and at the same time benefiting from falling yields in the future.

Let us look at key flow drivers and start with inflows? Liquid funds saw inflows in the quarter of  Rs79,908 crore. Among other inflows in the quarter, money market funds saw inflows of Rs29,519 crore, ultra-short duration funds Rs16,361 crore, Low duration funds Rs10,568 crore and short duration funds Rs5,651 crore. Most of the debt funds attracting bulk of the inflows in the June quarter were in the short end of the yield curve.

The June 2023 quarter story of debt fund flows veered towards redemptions just in a handful of fund categories. Overnight Funds saw outflows of (Rs8,175 crore), credit risk funds (Rs964 crore), banking & PSU funds (Rs826 crore) and medium duration Funds (Rs331 crore). Clearly, the number of funds seeing redemptions and even the intensity of redemptions was much lower in the June 2023 quarter.

Total AUM of all active debt funds at the close of the June 2023 quarter stood at Rs13.47 trillion with its overall share of MF AUM higher sequentially at 30.35%. In the March quarter, the share of debt funds had dipped below 30% of overall AUM for the first time in 5 years. That has been rectified now. In the latest quarter, the big story has been the way debt funds attracted a lot of inflows, although the equity funds gained in AUM terms due to a sharp rally in equities. Debt funds did not have that kind of an AUM advantage.

Equity fund flows in June 2023 quarter

Flows into Equity Funds in the Jun-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Jun-23
Rs94,253cr	Rs75,895cr	Rs18,358cr	Rs17.43 trillion

Net flows into equity funds in the June 2023 quarter tapered to Rs18,358 crore from a much higher level of Rs48,766 crore in March 2023 quarter. However, the June 2023 quarter flows into equity funds were at par with the December 2022 quarter. The enthusiasm in the equity funds even at higher levels has been sustained by a spike in SIP flow numbers as well as the number of NFOs raising fresh funds. Unlike in the previous quarters, several categories of equity funds like large cap funds, focused funds and ELSS Funds saw negative flows in the quarter as a whole.

Before we get into specific equity fund flows in the June 2023 quarter, let us look at some interesting themes. For example, the thrust of the flows is moving more towards alpha hunting. That is the reason you find flows gravitating towards small cap funds and mid-cap funds and even sector / thematic funds. One reason for the interest in thematic funds has also been the predominance of NFOs, as there are no limits on the number of thematic funds for an AMC.

The positive flows into equity funds were affirmative in the June 2023 quarter in select classes. Small cap funds led the way with flows of Rs10,937 crore followed by mid-cap funds Rs4,735 crore, value funds at Rs3,112 crore and large & mid-cap funds Rs3,019 crore. On the sell side, large cap funds saw net redemptions of Rs3,359 crore while focused funds saw net outflows of Rs2,093 crore. ELSS funds also remained on the sell side in the June 2023 quarter.

The total AUM of equity funds at the end of the June 2023 quarter stood at Rs17.43 trillion with a decisive market share of 39.27% marking a big shift in last one year. In the June 2023 quarter 2 trends were visible. Firstly, active debt funds once again came back into focus as the treasury outflows of the previous quarters got reversed. Secondly, within the active equity funds space, there was a shift from large index players into small and mid-cap stocks. Equity investors are either looking for alpha or they would rather go for passive funds.

 

Hybrid fund flows in June 2023 quarter

Flows into Hybrid Funds in the Jun-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Jun-23
Rs52,270cr	Rs38,249cr	Rs14,021cr	Rs5.26 trillion

In June 2023 quarter, hybrid fund saw net inflows, unlike in the previous quarter, and this can be largely attributed to inflows into arbitrage funds which had been the reason for net outflows in the previous quarter. Also, the NFOs driving record collection by BAFs were conspicuous by their absence. However, one category of fund that did attract buying interest in the quarter were the multi-asset allocation funds.

Let us look at the inflows into hybrid funds first. Arbitrage Funds led the way with net inflows of Rs13,722 crore in the June 2023 quarter. Multi-asset allocation funds saw meaningful net inflows of Rs2,507 crore in the June 2023 quarter while the equity savings funds also saw marginal net inflows of Rs724 crore in the quarter. In terms of outflows, aggressive hybrid funds saw outflows of Rs1,817 crore while Balanced Advantage Funds (BAFs) saw outflows of Rs1,042 crore. Others were largely neutral in the quarter. Total AUM of all hybrid funds at the end of June 2023 quarter stood at Rs5.26 trillion, even as its AUM share in June 2023 quarter has fallen marginally to 11.84%.

Passive fund flows in June 2023 quarter

Flows into Passive Funds in the Jun-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Jun-23
Rs39,692cr	Rs26,203cr	Rs13,489cr	Rs7.61 trillion

Passive funds had a relatively strong quarter, although nowhere close to the experience of previous quarters. In Q1FY24, net inflows into passive funds stood at Rs13,490 crore compared to net inflows of Rs37,247 crore in the March 2023 quarter. There was traction in index ETFs which saw net inflows of Rs14,717 crore while index funds saw negative flows of Rs650 crore. In the quarter, FOFs also saw net outflows of Rs875 crore while gold funds saw marginal inflows. Passive funds now contribute a whopping 17.13% of total MF AUM, albeit slightly lower than the March 2023 quarter. In the last few months, the NFO focus on passives has reduced and once that is rectified, we should see the flows come in again.

To summarize the June 2023 quarter, 4 trends emerge.

• Today, the fund with the largest AUM is not a debt fund but index ETFs that manage around Rs5.39 trillion. Liquid funds AUM is just Rs4.20 trillion.

   

• Debt saw solid inflows in the quarter but the focus is still at the short end of the curve and the bet is not on locking in higher rates or betting on yields falling.

   

• There are two trends in equities. Firstly, there is a shift out of active into passive assets. Within active assets, preference is for aggressive alpha hunting.

   

Finally, the alternatives that have emerged bigger than active debt funds with 30% market share. That is probably likely to define the road ahead.