However, flows into active debt funds stayed in the negative. The redeeming feature of the month was the rebound in flows into active equity funds, which did much better in January 2023 compared to the hybrid funds and the passive fund categories too. January 2023 repeated the SIP story, touching a record level of Rs13,856 crore in the month. Secondly, new fund offerings (NFOs) were robust in January 2023 collecting Rs4,422 crore. 

The NFO flows in January 2023 were largely dominated by multi-cap funds, multi-asset allocation funds and closed ended fixed term plans (FTP). Let us quickly turn to the AUM story for January 2023. Alternate AUM includes hybrids, passives and solution funds.

Data Source AMFI

The overall AUM of the mutual fund industry as of the close of January 2023 stood at Rs39.62 trillion, slightly lower than in December 2022, due to the fall in the index during the month. Here are some major takeaways.

• The overall AUM has been in a very narrow range for the past one year. Most of the volatility in AUM has arisen from sharp swings in the equity markets coupled with sharp swings in benchmark bond yields. 
  
   
• If you compare the AUM of active equity funds and active debt funds, there has been a complete reversal of roles over last 12 months. In January 2022, active debt had an overall AUM of Rs14.13 trillion and active equity had AUM of Rs13.38 trillion. As of January 2023, overall AUM of active debt funds has fallen to Rs12.38 trillion while AUM of active equity is up to Rs15.06 trillion. It is a complete reversal of roles; partially attributed to market contribution and partially to low yields on debt.
  
   
• The big takeaway is that the AUM of alternate assets has moved up from Rs9.89 trillion to Rs11.87 trillion in last one year. Active fund managers struggled to beat the index, which led to investors gravitating towards passive index funds and index ETFs. However, there are signals of a turnaround in active equity fund demand in January 2023.

Let us now turn to debt mutual fund flows for January 2023.

Debt fund flows again face pressure in January 2023

In the last one year, debt fund flows have been under pressure and have actually been negative in almost all the quarters. For the month of January 2023, debt funds saw net outflows of Rs10,316 crore. The outflows have halved over December 2022, but that must be adjusted for the treasury effect. The outflows from debt funds is quite high, despite January not being a treasury adjustment month. Active debt funds have also faced pressure of flows, at the long end of the duration curve, due to excess hawkishness of the RBI and the US Federal Reserve.

Here is a summary of debt fund flows in January 2023. The funds that saw positive inflows were limited. Money Market funds saw inflows of Rs6,460 crore and ultra-short duration funds Rs1,765 crore. Other than that, inflows into long duration funds, dynamic bond funds and 10 year Gilt Funds were quite limited. Clearly, the overall flows in active debt funds were biased towards the sell side as is evident from the large net selling number. There were signs of some buying interest in long duration bonds betting that the interest cycle in India may have topped out.

We now turn to the larger universe of debt fund categories that saw outflows in January 2023. Big selling was visible in Liquid funds Rs5,042 crore, short duration Funds Rs3,859 crore, Overnight funds Rs3,688 crore, Corporate Bond Funds Rs2,333 crore, Floater funds Rs1,438 crore, Banking & PSU Funds Rs1,173 crore. In addition, debt fund categories like low duration funds and credit risk funds also saw net outflows in January 2023. With the RBI hiking rates by another 25 bps and the Fed staying hawkish, bond yields are already under stress and could put further strain on the flows into longer duration funds.

Small fund categories boost equity fund flows in January 2023

Equity fund flows in January 2023 were sharply higher at Rs12,547 crore. The big thrust to equity flows came from Rs4,422 crore of NFO flows and Rs13,856 crore of SIP flows. Now for the equity fund inflow story! During January 2023, small cap funds led the way with Rs2,256 crore of inflows. Among other key contributors, Large and mid-cap funds collected Rs1,902 crore and mid cap funds saw inflows of Rs1,628 crore while ELSS saw inflows of Rs1,415 crore. The combination of Multi-cap funds plus flexi-cap funds saw inflows of Rs2,779 crore. Other fund categories that saw meaningful inflows include sector funds at Rs903 crore, contra funds at Rs763 crore and large cap funds at Rs716 crore. All categories of equity funds saw inflows in the month of January 2023.

One parameter that tells you the story of equity fund flows very eloquently is folio accretion. Folios are MF investor accounts and give a fairly good idea of retail spread. As of the close of January 2023, equity folios touched an all-time high of 962.07 lakh folios out of total mutual fund folios of 1,428.44 lakhs; or 67.35% share of overall folios. 

Hybrid flows in January 2023 less impressive than active flows

Hybrid fund flows saw positive flows to the tune of Rs4,492 crore in January 2023; largely because of NFO flows into Aditya Birla Sun Life multi-asset allocation fund. Even arbitrage funds showed positive flows in January 2023. However, the NFOs of the highly popular Balanced Advantage Funds (BAF) is yet to pick up and that was the only hybrid category, other than equity savings funds, to see negative flows. Multi asset allocation funds saw inflows of Rs2,182 crore, largely driven by the Aditya Birla Sun Life Multi Asset Allocation NFO. Arbitrage fund saw net inflows of Rs2,055 crore in January 2023.

Passive funds did not have a very great January 2023 as the dominance of previous months was missing. Overall, passive funds saw inflows of Rs3,955 crore as investors preferred beta over alpha. What is more interesting is the gross flows into passive funds at an impressive Rs23,604 crore. The passive surge was led by index funds at Rs5,813 crore while other ETFs saw outflows of 1,709 crore in January 2023.

What we read from the January 2023 mutual fund flows?

Here is a summation of the January 2023 fund flows in three key takeaways.

1. Equity fund flows saw a sharp turnaround as the levels of certainty and confidence among equity investors is gradually coming back.
   
    
2. The interesting data is that the debt fund with the highest AUM as of January 2023 is bond index ETFs, which stands at Rs4.87 trillion.
   
    
3. The active debt fund flows continue to remain tepid and that is unlikely to change till there is ambiguity over the rate trajectory.