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 February 2023 compared to hybrid funds and the passive fund categories. February 2023 saw SIPs tapering slightly to Rs13,686 crore, but still robust. Also, new fund offerings (NFOs) were robust in February 2023 collecting Rs7,187 crore across 27 NFOs.

How mutual fund flows panned out in February 2023

Here is a quick look at how the monthly flows across fund categories panned out for the last 13 months. Solutions funds have been combined into hybrid funds.

Data Source: AMFI

What are the quick takeaways from the mutual fund flows data for the last one year? Debt funds saw net outflows in 9 out of the last 13 months while hybrid funds saw net outflows in 7 out of the last 13 months. Both, active equity funds and passive funds saw net inflows in all the 13 months till February 2023. Overall flows of equity funds in the last 13 months stood at Rs1.74 trillion while net inflows into passive funds in the same period stood at Rs1.67 trillion. Active debt funds saw net outflows of Rs2.50 trillion in the same period. Hybrid funds had net outflows in the last 13 months of Rs4,940 crore, largely due to outflows from arbitrage funds. Flows eventually determine the shape of AUM.

How mutual fund AUM shaped up in last one year

The AUM (assets under management) is a combination of inflows and market conditions. While market conditions have been volatile for equity funds, it is more than compensated by the flows from SIPs and NFOs. If you look at the table below, there are 3 broad trends that emerge, especially the shift that is happening in the colour of the AUM.

Firstly, overall AUM has been largely wobbly in a narrow range and has gone up just 5.1% to Rs39.46 trillion in the last one year. During the same period, the debt fund AUM has sharply contracted from Rs14.09 trillion to Rs12.30 trillion, largely due to treasury outflows and concerns over rising rates. This has been made up with expansion of AUM of equity funds and passive alternative funds; where inflows have been consistently robust. The real story is the shift of AUM out of debt and into equity and passive funds.

Data Source AMFI

If you sum up the flows story and the AUM story, it is clear that active debt-funds and treasury funds have suffered under conditions of rising interest rates. While equity funds are preferred, investors are seriously looking at passive avenues since they give market returns with much lower expense ratios. The argument is that when it is tough to beat the market, as well stick to passive funds. As Jack Bogle summed it up succinctly, “Why look for a needle in a haystack, when you can buy the entire haystack?”

Active Debt funds: The flow story

Debt fund saw outflows of Rs13,815 crore in the month of February 2023. In the last 13 months debt funds have seen overall outflows of Rs2.50 trillion. The month was obviously dominated by net outflows, but there were some categories that saw inflows too. For instance, Overnight funds saw inflows of Rs2,946 crore, corporate bond funds Rs662 crore, dynamic bond funds Rs502 crore, gilt funds Rs451 crore and short duration funds Rs412 crore.  Let us now turn to the larger list of debt fund categories that saw outflows.

Big selling was visible in Liquid funds Rs11,304 crore, ultra-short duration Funds Rs2,430 crore, low duration funds Rs1,904 crore, Floater Funds Rs1,665 crore, Credit Risk Funds Rs673 crore and money market funds Rs542 crore. There were other funds that also saw selling, but were much smaller. The hawkishness of the Fed and the RBI also hint at higher terminal rates of interest, which is keeping debt fund flows under pressure.

Active Equity Fund flows got a boost from NFOs

Equity fund flows saw net inflows of Rs15,686 crore in February 2023. Let us look at the major driver categories among equity funds. Once again, all the equity fund categories saw net inflows in the month of February 2023. Sector funds saw inflows of Rs3,856 crore, flexi-cap / Multi-cap funds Rs3,779 crore, small cap funds Rs2,246 crore, mid-cap funds Rs1,817 crore, Large & Mid cap funds Rs1,651 crore, ELSS Rs981 crore and value funds Rs713 crore.

Most of the thrust to the equity fund flows came from SIP flows and a slew of NFOs during the month of February 2023. NFOs of multi-cap funds collected Rs1,764 crore, sectoral fund NFOs collected Rs2,540 crore while flexi-cap fund NFOs got Rs744 crore. They accounted for much of the net inflows in these categories in February 2023. Other categories saw inflows of a much smaller scale

Hybrid flows tepid but index funds shine in February

Overall, the combination of hybrid funds and solution funds got net inflows of Rs630 crore on a net basis. Among the hybrid funds, it was the multi-asset allocation funds that saw net inflows of Rs511 crore, while other inflows were smaller. Among the hybrid funds, conservative funds and equity savings funds saw outflows.

Passive funds again had a robust February 2023 with net inflows of Rs6,488 crore. This was driven by inflows into index funds, which saw inflows of Rs6,244 crore during the month of February 2023. In the month of February, there were 11 index fund NFO, but they collected just Rs863 crore overall. Most of the net index fund flows came as investors shifted to passives and more institutional and HNI money coming into index funds. Other categories like gold funds and Fund of Funds (FOF) saw marginal inflows in February 2023.

What we read from the February 2023 mutual fund flows?

Here is a quick summary of the February 2023 fund flows, and there are 3 takeaways.

1. Equity fund flows continues to be robust despite volatile market conditions. This can be largely attributed to robust inflows via NFOs and SIPs.
   
    
2. Equity and bond index ETFs combined have the highest AUM among all categories as of the close of February 2023 at Rs4.82 trillion. 
   
    
3. Active debt funds have shown some improvement but central bank hawkishness is likely to be a major overhang.