Debt fund inflows dominate in January 2024

9 Feb 2024 , 07:17 AM

Mutual fund flow and AUM story of January 2024

The new year has started with a bang in terms of mutual fund inflows. After negative flows in December 2023, the month of January 2024 has seen strong mutual fund inflows of ₹1.23 Trillion. Debt funds alone accounted for 62% of the total fund inflows in the month of January; with equity, hybrids, and passives accounting for the balance 38% of the inflows. December is normally a tepid month for mutual fund flows due to quarter end pressure on corporates to pay quarterly advance tax and GST, for which they rely on liquid funds. 

However, the robust cash surplus position of Indian corporates is evidenced by the massive inflows in to Indian debt funds in the month of January 2024. As usual, 2 factors were supportive of mutual fund flows in January 2024. Gross SIP (systematic investment plan) flows in January 2024 touched a new record level of ₹18,838 Crore while the NFO (new fund offering) flows in the month were also robust at ₹6,817 Crore; largely dominated by hybrid multi-asset allocation funds.

Net AUM scales new heights in January 2024

After crossing ₹50 Trillion mark in the month of December 2023, the net AUM of the mutual fund segment in January 2024 scaled higher to ₹52.74 Trillion. While some of the surge in the AUM came from market value appreciation, fresh flows into equity, debt and hybrid funds were a key factor in this accretion. The total mutual fund AUM today stands at around $635 billion and, combined with the AUM of LIC, Indian domestic institutions have more than $1.2 trillion in terms of AUM. 

That is huge and can act as a good counter to the $750 billion of FPI AUM. While NFO flows have been relatively subdued in FY24, that is more than compensated by robust flows into systematic investment plans (SIPs). Why have SIP flows have sustained despite markets trading at all-time highs? Experts attribute this to a phenomenon called “Chasing the Leaders.” That may be partially true, but that does not take away from the fact that mutual funds continue to play a very important role in bringing about equity market inclusion. 

Kings of the One Trillion Club

The trillion-rupee club is an exclusive club of fund categories with over ₹100,000 Crore in AUM. Out of the 39 categories of open-ended funds, there are 19 open ended fund categories with AUM of over ₹1 Trillion. Let us start with debt funds first. Out of the 16 active debt schemes, only 4 categories are in the trillion rupee club. This includes liquid funds, money market funds, short duration funds and corporate bond funds. The only debt fund category that would classify as a long maturity fund in this list is the corporate bond fund category; rest are funds at the short end. 

Let us turn to active equity funds? A total of 10 out of the 11 equity funds had AUMs in excess of ₹1 Trillion with only dividend yield funds having an AUM of under ₹1 Trillion. In fact, 6 out of 10 of the equity fund categories viz., large cap funds, mid cap funds, small cap funds, sectoral/thematic fund, ELSS Funds, and flexi-cap funds are already in the ₹2 Trillion club; and out of them, flexi cap funds are in the Rs3 trillion-dollar club. Most of the value accretion in AUM is coming from the active equity funds.

What about the hybrid and passive funds? Out of the 8 funds in the hybrids / solutions category, there are only 3 funds in the ₹1 Trillion club with Dynamic Asset Allocation Funds (BAFs) already in the ₹2 Trillion club. In the passive funds category, 2 out of the 4 fund categories viz., index funds and index ETFs are already in that category. If you take all the funds across the spectrum, index ETF has the highest AUM at ₹6.27 Trillion, with liquid funds trailing way behind at ₹4.31 Trillion and flexi cap funds at ₹3.34 Trillion.

Debt Fund flows dominate with 62% of overall flows

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

Month	Debt Fund  Flows (₹ Crore)	Equity Fund  Flows (₹ Crore)	Hybrid Fund  Flows (₹ Crore)	Passive Fund  Flows (₹ Crore)	Total MF Flows (₹ Crore)
Jan-23	(10,316)	12,547	4,681	3,955	11,373
Feb-23	(13,815)	15,686	630	6,488	9,575
Mar-23	(56,884)	20,534	(12,148)	26,804	(19,264)
Apr-23	106,677	6,480	3,511	6,945	121,435
May-23	45,959	3,240	6,193	4,487	57,420
Jun-23	(14,136)	8,638	4,611	2,057	(2,022)
Jul-23	61,440	7,626	12,541	860	82,046
Aug-23	(25,873)	20,245	17,273	4,535	16,181
Sep-23	(101,512)	14,091	18,650	4,720	(66,192)
Oct-23	42,634	19,957	10,250	7,746	80,529
Nov-23	(4,707)	15,536	13,723	2,234	25,616
Dec-23	(75,560)	16,997	15,229	573	(40,685)
Jan-24	76,469	21,781	20,885	3,983	1,23,205

Data Source: AMFI

Here are some quick takeaways. Debt funds surprised with positive flows but have been in the negative in 3 out of the last 5 months and in 8 out of the last 13 months. In the last one year, the debt fund flows have gone through a typical cycle; seeing aggressive sell-off towards the end of a quarter and then picking up in the months after that. In January 2024, equity funds saw the best inflows in the last 1 year, largely thanks to a combination of robust SIP flows and, to a lesser extent, NFO flows.

Hybrid fund flows are robust, but that is more due to the predominance of arbitrage fund inflows and the growing interest in multi-asset funds as a naturally diversified asset class. Fund managers have been talking about treasuries and HNIs shifting their short term funds from liquid funds to arbitrage funds in search of higher returns and lower tax incidence. That is evident from the sustained flows into arbitrage funds. Market volatility ahead of the general elections is also making arbitrage funds more attractive. Passive fund flows continue to remain at a subdued level, as investors are increasingly fascinated by the power of active.

How the overall AUM mix evolved in January 2024?

January 2024 saw another surge in overall AUM; from ₹50.78 Trillion to ₹52.74 Trillion over the previous month. This marks the highest ever closing AUM for mutual funds in India. Since the start of FY24, AUM of mutual funds is up 33.79%, largely due to the frenetic rally in equities, but also supported by positive flows into select categories of mutual funds.

Month	Debt AUM  (₹ Trillion)	Equity AUM  (₹ Trillion)	Alternate AUM  (₹ Trillion)	Total AUM  (₹ Trillion)
Jan-23	12.38	15.06	11.87	39.62
Feb-23	12.30	15.02	11.83	39.46
Mar-23	11.82	15.17	12.09	39.42
Apr-23	12.99	15.85	12.47	41.62
May-23	13.49	16.57	12.85	43.20
Jun-23	13.48	17.43	13.22	44.39
Jul-23	14.17	18.25	13.69	46.38
Aug-23	14.00	18.60	13.74	46.64
Sep-23	13.05	19.08	14.17	46.58
Oct-23	13.54	18.79	14.10	46.72
Nov-23	13.58	20.33	14.87	49.05
Dec-23	12.91	21.79	15.78	50.78
Jan-24	13.77	22.50	16.17	52.74

Data Source AMFI

For January, the debt fund AUM bounced to ₹13.77 Trillion compared to ₹12.91 Trillion at the close of last month. On a yoy basis, the AUM of debt funds is up 11.23%. However, the equity fund AUM surged to ₹22.50 Trillion compared to ₹21.79 Trillion at the close of last month; suggesting a yoy growth in AUM of 49.40%. Equity fund AUM has gained from the frenetic growth in the indices over the last one year; apart from positive flows. Alternate assets saw AUM grow by 36.23% yoy, largely driven by hybrid funds in FY24. Here is the AUM share of different categories of funds changed in last 4 months

Month	Active Debt Funds	Active Equity Funds	Hybrid  Funds	Passive Funds	Solution Funds	Close-ended Funds
Oct-23	28.99%	40.23%	12.58%	16.80%	0.81%	0.59%
Nov-23	27.68%	41.46%	12.72%	16.78%	0.82%	0.55%
Dec-23	25.42%	42.92%	13.03%	17.21%	0.84%	0.58%
Jan-24	26.10%	42.67%	13.09%	16.75%	0.82%	0.56%

If you take a 4 month perspective, share of active equity fund AUM and the share of hybrid fund AUM has gained smartly at the cost of active debt fund AUM share. However, if you look at January 2024 over December 2023; the AUM share of debt funds has gained at the cost of the AUM of active equity fund share and passive fund share. The AUM share of hybrid funds, solution funds and closed-ended funds have been neutral over last month. 

Active Debt funds: Smart turnaround in January 2024

Debt funds saw net inflows of ₹76,469 Crore in January 2024, reversing the December sell-off. This is the eighth time in last 13 months that debt funds have seen negative flows. The inflows were substantially broad-based, although concentrated at the short end. Liquid funds saw net inflows of ₹49,468 Crore, money market funds ₹10,651 Crore, overnight funds ₹8,995 Crore, ultra-short duration funds ₹2,937 Crore, low duration funds ₹2,116 Crore, corporate bond funds ₹1,301 Crore, and floater funds ₹1,221 Crore.

Among the debt fund categories that saw net outflows in January 2024 were banking & PSU funds ₹501 Crore, credit risk funds ₹303 Crore, and medium duration funds ₹211 Crore; all relatively tepid compared to the intensity of inflows. Most of the other debt fund categories also witnessed net selling or net buying in January 2024, but were very marginal to make a substantive difference to the flow story. 

Active Equity Funds: Record monthly flows in January 2024

For the month of January 2024, all categories of equity funds, other than Focused funds, saw positive flows. Total inflows into equity funds at ₹21,781 Crore, was the best in the last one year. Multi-Cap / Flexi Cap funds dominated inflows at ₹5,486 Crore. The other fund categories that saw net inflows in January 2024 include; Sectoral Funds / Thematic funds ₹4,805 Crore, small cap funds ₹3,257 Crore, large & mid-cap funds ₹2,330 Crore, mid-cap funds ₹2,061 Crore, value funds ₹1,842 Crore and large cap funds ₹1,287 Crore. Other flows were not too significant, but the penchant for alpha hunting appears obvious.

Hybrid flows robust, but passive flows subdued

Overall, the combination of hybrid funds and solution funds got net inflows of ₹21,133 Crore and is emerging as a key flow driver. However, just 2 fund categories dominated total hybrid flows in January 2024 and accounted for 83.70% of the net flows into the hybrid category. In the star hybrid category, net inflows into arbitrage funds stood at ₹10,608 Crore and multi-asset allocation funds saw inflows of ₹7,080 Crore. Among others, the dynamic asset allocation funds (BAFs) saw inflows of ₹1,340 Crore while equity savings funds also saw net inflows of ₹1,114 Crore. While arbitrage funds may be chipping away at liquid funds; multi-asset allocation funds, BAFs and equity savings funds point to a greater focus by investors on asset class diversification and a focus on asset allocation.

Passive funds had a relatively tepid month in January 2024 with net inflows at ₹3,983 Crore; albeit better than previous month. This was driven by inflows of ₹2,988 Crore into index funds, ₹658 Crore into gold funds, and ₹571 Crore into index ETFs. International FOFs, actually witnessed net outflows in the month.

Will Interim Budget 2024 spur mutual fund flows?

The interim budget is normally a stop-gap arrangement. However, this interim budget had some positive traction going in its favour. The fiscal deficit was cut by 10 bps to 5.8% for FY24 and slashed to 5.1% for FY25; nearly 20 bps to 40 bps lower than street estimates. That will mean lower borrowings and would serve to taper bond yields on the benchmark. This will be positive for debt funds and likely to attract debt fund flows into longer maturities.

The lower rates will also be positive for equity fund flows due to improved DCF valuations. More importantly, the 11.1% higher allocation to capex will also be a big boost for the demand for equity funds as investors try and buy into the India story. We may have to wait for the full budget in July for specific provisions pertaining to mutual funds. However, the right ecosystem has been set to encourage flows into mutual funds in 2024.