Debt funds sell off in Q2FY24; hybrid funds steal the show

12 Oct 2023 , 07:02 AM

Mutual fund saw net inflows of Rs176,833 crore in the June 2023 quarter as active debt fund inflows led the way for the quarter and it was supported by smaller contributions from active equity funds and other hybrid and passive fund categories. However, in the September quarter, the net inflows are at just Rs32,456 crore, which is nearly 81.7% lower than the previous quarter ended June 2023. That is because debt funds saw net inflows in the June quarter, while they saw net outflows in the September quarter. Otherwise, the performance of equity funds, hybrid funds and passive funds continued to be relatively robust in the September 2023 quarter too.

As of the close of September 2023 quarter, net AUM of Indian mutual funds stood at Rs46.58 trillion, which is higher by 4.93% compared to Rs44.39 trillion at the end of the June 2023 quarter, and higher by nearly 18.2% compared to the close of the March 2023 quarter. This can be largely attributed to the spike in equity valuations during the period. 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. But it was Hybrid funds that led the pack with the highest net inflows in the September quarter. We will look at this point in detail later. That was the real story of the quarter. It was not just about debt fund selling or equity fund buying. It was about the gradual shift in the alternative narrative from passive funds to hybrid funds as investors are now looking at the next level of alternative investments wherein the fund managers focus more on asset allocation and rules and less on discretion in investing or on pure passive investing. It was a middle path chosen.

Debt fund flows in September 2023 quarter

Flows into Debt Funds in the Sep-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Sep-23
Rs25.80 trillion	Rs26.46 trillion	Rs(0.66) trillion	Rs13.05 trillion

Indian debt funds saw net outflows of Rs(65,944) crore in the September 2023 quarter, which is a sharp contrast to the Rs1.39 trillion of buying in debt funds in the June quarter. Ironically, in the 6 quarters prior to the June quarter, debt funds had seen net outflows. The net inflows for June 2023 quarter were largely driven by treasury outflows from liquid funds, which is normal during quarter and half-year ends due to advance tax payments. However, Investors did show a tendency to lock themselves into long dated instruments in Q2FY24.

Let us look at key flow drivers and start with inflows? Gilt funds saw inflows in the quarter of  Rs1,001 crore, while long duration funds saw net outflows of Rs317 crore and medium to long duration funds saw net inflows of Rs147 crore in the September quarter. The long end categories saw some interest as investors tried to lock themselves into longer maturities at higher yields. It remains to be seen if this interest sustains.

However, the bigger story in the September 2023 quarter story was on the sell side of debt fund flows. Liquid Funds saw outflows of (Rs49,062 crore), Overnight funds (Rs8,863 crore), ultra short duration funds (Rs6,426 crore) and banking & PSU Funds (Rs3,352 crore). Clearly, the number of funds seeing redemptions and even the intensity of redemptions was much higher in the September 2023 quarter as compared to the steady inflows in June quarter.

Total AUM of all active debt funds at the close of the September 2023 quarter fell to Rs13.05 trillion compared to Rs13.47 trillion as of the close of the June quarter. The share of debt fund AUM in overall open-ended MF AUM fell sequentially to 28.19% as of the end of the September 2023 quarter, compared to  30.35% at the close of the June 2023 quarter. Unlike the previous quarter ended June 2023, which was largely dominated by debt fund inflows, the September quarter has seen the debt fund flows again veering towards the redemption side.

Equity fund flows in September 2023 quarter

Flows into Equity Funds in the Sep-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Sep-23
Rs125,015cr	Rs83,052cr	Rs41,963cr	Rs19.08 trillion

Net flows into equity funds in the September 2023 quarter at Rs41,963 crore was more than double the inflows of Rs18,358 crore in the June 2023 quarter. However, the September quarter flows are still lower than the March 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. Within the equity fund category, the investor interest is shifting more towards alpha generators like small cap funds, mid-cap funds, sectoral funds, thematic funds etc. That is evident in the flow and AUM numbers too.

One reason for this phenomenon is that NFOs and even SIP flows have gravitated towards such alpha ideas like small cap and mid-cap funds. Sector funds and thematic fund have a special advantage in that they can float a number of NFOs for different themes and sectors, even as SEBI only permits one fund per AMC under each category. With active large cap funds struggling to beat the index amidst volatility and kurtosis, investors are starting to prefer index funds and index ETFs for beta and small cap, mid cap, and thematic funds for alpha. It is hard to say it will work, but that is the trend right now.

The positive flows into equity funds were affirmative in the September 2023 quarter in most classes of equity funds. Small cap funds led the way with flows of Rs11,115 crore followed by multi-cap / flexi cap funds at Rs10,771 crore, Sectoral / Thematic funds at Rs9,382 crore, mid-cap funds Rs6,137 crore, large & mid-cap funds Rs4,774 crore and value funds at Rs3,359 crore. On the sell side, large cap funds saw net redemptions of Rs2,340 crore while focused funds saw net outflows of Rs1,489 crore. ELSS funds also remained on the sell side to the tune of Rs760 crore in the September 2023 quarter.

The total AUM of equity funds at the end of the September 2023 quarter stood at Rs19.08 trillion with a decisive market share of 41.21% of the AUM of open ended funds. On the equity funds front, there are two trends visible. Firstly, there is a preference to rule based allocation over discretion based allocation. Thus, multi-cap funds did better than flexi-cap funds on flows and also folios. The second trend is that investors are not opting for index funds and index ETFs for beta and for more focused themes for the same of alpha.

Hybrid fund flows in September 2023 quarter

Flows into Hybrid Funds in the Sep-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Sep-23
Rs94,183cr	Rs46,030cr	Rs48,153cr	Rs5.88 trillion

In September 2023 quarter, hybrid fund not only saw net inflows, but the net inflows were more than 3 times the size of net inflows into hybrid funds in the June quarter. This can be largely attributed to inflows into arbitrage funds and to a lesser extent, into multi-asset allocation funds. NFOs have been driving record collection into multi-asset allocation funds, which is the new flavour of the hybrid funds market. It is more of an asset allocation fund and investors are finding it exciting as it provides an automatic hedge and diversification of risk in volatile market conditions.

Let us look at the inflows into hybrid funds first. Arbitrage Funds led the way with net inflows of Rs29,733 crore in the September 2023 quarter. Multi-asset allocation funds saw meaningful net inflows of Rs9,323 crore in the September 2023 quarter followed by significant inflows of Rs4,529 crore into Dynamic Allocation Funds (BAFs) and inflows of Rs3,410 crore into equity savings funds. Aggressive hybrids and conservative hybrids also saw net inflows, but were not too significant. Overall, each of the 6 categories of hybrid funds saw net inflows in the September 2023 quarter. Total AUM of all hybrid funds at the end of September 2023 quarter stood at Rs5.88 crore, significantly higher than Rs5.26 trillion at the end of the June quarter. AUM share in of hybrid funds AUM as of the close of September 2023 quarter stood at an impressive 12.70% of open ended fund AUM.

Passive fund flows in September 2023 quarter

Flows into Passive Funds in the Sep-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Sep-23
Rs48,677cr	Rs38,562cr	Rs10,115cr	Rs7.91 trillion

Passive funds had a relatively subdued quarter. In Q2FY24, net inflows into passive funds stood at Rs10,115 crore, compared to Rs13,490 crore in June 2023 quarter and a whopping Rs37,247 crore in the March 2023 quarter. Clearly, passive funds are not showing the same vigour in terms of inflows as in the previous quarters. There was traction in index funds which saw net inflows of Rs4,847 crore while index funds saw inflows of Rs4,782 crore and gold ETFs saw net inflows of Rs1,660 crore. In the September 2023 quarter, FOFs saw net outflows of Rs1,174 crore. Passive funds now contribute 17.08% of open ended AUM, slightly lower than the 17.13% share of AUM as of the end of June 2023.

To summarize the September 2023 quarter, 4 trends emerge.

• Today, the fund with the largest AUM is not a debt fund but index ETFs that manage around Rs5.61 trillion. Liquid funds AUM is just Rs3.78 trillion.

   

• Debt saw sharp outflows in the quarter but the positive preference is still at the longer end of the yield curve on hopes of locking in at higher yields.

   

• 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, hybrid funds are emerging as the star among alternatives as the allocation and rule based investing is appealing to a lot of younger and tech savvy investors.