Dec-22 MF flows flat, but SIPs and NFOs hold the fort

12 Jan 2023 , 10:31 AM

The redeeming feature of the month was the flows into index funds and ETFs, which actually helped flows. December 2022 repeated the SIP story, touching a record level of Rs13,573 crore in December 2022. Secondly, new fund offerings (NFOs) also gathered steam in December 2022 collecting Rs8,486 crore. 

The NFO flows in December 2022 were largely dominated by bond ETFs, multi-asset allocation funds and closed ended fixed term plans (FTP). Let us quickly turn to the AUM story for December 2022. Assets under management (AUM) is the combination of flows and capital accretion and includes the AUM of equity, debt and hybrids.

Month	Debt AUM  (Rs trillion)	Equity AUM  (Rs trillion)	Alternate AUM  (Rs trillion)	Overall AUM  (Rs trillion)
Dec-21	14.05	13.34	9.72	37.73
Jan-22	14.13	13.38	9.89	38.01
Feb-22	14.09	12.95	9.91	37.56
Mar-22	12.99	13.65	10.31	37.57
Apr-22	13.56	13.66	10.42	38.04
May-22	13.22	13.32	10.40	37.22
Jun-22	12.34	12.86	10.20	35.64
Jul-22	12.46	14.16	10.88	37.75
Aug-22	13.03	14.78	11.26	39.34
Sep-22	12.42	14.63	11.12	38.42
Oct-22	12.45	15.22	11.58	39.50
Nov-22	12.57	15.58	11.93	40.38
Dec-22	12.42	15.25	11.92	39.89

Data Source AMFI

The overall AUM of the mutual fund industry as of the close of December 2022 stood at Rs39.89 trillion, slightly lower than in November 2022, due to the fall in the index during the month. Here are some key takeaways.

• The overall AUM has been in a very narrow range for the past one year. Most of the volatility in AUM has come from sharp swings in the equity market indices plus 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 December 2021, active debt had an overall AUM of Rs14.05 trillion and active equity had AUM of Rs13.34 trillion. As of December 2022, overall AUM of active debt funds has fallen to Rs12.42 trillion while AUM of active equity is up to Rs15.45 trillion. It is a complete reversal of roles; but this can be largely attributed to market contribution.

   

• The big takeaway is that the AUM of alternate assets built heft from Rs9.72 trillion to Rs11.92 trillion in last one year. Active fund managers have struggled to beat the index, forcing investors to gravitate towards passive index funds and index ETFs. Alternative fund have come with more granular offerings. Alternative assets include hybrids, passives and allocation funds.

Let us now turn to debt mutual fund flows for the month of December 2022.

Debt fund flows face quarterly treasury pressure in December 2022

In the last one year, debt fund flows have been under pressure and have actually been negative in all the quarters. For the month of December 2022, debt funds saw net outflows of Rs21,947 crore. This is almost a third of the debt outflows seen in September 2022. The reasons for outflows are quite apparent. At the end of each quarter, debt funds witness outflows due to treasury operations of corporates. Companies park in debt funds for short term and they need funds to pay advance taxes. Active debt funds have also faced pressure of flows due to excess hawkishness of the RBI and the US Federal Reserve.

Here is a quick summary of the colour of debt fund flows in December 2022. The funds that saw positive inflows were limited. Ultra-short duration funds saw inflows of Rs1,737 crore while long duration funds saw inflows of Rs324 crore. Clearly, the overall flows in active debt funds were biased towards the sell side as is evident from the large net selling number. Treasury managers have been cautious about longer term debt since longer duration bonds are more vulnerable to rise in bond yields.

We now turn to the larger universe of debt funds that saw outflows in December 2022. Big selling was visible in Liquid funds Rs13,852 crore, Floater Funds Rs2,240 crore, Medium Duration funds Rs1,800 crore, Banking & PSU Funds Rs1,353 crore, Overnight funds Rs1,254 crore, Money Market Funds Rs915 crore, short duration funds Rs783 crore and corporate bond funds Rs713 crore. With bond yields hovering around 7.3%, the pressure on debt funds is quite obvious. The recent RBI MPC minutes also hinted at continued hawkishness.

NFOs, SIPs boosted active equity fund flows in December 2022

Equity fund flows in December 2022 were relatively tepid at Rs7,303 crore. The big thrust to equity flows came from Rs8,486 crore of NFO flows and Rs13,573 crore of SIP flows. Now for the equity fund inflow story! During December 2022, small cap funds led the way with Rs2,245 crore of inflows. Among other key contributors, Mid Cap funds collected Rs1,962 crore and large & mid cap funds saw inflows of Rs1,190 crore. The combination of Multi-cap funds plus flexi-cap funds saw inflows of Rs1,080 crore. Other fund categories that saw meaningful inflows include value funds at Rs648 crore and ELSS funds at Rs564 crore. Investors are betting on alpha and shifting large cap fund allocations to index funds.

There were some equity fund categories with negative flows too. For instance, sectoral funds saw outflows of Rs204 crore and focused funds Rs164 crore. 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 December 2022, equity folios touched an all-time high of 949.39 lakh folios out of total mutual fund folios of 1,411.20 lakhs; or 67.28% share of overall folios. It must be added that passive fund folios have grown to 208.51 lakhs; or a significant 14.8% of the total folios.

Hybrid flows turn around, but passive flows steal the show

Hybrid fund flows turned around to a positive Rs2,255 crore in December 2022; largely because of NFO flows into Baroda BNP multi-asset allocation fund. Even arbitrage funds saw a turnaround to positive flows in the month, after several months of consistent negative flows in arbitrage funds. However, the NFOs of the highly popular Balanced Advantage Funds (BAF) is yet to pick up. Multi asset allocation funds saw inflows of Rs1,711 crore, largely driven by the Baroda BNP NFO. Arbitrage fund saw net inflows of Rs883 crore while the BAFs saw outflows of Rs413 crore.

Passive funds were again the big story of December 2022, witnessing healthy inflows of Rs15,398 crore as investors looked for lower cost alpha. What is more interesting is that the gross flows into passive funds at Rs28,319 crore is inching very close to the gross flows into active equity funds. The passive surge was led by equity & debt index ETFs at Rs8,788 crore followed by index funds at Rs6,737 crore. Passive funds cornered bulk of the NFO flows.

Three key takeaways from the December 2022 MF flows

The story of mutual fund flows in December 2022 can be summed up in 3 key takeaways.

1. Equity fund flows are not substantially decoupled from the equity market conditions and that is largely thanks to steady SIP flows.

    

2. The interesting data is that the debt fund with the highest AUM as of December 2022 is bond index ETFs, which stands at Rs4.97 trillion.

    

3. In equity and in debt, there seems to have been a major shift out of active investing into passive investing. That could be the trend going ahead too.