December quarter MF flows favour equity and hybrid funds

9 Jan 2024 , 10:20 AM

Macro picture of MF flows in December quarter

How did the fund flows look like in the quarter ended December 2023? Let us look at the macro picture first. The total gross flows into open ended funds in the December 2023 quarter stood at Rs29.17 trillion while the redemptions of open ended funds in the quarter stood at Rs28.52 trillion, resulting in net redemptions into open ended funds overall at Rs0.65 trillion. Even closed ended funds saw positive flows in the quarter to the tune of Rs2,076 crore on a net basis, although it was not sufficient to make any substantive difference to the overall flows into mutual funds in the December quarter. Why do we look at the quarterly flows each quarter. The reason is that monthly cycles can be quite volatile, especially for debt funds. However, when you look at fund flows over a quarterly cycle, you get a better directional trend of which way the wind is blowing.

As of the close of the December 2023 quarter, the net AUM of Indian mutual funds stood at a record level of Rs50.78 trillion as compared to Rs46.58 trillion at the close of the September 2023 quarter and Rs44.39 trillion at the end of the June 2023 quarter. This growth in AUM at such a sharp pace can be largely attributed to the spike in equity valuations during the period. After all, the Nifty and the Sensex have been among the star performers during this period. Although the flows into equity funds and passive funds were positive, the real boost to the AUM came from value accretion of equities. Debt fund flows stayed under pressure during the quarter and, like the September quarter, we once again had negative flows into debt funds in the December quarter on a net basis.

Debt fund flows in December 2023 quarter

Flows into Debt Funds in the Sep-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-23
Rs26.35 trillion	Rs26.73 trillion	Rs(0.38) trillion	Rs12.91 trillion

Indian debt funds saw net outflows of Rs(37,633) crore in the December 2023 quarter, which is lower than the outflows in the September quarter, but a sharp contrast to the Rs1.39 trillion of net inflows into debt funds in the June 2023 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 flows 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 the first and the second quarter of FY24. It is hard to say if the trend is sustainable, since the RBI has not made its stand on cutting rates from current levels too clear.

Let us look at key flow drivers and start with inflows? Gilt funds saw inflows in the quarter of  Rs1,611 crore, while short duration funds saw net inflows of Rs1,462 crore, corporate bond funds saw inflows of Rs549 crore and long duration funds saw net inflows of Rs544 crore in the December 2023 quarter. The long end categories saw some interest as investors tried to lock themselves into longer maturities at higher yields. However, with the RBI still playing its rate card close to its chest, the markets still look ambivalent about long duration bonds.

However, the bigger story in the December 2023 quarter story was on the sell side of debt fund flows. Low Duration Funds saw outflows of (Rs11,541 crore), Overnight funds (Rs8,794 crore), liquid funds (Rs7,356 crore), ultra short duration funds (Rs5,536 crore) and Floater Funds (Rs4,925 crore). Clearly, the number of funds seeing redemptions and even the intensity of redemptions was much higher in the December 2023 quarter as compared to the funds that witnessed inflows. However, the pressure of redemptions on liquid funds was not as intense as it was last time.

Total AUM of all active debt funds at the close of the December 2023 quarter fell to Rs12.91 trillion as compared to Rs13.05 trillion at the close of the September 2023 quarter and at Rs13.47 trillion as of the close of the June 2023 quarter. The share of debt fund AUM in overall open-ended MF AUM fell sequentially to 25.42% as of the close of December 2023 quarter, as compared to 28.19% as of the end of the September 2023 quarter, and 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 and the December quarters have seen the debt fund flows again veering towards the redemption side. The fall in AUM share of debt funds across the last 2 quarters has been steadily intensifying.

Equity fund flows in December 2023 quarter

Flows into Equity Funds in the Dec-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-23
Rs133,362cr	Rs80,871cr	Rs52,491cr	Rs21.79 trillion

Net flows into equity funds in the December 2023 quarter stood at Rs52,491 crore compared to Rs41,963 crore in the September 2023 quarter and more subdued inflows of Rs18,358 crore in the June 2023 quarter. However, the December and September quarter flows are still lower than the March quarter flows. 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; especially across select categories. 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 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 for the others. To an extent, when it comes to playing the NFO game, the sectoral funds, thematic funds, and passive funds have a natural advantage. With active large cap funds struggling to beat the index due to an amalgam of volatility and kurtosis, investors are starting to prefer index funds and index ETFs for beta since the costs are much lower and that makes a huge difference. For alpha hunting, they still prefer focused stories like small cap, mid cap, and thematic funds. It is hard to say it will work, but that is the trend right now. One offshoot of that trend is the rising interest in multi-cap funds.

The positive flows into equity funds were affirmative in the December 2023 quarter in all the classes of equity funds. Small cap funds led the way with flows of Rs12,052 crore followed by sectoral / thematic funds at Rs11,866 crore, multi-cap / flexi cap funds at Rs11,399 crore, mid-cap funds at Rs6,468 crore, large & mid-cap funds Rs5,920 crore, and value funds at Rs2,936 crore. There were no equity funds that saw net redemptions in the December 2023 quarter, although it must be said that the net fund flows for the quarter were relatively tepid for ELSS funds, focused funds, and large cap funds.

The total AUM of equity funds at the end of the December 2023 quarter stood at Rs21.79 trillion with a decisive market share of 42.92% of the AUM overall, compared to 41.21% of the AUM as of the end of the September 2023 quarter. On the equity funds front, there are two trends visible. Firstly, there is a preference to rule based allocation over discretion based allocation. This is evident from the fact that multi-cap funds did better than flexi-cap funds on flows and also folios. The second trend is that investors are opting for index funds and index ETFs for beta and for more focused themes for the same of alpha. These alpha themes include mid-cap funds, small cap funds, sector funds, thematic funds etc.

Hybrid fund flows in December 2023 quarter

Flows into Hybrid Funds in the Dec-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-23
Rs96,171cr	Rs56,969cr	Rs39,202cr	Rs7.04 trillion

In December 2023 quarter, hybrid fund not only saw net inflows, but the net inflows were higher than the June and September quarters. This can be largely attributed to inflows into arbitrage funds and to a lesser extent, into multi-asset allocation funds. Arbitrage funds are evolving as an alternative to liquid funds to hold treasury funds. Apart from the higher returns due to volatility, arbitrage funds are also offering HNIs, better tax benefits due to their classification as an equity fund for tax purposes. NFOs have been driving record collection into multi-asset allocation funds, which is the new flavour among the hybrid funds. Multi asset allocation funds are much more than an automatic hedge and diversification of risk in volatile market conditions. It is also a step towards the right asset allocation, which drives over 90% of the variation in returns of the portfolio anyways.

Let us look at the inflows into hybrid funds first. Arbitrage Funds led the way with net inflows of Rs25,573 crore in the December 2023 quarter. Multi-asset allocation funds saw meaningful net inflows of Rs7,420 crore in the December 2023 quarter followed by significant inflows of Rs2,920 crore into Dynamic Allocation Funds (BAFs) and inflows of Rs2,808 crore into equity savings funds. Overall, the other flows were not too meaningful. Overall, 4 out of the 6 categories of hybrid funds saw net inflows in the December 2023 quarter. Total AUM of all hybrid funds at the end of December 2023 quarter stood at Rs7.04 trillion, significantly higher compared to the September and the June quarters. AUM share of hybrid funds in the AUM as of the close of December 2023 quarter stood at an impressive 13.86% of overall mutual fund AUM; up by 116 basis points over the September quarter.

Passive fund flows in December 2023 quarter

Flows into Passive Funds in the Dec-23 quarter (AMFI)
Funds Mobilized	Redemptions	Net Flow	Net AUM as of Dec-23
Rs52,011cr	Rs41,458cr	Rs10,553cr	Rs8.74 trillion

Passive funds had a relatively subdued quarter. In Q3FY24, net inflows into passive funds stood at Rs10,553 crore; almost at par with the September 2023 quarter. However, this sharply lower compared to Rs13,490 crore in June 2023 quarter and a whopping Rs37,247 crore in the March 2023 quarter. It looks like the passive funds are not showing the same vigour in terms of inflows as in the previous quarters; and that is understandable as in a bullish market it is the active fund that doing wonders. There was traction in index ETFs which saw net inflows of Rs5,803 crore while index funds saw inflows of Rs4,145 crore and gold ETFs saw net inflows of Rs1,263 crore during the third quarter of FY24. FOFs saw net outflows of Rs658 crore in the December quarter. In terms of AUM share, the passive funds had an AUM share of 17.21% share of AUM as of the end of December 2023.

To summarize the December 2023 quarter, 4 interesting findings emerge.

• Today, the fund with the largest AUM is not a debt fund but index ETFs that manage around Rs6.23 trillion. Of course, this is across equity and debt ETFs. Liquid funds AUM is just Rs3.79 trillion.

   

• Debt saw sharp outflows for the second quarter in succession. However, the positive preference is still at the longer end of the yield curve on hopes of locking in at  higher yields. RBI stance needs to be a little clearer.

   

• There are two trends in equities. Firstly, there is a shift back from passive assets to active assets after active equity funds have done very well in the last one year. 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. If you add up passives and hybrids as alternatives, they are emerging as a distinct asset class; at par with equities and debt funds.