Equity and passive funds keep MF flows in positive territory

11 Nov 2022 , 09:43 AM

For the month of October 2022, inflows into equity funds remained in the positive as did flows into passive index funds and ETFs. However, the flows into debt funds and hybrid funds remained in the negative territory. Arbitrage funds continued to spoil the game for hybrid funds, but for the first time in over 2 years, the Balanced Advantage Funds (BAFs) saw net outflows in October 2022. Overall, the net inflows into mutual funds at Rs14,047 crore was relatively tepid compared to the median of the previous months.

The big story of October 2022 was that SIP flows finally crossed the Rs13,000 crore mark. The second good news was that the new fund offerings (NFOs) gathered steam and in the month of October 2022, the NFOs managed to collect Rs5,439 crore, largely dominated by sectoral and index funds. Let us quickly turn to the AUM story for October 2022. Assets under management (AUM) below is the combination of flows and capital accretion.

Month	Debt AUM (Rs trillion)	Equity AUM (Rs trillion)	Alternate AUM (Rs trillion)	Overall AUM (Rs trillion)
Oct-21	14.31	12.97	9.41	37.33
Nov-21	14.52	12.78	9.42	37.34
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

Data Source AMFI

The overall AUM of the mutual fund industry as of the close of October 2022 stood at Rs39.50 trillion. Here are some key trends that emerge from the AUM tabulation as above.

• The overall AUM has been in a very narrow range for the last 12 months, although it has gyrated sharply with the swings in the equity markets and interest rate movements.
• If you compare the AUM of active equity funds with that of active debt funds, there has been a complete reversal of roles in the last one year. Just a year back, active debt had an overall AUM of Rs14.31 trillion and active equity an AUM of Rs12.97 trillion. As of October 2022, the overall AUM of active debt has fallen to Rs12.45 trillion while the AUM of active equity has surged to Rs15.22 trillion. It is a complete reversal of roles.
• The biggest takeaway is that alternate assets AUM has built heft from Rs9.41 trillion to Rs11.58 trillion in the last one year. Alternate assets include hybrid funds, passive funds and solution oriented funds. There has been a clear preference for passive funds as active fund managers struggle to outperform indices. The good news is that with AUM of Rs11.58 trillion, alternate assets are emerging as a distinct asset class for investors.

Debt fund outflows mellow down in October 2022
In the current fiscal year, debt fund flows have been under pressure for majority of the months. Even for the month of October 2022, debt funds saw net outflows of Rs2,818 crore. Of course, September was much higher due to treasury commitments of corporates. In comparison, the October 2022 outflows from debt funds are a more mellowed. While the pressure of rising rates is still there, indications are that the rates may be close to peaking.

Here is a quick summary of the colour of debt fund flows in October 2022. The funds that saw positive inflows include Liquid Funds Rs19,085 crore and gilt funds at a very modest Rs146 crore. The inflows into liquid funds were largely a reversal of the outflows in the previous month, when corporates and treasury managers would have withdrawn funds from liquid funds for their quarterly advance tax commitments.

We now turn to the category of debt funds that saw outflows in October 2022; and that is more substantial. Big selling was visible in Overnight Funds Rs7,505 crore, Low Duration Funds Rs2,660 crore, short duration funds Rs2,466 crore, Floater Funds Rs2,444 crore, Money Market Funds Rs1,996 crore, Banking & PSU Funds Rs1,537 crore, Corporate Bond funds Rs1,534 crore, Ultra Short Duration Funds Rs1,145 crore and Credit Risk Funds Rs408 crore. With bond yields holding above 7.3%, the pressure on debt funds is understandable. RBI is not relenting on its hawkish stance, although things may change based on mellowed inflation data from the US.

NFOs and SIPs once again boost equity fund flows in October 2022

Equity fund inflows in October 2022 tapered to Rs9,390 crore. The big thrust to equity flows came from Rs5,439 crore of NFO flows and Rs13,041 crore of SIP inflows in October 2022. Now for the equity fund inflow story! During October 2022, sector funds once again led the way with Rs2,686 crore of inflows; largely supported by a spate of NFOs. Small cap fund flattered with inflows of Rs1,582 crore and mid cap funds with Rs1,385 crore, showing a clear preference among investors for alpha picking. The combination of Multi-cap funds plus flexi-cap funds saw inflows of Rs1,354 crore. Among other key contributors, large & mid-cap funds collected Rs1,190 crore, while value funds and ELSS funds got around Rs400 crore each. Other categories were relatively less significant in terms of size. Dividend yield funds were the only category to see outflows, albeit very small to matter.

One parameter that tells you the story of equity fund flows very eloquently is folio accretion. Folios are MF investor accounts and give a good idea of the retail spread of demand. As of the close of September 2022, equity folios touched an all-time high of 932.34 lakh folios out of total mutual fund folios of 1,390.78 lakhs; or 67.04% share of overall folios.

Hybrid flows lag while passive flows stay in the positive

Hybrid funds saw outflows of Rs2,819 crore in October 2022. This is similar to the trend that we have seen in last few months. Two factors impacted hybrid fund flows. Firstly, NFOs have just started and for the first time in the last 2 years since the pandemic, BAFs saw net outflows of Rs454 crore. The focus is on equity and passive funds now. Secondly, arbitrage funds saw bulk of the outflows of Rs2,470 crore. Other hybrid categories saw relatively smaller flows in the month.

Passive funds were again the big story of October 2022, witnessing healthy inflows of Rs10,261 crore as investors looked for lower cost alpha. The passive surge was led by index funds at Rs5,076 crore while the equity & debt index ETFs saw inflows of Rs4,845 crore in October 2022. Gold Funds and International FOFs also saw marginal inflows in the month of October 2022.

Three important takeaways from the October 2022 MF flows

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

1. Equity fund flows are increasingly becoming decoupled from the equity market volatility and churn. That can be largely attributed to the consistent flows that equity funds are getting from NFOs and SIPs.
2. Debt funds are not taking enough risk and that is the real risk. Perhaps, the Templeton saga has forced mutual funds to play it cautiously, but it will only further deplete AUMs.
3. Lastly, alternate classes like hybrids and passive funds are becoming significant in terms of folios and AUM. Passive is finally starting to making sense in India.