Equity fund flows bounce back sharply in August 2023

12 Sep 2023 , 09:07 AM

The big story of FY24 may have been all about the return of debt funds; but August was the story of the return of equity funds to the forefront all over again. For the month of August 2023, the debt funds saw net outflows of Rs25,873 crore. However, this was almost offset by net inflows of Rs20,245 crore into equity funds. We will come back to equity funds later, but what we are seeing in debt funds is a gradual product shift for the short term treasury parking. Even as treasury funds saw outflows in August 2023, nearly half of that was mopped in the form of inflows into arbitrage funds. Of late, corporates have found arbitrage funds offering higher yields due to the market volatility as well as greater tax efficiency, since it is classified as an equity product, rather than a debt product. Liquid fund selling was also quite prominent, especially after the RBI announce phasing out of I-CRR scheme.

August 2023 flow story shifts in favour of equities

However, the big story in August was on the equity funds front. In August 2023, the equity fund inflows of Rs20,245 crore was largely supported by NFO inflows of Rs7,343 crore, of which Rs5,002 crore was accounted for by equity funds. Apart from the NFOs, the SIP flows were also robust and touched an all-time record of Rs15,813 crore in the month of August 2023. Of course, these are gross SIP flows, but that is surely driving the equity inflows. But there is also a story of alpha hunting that is visible in equity funds. If you look at the colour of flows into equity funds, you would notice strong inflows into small cap funds, mid-cap funds, multi-cap funds and thematic funds. Investors are looking to take a more refined view of the current market through mid and small cap funds. Here is the story of how mutual fund flows panned out in the month of August 2023.

Debt funds subdued in August, equity funds are back in action

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 (Rs crore)	Equity Fund  Flows (Rs crore)	Hybrid Fund  Flows (Rs crore)	Passive Fund  Flows (Rs crore)	Total MF Flows (Rs crore)
Aug-22	49,164	6,120	(6,509)	15,069	65,077
Sep-22	(65,372)	14,100	(2,475)	13,623	(41,404)
Oct-22	(2,818)	9,390	(2,647)	10,261	14,047
Nov-22	3,669	2,258	(6,385)	10,394	13,264
Dec-22	(21,947)	7,303	2,418	15,398	4,491
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

Data Source: AMFI

Here are some quick takeaways. Debt funds have been relatively subdued compared to previous months due to the phasing out of I-CRR, which is likely to infuse liquidity and impact shorter term yields. There are 2 broad trends visible in the flows. Hybrid fund flows are robust, but that is more due to the predominance of arbitrage fund inflows. There has been a lot of short term funds shifting to arbitrage funds in search of higher returns and lower tax incidence.

New fund offerings were strong with total collections at about Rs7,343 core, largely dominated by equity fund NFOs and one balanced advantage fund (BAF) NFO from UTI. One good thing is that the gross SIP flows during the month of August 2023 against touched an all-time record level of Rs15,813 crore. That is certainly cause for celebration.

How overall AUM mix evolved in August 2023?

The month of August 2023 once again witnessed an uptick in the overall AUM, which went up 0.56% over July at Rs46.64 trillion. In fact, since the start of this fiscal year FY24, the AUM of mutual funds is up 18.3%, largely explained by the frenetic rally in equities, but also by the surge in equity fund inflows. This again marks a new high for mutual funds AUM. While the AUM of debt funds reduced marginally, and alternates are flat; it is the equity fund AUM that has surged in August on the back of fresh flows and market support. Here is the story of how the AUM across fund categories evolved over the last one year.

Month	Debt AUM  (Rs trillion)	Equity AUM   (Rs trillion)	Alternate AUM  (Rs trillion)	Total AUM  (Rs trillion)
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
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

Data Source AMFI

The good news is that on a yoy basis, the AUM of debt, equity and alternate funds are higher. However, if you look sequentially, equity funds have gained at the cost of debt funds AUM, while alternate funds have largely remained constant. There are two big takeaways The debt funds are attracting attention once again as an asset class since the start of FY24 and that is good news from an asset allocation perspective. Alternatives appear to be stagnating, but that is because the initial story is done and dusted and they will now need a new narrative to take the AUM to the next level of growth. Here are the relative shares for the last 3 months.

Month	Active Debt Funds	Active Equity Funds	Hybrid  Funds	Passive Funds	Solution Funds	Close-ended Funds
Jun-23	30.35%	39.27%	11.84%	17.13%	0.81%	0.59%
Jul-23	30.56%	39.34%	11.88%	16.84%	0.81%	0.56%
Aug-23	30.01%	39.88%	12.03%	16.62%	0.81%	0.64%

There has been some interesting action in terms of shifts in share of AUMN. Debt funds have seen the share deplete while the equity funds have built further heft and is now closing in on 40% share. Hybrid funds have gained share at the cost of passive funds during the month of August 2023. In a market, that is once again getting obsessed with alpha, the passive funds badly need a new narrative. But that is a debate we take up separately. 

Active Debt funds: Liquid Funds sold off in August 2023

Debt funds saw net inflows of Rs25,873 crore in August 2023. The outflows were from liquid funds which saw bulk of the outflows in the month. This was triggered by the phased withdrawal of I-CRR by the RBI as well as treasuries shifting to arbitrage funds for higher yields. Now for how specific categories of debt funds have done, and let us start with the debt fund categories that saw inflows in August 2023. Overnight funds saw inflows of Rs3,158 crore, Floater Funds Rs2,325 crore, corporate bond Funds Rs1,756 crore and Gilt Funds Rs255 crore. Other inflows were not too material

Among the categories that saw net outflows in August 2023 was dominated by Liquid Funds at Rs26,824 crore, ultra-short duration funds Rs4,123 crore and Banking & PSU Funds Rs985 crore. The buying action in August 2023 has been surprisingly seen in floaters and corporate bond funds at the longer end, which is in contrast to the last few months when the buying was concentrated at the short end. While floaters look like a bet on more hawkishness by the RBI, the corporate bond funds are a surprise inclusion in the top inflow list. It is probably the high inflation levels that is worrying the markets.

Active Equity Funds: net inflows surge in August 2023

For a number of months, all categories of equity funds saw net inflows. That has changed as investors are start to get more selective at elevated levels of the market. Let us look at the equity fund categories that saw net inflows first. Overall, equity funds saw net inflows of Rs20,245 crore in August 2023 (a near three-fold increase compared to July). In terms of key categories seeing inflows; Flexi/Multi Cap funds saw inflows of Rs5,615 crore, Sector / Thematic funds saw inflows of Rs4,806 crore, small-cap funds Rs4,265 crore, mid-cap funds Rs2,512 crore, large & mid-cap funds Rs2,113 crore and Contra funds Rs1,365 crore.  

However, several interesting categories saw net outflows also; albeit of smaller amounts. For example, Focused funds saw net outflows of Rs471 crore while the large cap funds saw net outflows of Rs349 crore in July 2023. Among other categories, ELSS Funds saw marginally selling. One reason could be the sharp bounce in equity fund NFOs as well as SIPs staying robust. However, there is a method in the trend. For example, the flows show a clear preference for alpha generating small cap and mid-cap funds or even sectoral funds. However, investors are avoiding large cap funds in favour of passive index funds and index ETFs. We need to examine how the flows into small cap funds pan out once more small cap funds start restricting fresh flows.

Hybrid flows positive, passive flows losing shine in August 2023

Overall, the combination of hybrid funds and solution funds got net inflows of Rs17,273 crore. However, the macro picture glosses over the fact that the one fund category that dominated the total flows in August 2023 was the arbitrage funds. In terms of net inflows, arbitrage funds saw net inflows of Rs9,483 crores. But there were other stories too. The UTI BAF NFO resulted in BAFs seeing inflows of Rs3,616 crore while multi-asset allocation funds saw healthy inflows of Rs1,617 crore and equity savings funds saw net inflows of Rs1,491 crore. All the 6 categories of hybrid funds saw net inflows in August 2023.

Passive funds had a relatively better month in August 2023 with net inflows of Rs4,535 crore. This was driven by inflows of Rs1,985 crore into index funds, Rs1,893 into index ETFs and a rather gratifying Rs1,028 crore into gold ETFs. However, FOFs (fund of funds) once again saw net outflows in August 2023.

How do we sum up the mutual fund flow story for August 2023? Debt fund flows took a breather as the phasing out of I-CRR led to selling in liquid funds. The good news is that debt funds as an idea are back and this month there was interest visible at the long end of the yield curve. The big question mark is over liquidity and rates. Rates are likely to be influenced by retail inflation. With retail inflation above 7%, it remains to be seen how soon the RBI hikes rates. With the I-CRR being withdrawn, liquidity is likely to normalize in the money markets. On the equity markets, we are looking at the Nifty and Sensex at life-time highs. Most likely, the investors may now veer towards stock-specific stories with a strong alpha content. The good news is that SIP flows are still robust and that should keep the show ticking for fund flows.