June 2022 sees heavy outflows from debt funds; equity flows robust

11 Jul 2022 , 11:59 AM

The pressure was visible across debt funds and arbitrage funds as companies redeemed debt fund holdings for advance tax payments in June. This is a normal cycle and debt funds do see outflows around the quarterly closing. However, the good news was again on the SIP front, which held steady at Rs12,276 crore in the month of June 2022.

The overall MF AUM in June 2022 fell sharply to Rs35.64 trillion. This was on the back of debt fund redemptions, the virtual drought of NFOs due to regulatory restrictions and value depletion of equities in a falling market. The fall was due to global and domestic headwinds in the form of Fed hawkishness, rising inflation and the growing fear of recession.

Data Source: AMFI

Overall MF net outflows for June 2022 stood at Rs(69,853) crore. This was driven by open ended debt fund outflows of Rs(92,248) crore and outflows of Rs(2,280) crore from hybrid funds (principally arbitrage funds). Close-ended Capital protection schemes also saw outflows of Rs(3,985) crore. All categories of open-ended equity funds and passive funds saw net inflows in June 2022. The current AUM mix is; Income Funds (34.63%), equity funds (36.08%), hybrid funds (13.21%) and passive & solution funds (15.41%). The residual 0.67% was accounted for by close-ended funds.

In March 2022, the AUM of active equity funds had crossed that of debt funds. That lead has been sustained since. However, the depletion in equity values has ensured that the share of equity funds has tapered; although at above 36%, it is at an all-time high. Overall MF AUM grew just 5.85% yoy from Rs33.67 trillion in June 2021 to Rs35.64 trillion in June 2022. Hybrids, solution funds and passive funds account for 28.62% of the total AUM.

Debt funds see outflows in June 2022 on treasury compulsions

In the last 4 months, debt funds have seen outflows in 3 months. April 2022 was an exception, but a combination of treasury management compulsions and hawkish central bank stance triggered outflows from debt funds. Overall open-ended debt fund outflows were Rs(92,248) crore in June 2022. The selling was prominent in low duration funds, overnight funds, and money market funds, but even corporate bond fund saw heavy selling.

Long duration funds and 10-year gilt funds were the only debt fund categories to see inflows in June 2022, but the flows were not significant. Let us first look at debt fund outflows at the long end of the yield curve. In June 2022, selling was prominent in corporate bond funds Rs9,086 crore, Floater Funds Rs7,078 crore, Banking & PSU funds Rs3,881 crore, medium duration funds Rs1,228 crore and credit risk funds Rs482 crore.

We now turn to the short-end debt funds where treasury induced selling was visible in June 2022. The selling included overnight funds Rs20,668 crore, liquid funds Rs15,783 crore, ultra-short duration funds Rs10,058 crore, low duration funds Rs8,532 crore, money market funds Rs8,126 crore and short duration funds Rs6,649 crore. Despite the promise of higher yields, investors don’t appear to be too enthused by debt funds at this juncture.

SIP flows hold robust equity fund flows in June 2022

Equity fund AUMs were hit by two factors. Firstly, market value depletion led to a lot of AUM damage for equity funds. Secondly, the SEBI freeze on NFOs just expired in June 2022 and we should see fresh NFOs from July. However, that hardly deterred the SIP flows, which remained stable in June 2022 at Rs12,276 crore. While the momentum of fresh SIP accounts may be plateauing, investors are persisting with SIPs.

In the last 4 months, equity fund flows have been volatile, but positive. Equity funds saw inflows of Rs28,464 crore in March 2022, Rs15,890 crore in April 2022, Rs18,529 crore in May 2022 and Rs15,498 crore in June 2022. Like in May, even in June 2022, no category of equity funds saw net outflows, which is commendable in the absence of NFOs.

Let us turn to specific inflows. During June 2022, Multi-cap funds plus flexi-cap funds led the way with inflows of Rs3,482 crore. Large cap funds collected Rs2,130 crore while the large & mid cap funds saw inflows of Rs1,995 crore and mid cap funds attracted flows of Rs1,852 crore. Among others, sector funds saw inflows of Rs1,678 crore, small cap funds Rs1,616 crore, focused funds Rs1,192 crore and value funds Rs847 crore.

One parameter that tells you the story of sustainability of equity fund flows is folio accretion. Folios are MF investor accounts and give a good idea of the retail spread of demand. As of the close of June 2022, equity folios touched an all-time high of 8.95 crore out of total mutual fund folios of 13.47 crore; or 66.46% share of overall folios.

Hybrid funds see outflows, but passive flows robust

Hybrid funds saw outflows of Rs2,279 crore in June 2022. This is in contrast to the trends that we have seen in recent times. Two factors worked against hybrid funds in June 2022. Firstly, in the absence of NFOs, the popular Balanced Advantage funds saw tepid flows. Secondly, due to treasury considerations, arbitrage funds saw outflows of Rs5,593 crore. Other hybrid categories like aggressive hybrids and BAFs continued to see net positive inflows in June 2022, albeit small.

Passive fund showed no signs of relenting in June 2022, despite the absence of NFOs. It saw robust inflows of Rs13,110 crore as investors looked for lower cost alpha. The passive surge was led by index funds at Rs7,301 crore and the equity & debt index ETFs at Rs5,359 crore. Gold funds and Fund of Funds (FOFs) saw relatively smaller inflows. Passive funds are the favourites among NFOs as there are no product level limits. However, it is gratifying that these passive funds have seen robust inflows despite the drought of NFOs in June 2022.

What did we read from the June 2022 mutual fund flows story?

On an overall basis, mutual funds saw net outflows of Rs(69,853) crore in June 2022, largely on account of outflows from open-ended and close-ended debt funds; including arbitrage funds. All equity and passive fund categories saw smart inflows in June 2022. Despite the global headwinds and the domestic market volatility, the SIP flows were stable at Rs12,276 crore in June 2022. Obviously, that is not just market bravado; but a larger conviction and learning from the pandemic that those who persist with SIPs, laugh all the way to the bank.