Equity mutual funds witnessed a second consecutive monthly net outflow. In August, equity funds saw net outflow of close to Rs 4,000 crore with multi cap and large cap funds accounting for the bulk of the outflows at Rs - 2,710 crore.
“Two factors are driving this trend. Firstly, investors require cash flow, so they are redeeming from funds. Secondly, some investors are booking profits by either redeeming or switching to debt funds,” says Vinod Jain of Jain Investment. The BSE Sensex has recovered 30% from its March 2020 dip, when the nationwide lockdown was put in place in response to the pandemic.
Systematic investment plan (SIP) inflows are dipping
SIP inflows are declining steadily. From a peak of Rs 8,641 crore in March 2020, SIP inflows have dipped to Rs 7,792 crore in August 2020.
Meanwhile, the industry continues to add new investor accounts or folios through SIPs. The SIP folio count of the industry increased from 3.27 crore in July to 3.30 crore in August 2020.
“Over the last two or three months, investors have continued to book profits from equity mutual funds. At the same time, it is encouraging to see that about 4.65 lakh of new folios were added in August indicating sustained retail interest in mutual funds. While the SIP amount has dropped very nominally, once again there is a net addition of about 3.43 lakh SIP folios,” said G Pradeepkumar, CEO, Union Mutual Fund.
Net inflows in equity funds are declining steadily. Equity funds saw inflows of Rs 11,723 crore in March 2020.
Santosh Kumar Singh, Head of Research, Motilal Oswal Asset Management Company, believes that investors typically tend to book profits after a recovery in markets and a similar trend was observed post the global financial crisis in 2008. He is hopeful of a trend reversal. “This is also a function of the uncertain environment where the markets recovered significantly but we are still seeing significant negative data both on the virus and the economy. We have seen multiple market participants advising caution and this is a cautious stance of the investors. I do not see it as a long-term trend. Once we see clarity emerging, we would start seeing inflows in mutual funds.”
Search for higher yield
In the debt funds category, overnight and liquid funds saw combined outflows of Rs 26,112 crore as returns in these categories fell. Consequently, investors moved to earn higher yield which was evident by inflows in categories like ultra-short, low duration and money market funds, which collectively received Rs 18,708 crore worth inflows in August 2020.
“In March 2020 crash, investors had moved to overnight and liquid for safety. That money is now going towards slightly higher yield funds in the short-term category. The returns were marginally negative in Banking & PSU Funds and Gilt Funds over a one-month period. So inflows are drying in these categories,” observes Vinod.
Himanshu Srivastava, Associate Director, Manager Research, Morningstar Investment Advisers India, says that inflows in medium duration category has stabilized over the last two months. “While medium duration funds received net inflow of Rs 379 core in July; in August, the net inflow figure stood at Rs 1,001 crore. This category houses some credit-oriented strategies and suffered significantly during the March and April period of credit crises. From March 2020 till June 2020, the category witnessed a net outflow of Rs 10,274 crore. However, since then, the credit profile of these funds has improved with higher investments in AAA or equivalent rated securities. Also, on the duration front, the category is positioned well in the current environment. This would have prompted investors to have a relook at the category.”
Is the party over for gilt funds?
Over a period of two years, the Reserve Bank of India has slashed policy repo rate from a high of 6.50% in August 2018 to 4% now. As a result, gilt fund assets have more than doubled from Rs 9,201 crore in January 2020 to reach Rs 18,895 crore in August 2020. Gilt funds benefit from rate cuts. The category had delivered a return as high as 14%. Gilt funds, which were receiving consistent inflows due to the downward trajectory of interest rates saw a net outflow of Rs -1,122 crore in August 2020 as RBI has refrained from cutting rates further.
Market participants believe that we are perhaps at the end of a rate cut cycle. In a scenario when the policy rate starts to move up from here, R Sivakumar, head of fixed income, Axis Mutual Fund, advises investors to go for short duration funds. “Short duration funds benefit when rates go up. When rates rise, there is a mark to market loss as bond prices rise. Short duration funds benefit by reinvesting the proceeds from the maturity of short-term holdings at a higher prevailing rate. While short-duration funds can hold securities up to three-year maturity, they can cut the maturity to one year. Such funds benefit from a rising interest rate environment over a three-year holding period. Investors should not worry about the interest rate cycle if their holding period is three to five years in short duration funds. The performance could lag over six months to one year. However, over a three-year period, the fund benefits in a rising interest rate scenario.”
Gold ETF assets rise
The yellow metal has gained steadily as investors around the world flocked to safety in response to the pandemic. On August 6, 2020, gold price reached a high of Rs 58,050 per 10 grams and has corrected now. A result, gold ETF assets have increased from Rs 5,798 crore in August 2019 to reach Rs 13,503 crore as of August 2020.
