Inflows into equity MFs in March more than double month-on-month

Assets under management (AUM) of the mutual fund industry stood at Rs 23.79 lakh crore as at March-end, up 11 percent year-on-year (YoY), as per data released by Association of Mutual Funds in India (AMFI) today. On a sequential basis, AUM growth was three percent higher compared to the previous month.

The mutual fund (MF) industry witnessed a total outflow of Rs 22,359 crore in March. While inflows into equity funds and equity linked saving scheme (ELSS) were very strong, the same was offset by redemptions in liquid and balanced funds.

Liquid or money market funds saw outflows of Rs 51,343 crore in March. Fund houses generally witness redemptions in March as corporates, who are active investors in liquid funds, tend to redeem their investments to meet the advance tax payment deadline. Though outflows from liquid funds in March tend to be very high due to year-end demand for funds by businesses, the overall widening of systemic level liquidity deficit was limited this year due to  rupee-dollar swap undertaken by the Reserve Bank of India (on March 26), which injected Rs. 34,561 crore into the banking system.

Inflows into equity funds (including ELSS) spiked 130 percent on a month-on-month (MoM) basis to Rs 11,756 crore in March. The spike can be attributed to larger flows into tax saving schemes in the last month of the financial year and improved investor sentiment on expectations of getting a stable political mandate in the national elections, in contrast to the possibility of a fractured political mandate. Strong flows from foreign portfolio investors (FPIs) supplemented higher domestic flows, taking the broader equity market index close to record highs in March.

Investment in equity funds through systematic investment plans (SIPs) showed a significant improvement in FY19 and continued to hold up well in March. MFs mobilised Rs 8,055 crore via SIPs in March as compared to Rs 8,095 crore in the previous month, almost flattish sequentially.

The rising share of SIP contribution has been the key success story of Indian MFs in FY19 as SIP flows are relatively stickier and improves persistency of equity AUMs. Even if the current monthly SIP run rate of around Rs 8,000 crore is sustained, the MF industry will receive equity inflows of around Rs 100,000 crore next fiscal, which is sizeable.

Monthly equity inflows have come off significantly from the high of Rs 20,308 crore seen in November 2017. That said, the underlying trend is very encouraging as SIP flows are resilient and indicate buoyancy in retail flows.

Thanks to strong equity MF inflows of Rs 111,858 crore in FY19, Indian equity markets could endure lacklustre participation of FPIs to the tune of Rs 5,570 crore during the same period.

Having said that, resilience of domestic equity flows will be put to test as we head closer to the outcome of general elections. The moot question is will the strong domestic equity flows sustain if equity markets weaken in coming months? While there is no clear answer to this, we are enthused by the fact that current flows are still strong and holding up well. Granularity in flows, as reflected in rising SIPs and higher share of individual investors in the MF industry’s total AUM (53.5 percent as at February-end), are further encouraging.

Progressive regulations by SEBI like reduction of total expense ratio (TER) and introduction of direct plans have drawn smaller retail investors. Added to that, various initiatives and campaigns by industry body -- AMFI -- like 'Mutual Funds Sahi Hai' seems to have altered the retail investors’ behaviour, who traditionally withdraw funds following a year of negative returns.

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