Equity MF inflows improve slightly in May, SIP flows remain stable

Assets under management (AUM) of the mutual fund industry stood at Rs 25.43 lakh crore at May-end, up 5 percent month-on-month (MoM), data from Association of Mutual Funds in India (AMFI) showed. Equity SIPs stood steady, just short of their all-time high.

MFs received net fresh flows of Rs 76,989 crore in April, mainly driven by stable inflows into liquid funds and modest equity figures.

Outflows in  credit risk funds and balanced funds

Liquid and money market funds saw inflows of Rs 72,478 crore in May compared to Rs 96,000 crore in April.

While flow in liquid funds were stable, outflows in credit risk funds increased significantly to Rs 4,156 crore as against Rs  1,253 crore  in April. Credit-risk funds are debt funds that have at least 65 percent investments in less than AA-rated paper.

Investors seem to have stayed off credit risk funds following numerous credit events, indicating a sharp decline in their risk appetite.

Last 10 months have seen default by IL&FS group companies, rating downgrades of Dewan Housing Finance (DHFL) to 'default', a set of downgrades for multiple companies of Reliance ADAG Group and deadlock over resolution of mutual funds’ exposure to Essel Group firms.

Balance funds, too, remained out of favour as outflows in May stood at Rs 2,481 crore, in continuation of net selling of Rs 2,121 crore in April.

Moderate inflows into equity funds

Inflows into equity funds, including ELSS, improved slightly to Rs 4,969 crore in May, from Rs 4,229 crore in April. Open-ended equity schemes saw inflows of Rs 5,408 crore, which were slightly offset by outflows of Rs 439 crore in close-ended equity plans.

Equity flows have been subdued in April and May, with investors preferring to stay on the sidelines till election outcome on May 23. However, the clear political mandate seems to have led to spike in flows in the last week of May.

SIP inflow a bright spot

While overall equity flows have been erratic, investment in equity funds through systematic investment plans (SIPs) came as a silver lining, with a tally of Rs 8,183 crore almost similar to April SIP flows of Rs 8,238 crore.

The rising clout of SIP has been a standout feature and is key to the success story of the mutual fund industry as the flows are stickier and improve the persistency of equity AUMs. If the current monthly run rate of SIP at Rs 8,000 crore is maintained, the MF industry is expected to see equity inflows of nearly Rs 1,00,000 crore in 2019-20, which is sizeable by any standard.

What are the key takeaways from the equity flows? 

Pick-up seen in mid, small cap funds, but large cap funds lose steam

In the equity universe, large cap funds saw negligible inflows in May. This can be explained by two factors. First, large cap indices have seen a strong rally in the past one year while mid and small indices have relatively underperformed massively. Second, most large cap funds have trailed the broader benchmark Nifty, which could be a key reason for investors’ disinterest.

The pattern of equity flows in May indicates that investors probably are expecting improvement in macroeconomic situation following the election outcome and accordingly, a broad-based rally in mid and small cap stocks after solid returns in large caps so far. This, in part, explains investors’ preference for mid and small cap funds in May.

Underlying trend still positive

Monthly equity inflows have come off significantly from the high of Rs 20,308 crore in November 2017. That said, the underlying trend is very encouraging as SIP inflows are resilient and indicates buoyancy in retail flows. Thanks to strong equity MF inflows in FY19, Indian equity markets could endure the lacklustre participation of FPIs.

However, the resilience of domestic equity flows will be put to test by the slowing economy. The moot question is, will the strong domestic equity flows sustain if equity markets remain lacklustre in coming months?

While there is no clear answer to this, we are enthused by the fact that the current flows are still strong and holding up well. The granularity of the flows as reflected in the rising SIP figures and higher share of individual investors in MFs’ total AUM – 54.7 percent as of April-end 2019 – only add to the cheer.

Market reforms introduced by SEBI such as reduction of total expense ratio (TER) and introduction of direct plans have attracted small retail investors. Add to that various initiatives and campaigns of the industry body AMFI, including 'Mutual Funds Sahi Hai'.