In July 2023, equity mutual funds recorded a net inflow of ₹7,625.96 crore, marking a decrease from the ₹8,637 crore inflow observed in June 2023 as per the recent data published by the Association of Mutual Funds in India (AMFI). Conversely, exchange-traded funds (ETFs) experienced an outflow of ₹353 crore in July, in contrast to the ₹3,402 crore inflow seen in June.
Small-cap funds see more inflow
In July 2023, small-cap equity mutual funds garnered the largest influx of ₹4,171.44 crore, trailed by multi-cap funds securing ₹2,500.47 crore. Conversely, there was a noteworthy outflow of ₹1,880 crore from large-cap funds, with focused funds experiencing an outflow of ₹1,066.72 crore.
In July 2023, the highest influx of funds was observed in liquid funds, totalling ₹51,938.41 crore, succeeded by debt funds which garnered ₹61,440.08 crore.
NS Venkatesh, CEO, AMFI said, “The surge in retail investors' interest in mutual funds has translated into impressive inflows across scheme categories. The star performer this month has been Systematic Investment Plan (SIP), with an impressive 33,06,337 new SIP accounts registered and a record ₹15,245 crores of monthly contribution. Moreover, the industry’s Assets Under Management (AUM) have grown by 25 per cent YoY, underscoring mutual funds' significance in the financialization of savings.”
More outflow from large-cap funds
Large cap-oriented categories witnessed net outflows. The large-cap segment has delivered a good performance in recent times providing investors with a good profit booking opportunity. Investors would have also chosen to prefer currently performing mid and small-cap funds over large-cap funds.
Himanshu Srivastava, Associate Director - Manager Research, Morningstar India said, “It would be prudent for investors to have long-term investment horizon while investing in equity funds and should not get carried away by short-term trends. Mid and small-cap funds are relatively risky in nature compared to large caps. Hence, investors should access their risk appetite before investing in these funds, as the allocation should be taken in them in line with their risk appetite.”
Debt funds took a beating
In June, during the quarter-end period, there was an observed net outflow of ₹14,135 crores. However, in July, debt-oriented schemes experienced a significant net inflow of ₹61,400.08 crores.
Among various fund categories, Overnight Funds, Short Duration Funds, Medium Duration Funds, Credit Risk Funds, Banking and PSU Funds, and Gilt Funds with 10-year constant duration recorded net outflows. On the contrary, all other categories received net inflows.
Notably, the Overnight Fund category showed the most substantial net outflows throughout the month. This could be attributed to investors redeeming from these funds and reallocating their investments into more promising assets like equities. Typically, investors use these funds to temporarily park their short-term funds, resulting in their flows being relatively volatile.
As anticipated, the Liquid Fund category attracted the highest net inflows. Following the end of the quarter, many corporations and institutions likely opted to invest their surplus short-term capital in these funds, which is a customary practice.
Srivastava explained, “Given the current interest rate scenario and uncertainty over the direction of interest rates in the country, it appears that many investors chose to stay cautious and continue to invest in categories with one year or less maturity profile since they carry relatively lesser interest rate risk.”
An impetus to passive funds
Passive investment vehicles have witnessed a surge in popularity among Indian investors over recent years, witnessing their market share escalate from 1.4 per cent in 2015 to surpass 17 per cent in 2023.
Passive funds, essentially vehicles that mirror a market index or a specific market segment, have refrained from active attempts to outperform the market. Instead, their goal is to deliver returns aligned with the performance of the tracked index or segment. This characteristic positions them as a cost-efficient option for investors, circumventing the need for high fees associated with fund managers striving to surpass market benchmarks.
There are three primary categories of passive funds:
- Index funds: These funds mirror designated market indices, such as the Nifty 50 or the Sensex.
- Exchange-traded funds (ETFs): Similar to index funds, ETFs can be traded on stock exchanges just like individual stocks.
- Funds of Funds (FoFs): These funds channel investments into other passive funds, such as index funds or ETFs.
“The substantial increase in SIPs is a result of mutual fund houses and AMFI's widespread awareness campaigns, tapping into Bharat’s wealth and aspiration to partake in market growth. Investors in B30 cities are indirectly investing in stock markets via SIPs in equity mutual funds.
Short-term debt fund inflows continue due to treasury management by banks and corporates, while hybrid categories like multi-asset allocation funds have seen increased investor interest. Investors are increasingly realizing that mutual funds have various options suited for their risk profile and goals and that they can partake in the India growth story by investing as little as ₹500 a month,” added Venkatesh.
The ascent of passive funds in India stems from various factors, including:
- Emergence of retail investors: Retail investors are increasingly recognizing the advantages of passive funds, actively seeking cost-effective investment avenues.
- Momentum in the stock market: The Indian stock market has exhibited substantial growth, rendering it a more appealing target for passive fund investments.
- Regulatory reforms: SEBI has introduced several regulatory changes that have streamlined the operational landscape for passive funds in India.
SEBI is also endeavouring to introduce “MF Lite” regulations for passive funds, aimed at alleviating compliance burdens and fostering innovation. This initiative is projected to further invigorate the expansion of passive funds in India over the forthcoming years.
Highlights AMFI mutual fund industry monthly data for July 2023
- The mutual fund industry net AUM is ₹46,37,565 crores, while AAUM was ₹46,27,687 crores for the month of July 2023
- Mutual fund folios reached an all-time high of 15, 14,21,270 in the month of July 2023 compared to 14,91,31,708 for the month of June 2023.
- Retail MF Folios (Equity + Hybrid + Solution Oriented Schemes) is also at an all-time high at12,08,50,415 for the month of July 2023 compared to 11,90,63,434 in June 2023
- Retail AUM (Equity + Hybrid + Solution Oriented Schemes) stood at ₹24,17,268 crores for July 2023, with an Average AUM of ₹23,77,395 crores
- A total of 17 schemes were launched in the month of July 2023, all in open-ended categories, raising a total of ₹6,723 crores.
- SIP contribution stood at an all-time high of ₹15,244.73 crores in July 2023.
- The number of SIP accounts stood at its highest ever at 6,80,52,826 for July 2023 compared to 6,65,37,033 in June 2023
- The SIP AUM stood at ₹8,32,274.61 for July 2023, compared to ₹7,93,608.79 crores for June 2023.
- The number of new SIPs registered in July 2023 was 33,06,337 highest ever.
Possible reasons for investors’ behaviour
The reduction in net inflows for equity mutual funds during July can be attributed to several contributing factors, which include:
- The upward trajectory of interest rates prompted investors to find greater appeal in debt funds.
- The prevailing market volatility induces a sense of caution among investors regarding their engagement with equity funds.
- The customary decline in SIP inflows during July is a trend observed in this particular month.
“The drop in net inflow in July from June could be attributed to some investors booking profit with markets trading near all-time highs. Some investors would have also chosen to stay on the sidelines and wait for some rationalization to set in before they invest,” added Srivastava.
Notably, the outflow of ₹353 crores from ETFs in July holds significance. ETFs constitute a variety of mutual fund that mirrors a specific index, such as the Nifty 50 or Sensex. They generally offer a more cost-efficient avenue for stock market investment. The outflow from ETFs in July might indicate a growing investor wariness toward the stock market.
Explaining investors’ rush to buy gold ETFs, Srivastava elucidated, “Gold ETFs continue to attract flows, as it received a net inflow of ₹456.15 crores, which is sharply higher than the net inflow of ₹70.32 crore in June. Pertinent risks still engulf developed economies. With the continued hike in interest rates in the US, inflation still higher than expected, and the growth rate slowing down, the appeal of Gold as a safe haven and hedge against inflation is expected to continue. Moreover, gold prices in recent times have come off from their all-time high levels, thereby providing some buying opportunity, particularly after a sharp rally it witnessed since March this year.”
Collectively, the data provided by AMFI underscores the continuous expansion of the Indian mutual fund industry. However, it is discernible that investors are progressively exercising a discerning approach when selecting the categories of funds in which they allocate their investments.
