Liquid funds registered a huge outflow of Rs 44,226 crore in June on the back of advance tax outflows, data released by the Association of Mutual Funds in India (AMFI) shows.
Mutual funds had Rs 25.48 lakh crore in assets under management (AUM) at the end of the month, a growth of 4 percent compared to May, the data that was released on July 8 says.
Net inflow into equity mutual funds slumped 95 percent to a little over Rs 240 crore in June as investors pulled out from largecap and multicap funds due to profit-booking.
This is the third consecutive monthly decline in inflow in equity mutual funds, AMFI data shows.
Inflow through systematic investment plans (SIP) dropped below Rs 8,000 crore for the first time since November 2018. Net investments through the route stood at Rs 7,927 crore in June as against Rs 8,123 crore in May.
The dip in equity inflow happened at a time when the market was trading higher and the number of retail investors, as per media reports, increased.
Should the dip worry you?
A careful examination of the data reveals that the underlying trend in the MF industry has not deteriorated too much though the slowing of monthly SIP contributions is worrying.
Experts point out that the overall inflows into equity funds in June were higher as compared to May but there was a significant increase in redemptions that led to weak net inflows.
"If we look at the data closely, we would realise that there was no drop in gross inflows. The low net inflows have been because of heavy redemptions, which have taken place last month. The primary reason was that a lot of clients saw sharp recoveries in the portfolio values compared to March 20 values. In these uncertain times there was a rush to redeem for multiple reasons, ranging from creating liquidity, cutting losses to booking profits," said Jharna Agarwal, Head, Anand Rathi Preferred.
Ritu Poddar, Head, Mutual Fund Research and Product, Nirmal Bang agrees.
"Overall fund mobilisation has increased by 6 percent to Rs 13,760 crore in June 2020 from Rs 12,950 crore in May 2020 whereas redemption has gone up by 71 percent to Rs 13,535 crore in June against Rs 7,904 crore in May 2020. This resulted in the net inflow number looking so low," said Poddar.
Despite a slowdown in inflows, the industry has added 1.35 lakh new folios in the equity category, Poddar added.
A jump in redemption could have been triggered by investors' desire to reap bigger profits by directly investing in the market.
Poddar highlights that in a normal scenario, retail participation of 40-50 percent of total average volume, which has gone up to more than 70 percent in the month of June 2020, was seen. It could be a short-term phenomenon, where investors are seeking alternatives for traditional products like fixed deposits in low-interest rate scenario.
Work from home is also one of the big reasons for such a great jump in retail participation as DIY-kind of clients are taking the opportunity to participate in the equity market. The market recovery since March 2020 has also helped to increase retail participation.
"This heavy redemption has been attributed mainly due to rally in equity markets in the month of June where Nifty50 TRI index delivered 7.6 percent return. Due to the ongoing pandemic, investor’s cash flows are also impacting their investment decision; resulting in more paused or cancelled SIPs and in some cases redemptions as well," Poddar said. Restructuring and positioning of fresh portfolios also could be a reason for such low flows, she said.
Rusmik Oza, Executive Vice President & Head of Technical Research at Kotak Securities, said the inflows into mutual funds come from mainly two segments: pure retail and HNIs or sophisticated investors.
"In the last two-three years, most of the retail flows have been coming in the form of SIP. The last one year has seen monthly SIP flows remain quite sticky at nearly Rs 8,000 crore per month. This means the smart money being allocated through mutual funds has gone down sharply," Oza said.
One of the reasons for the very low flow or possible outflows from the HNI clients could be the sharp run-up in the market and valuations becoming rich, Oza added.
Will the trend continue?
If the market remains at elevated levels, smart money coming into mutual funds could either remain low or could also see outflows, said Oza.
He is of the view that the SIP culture could continue and to that extent, pure retail flows should be expected to continue.
After lockdown started, there has been a surge in new trading accounts, he said. The monthly jump in new client activation at discount brokers shows investors growing interest in direct trading.
"This is a global phenomenon which has led to higher participation of non-institutional clients in the daily turnover of leading exchanges. This trend could continue till the time there is no major correction in the market. One deep correction could change the trend and at lower levels, we can again expect smart money to come back into mutual funds," Oza said.
In June, brokerages have seen strong volumes in their direct trading, which will continue to impact the inflows into mutual funds.
"There has been a tremendous surge in retail investors' interest in direct trading. Some of the reasons are the business owners and professionals having surpluses to be deployed as no new project is being started and the huge momentum in individual stocks has been providing opportunities to make some short-term profits," said Agarwal of Anand Rathi Preferred.
Work-from-home gave people more time to pay attention to their personal investments and take advantage of the market volatility to make quick gains, she said.
Some of this volume would continue to be there for the long run as more investors were getting comfort with direct trading.
"However, once the lockdown is over, we will see monies flowing back to business and professional activities, also less time in hand with people to monitor and transact. Money from the latter would at that time move to mutual funds and PMS," Agarwal said.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.