Equity mutual funds see exit in November, fifth month in a row; here's why

The number of systematic investment plan (SIP) accounts grew to 3.4 crore in November from 3.37 crore in October.

The monthly SIP contributions in November fell to Rs 7,302 crore compared to Rs 7,800 crore in October, data released by the Association of Mutual Funds in India (AMFI) shows.

Equity mutual funds continued witnessing exit even as the market soared to record highs. November was one of the best for the Indian equity market as the benchmark indices posted their best monthly return since April 2020.

The S&P BSE Sensex rose 11.4 percent, while the Nifty50 rallied 11.39 percent. The BSE midcap index rose 13.49 percent, while the BSE smallcap index was up 13.3 percent in November.

FPIs pumped Rs 62,782 crore in the Indian market in November, data available with NSDL shows.

Why did outflow continue?

The uncertainty in the equity market is seen as the biggest reason behind the outflow in equity mutual funds.

Gaurav Garg, Head of Research, CapitalVia Global Research underscored even though new investments remained constant, as stocks reached new highs, the rate of redemptions picked up, indicating investors were looking to book some profits given the higher market valuations.

While stellar gains may lure retail investors to go for direct trading, the rich valuation of the market ignites fear of a correction as the economy is yet to pick up the desired pace.

"From the lows of March 2020 correction, the market has given some stupendous returns, leading to the belief that it is over-heated and therefore we saw outflow from equity mutual funds to the extent of 35,000 crore, highest ever seen," said Akhil Chaturvedi, Associate Director & Head of Sales, Motilal Oswal Asset Management Company.

"Adjusted for inflows of 17,000 crore (50 percent of which would be SIP flows), the net redemptions have been almost 18,000 crore," Chaturvedi said.

He pointed out that all outflows would not have gone completely out of equities as an asset class but probably moved to direct equities as investors have had some successes in the past few months investing directly.

Some part of this liquidity could have also flown to real estate with renewed interest among genuine buyers wanting to own a home at lower interest rates and falling taxes and prices. There also investors who would be sitting on cash to deploy once again after a meaningful correction in near future, Chaturvedi said.

G Pradeepkumar, CEO, Union AMC, believes the strong performance of the equity markets in November seems to have encouraged more investors to book profits and move to short-term investments.

"We still believe that there is a significant amount of money that can come back to the market in the event of any correction. The medium to the long-term potential of the equity markets remain strong," he said.

Pradeepkumar said SIP numbers have remained robust which is a good indication of continued retail interest.

"It must be kept in mind that since the last three days of November were non-business days, a significant amount of SIP flows might not be reflected in the official numbers that have been released," Pradeepkumar said.

Garg of CapitalVia Global Research believes as markets are at new highs, investors may further redeem from the equity markets and may look for alternative investments like debt funds, etc.

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