At a time when broader markets are rising, equity mutual funds are faltering. Equity mutual funds witnessed an outflow of Rs 2,480 crore in July, making it the first withdrawal in more than four years.
Outflow from equity and equity-linked open-ended schemes was at Rs 2,480.35 crore during the month compared to an inflow of Rs 240.55 crore in June.
However, overall, the mutual fund industry saw a net inflow of 89,813 crore across all segments in July, which was higher than Rs 7,265 crore in the previous month, the Association of Mutual Funds in India (AMFI) data showed on August 10.
While equity mutual funds saw an outflow, fixed-income securities or debt funds saw an inflow of Rs 91,392 crore in July compared to Rs 2,862 crore in June, which points to participants embarking on profit-booking as they expect volatility to continue in the market. As the country's macroeconomic health falters due to the coronavirus outbreak, there is also a fear that the market may retreat from higher levels.
“The net inflows into debt funds show a healthy uptick. A major chunk of these inflows has been into funds with a short duration. It is very clear that investors are avoiding longer duration probably due to the expectation that there is likely volatility at the long end of the curve emanating from the issue of long-dated papers at the Gilts' primary auctions," said Joseph Thomas, Head of Research-Emkay Wealth Management.
Short duration funds, corporate bond funds and banking and PSU funds continue to attract investors due to the hunt for superior risk-adjusted returns, as these funds have the most appropriate duration positioning and excellent credit risk profile, Thomas said.
Broader markets have been rising even as concerns over rising coronavirus cases, geopolitical tensions and falling economic indicators persist.
Jharna Agarwal, Head, Anand Rathi Preferred, highlighted three distinct investor reactions to the market wherein MF space is not reflecting the mood of the market.
"First is that after the sharp correction witnessed in March and April, investors saw their long-term equity portfolio returns at par with interest earned on savings accounts. Now, with the recent recovery in their portfolios, these investors exit the market in order to safeguard their principal," she said.
Secondly, with the uncertainty looming around the loss of primary income due to job losses or business losses, there was a drop in the risk appetite. Thirdly, only a handful of stocks led to the rally in the broader indices. This has given rise to a category of investors who find it more prudent to invest in direct equity than through MFs. "This is evident from the increase in the number of Demat accounts in the last few months," she said.
The market rally is also seen as a factor for outflow in equity mutual funds as retail investors try to reap more gains.
Binod Modi, Senior Research Analyst at Reliance Securities, said the consistent underperformance of mutual fund industry in terms of returns for the last three to five years and redemptions after recent recovery in markets could be the reasons for a sharp fall in equity inflows.
"With persistent uncertainty over jobs and savings, people seem to shy away from any long-term commitment, especially in terms of SIPs. Additionally, a large pool of people started doing direct investment into equities due to their short-term investment goals," he added.
The road ahead
MF space may continue to remain under pressure as long as there is uncertainty over the recovery. Once the economy is back on track and job market revives, the outflow from equity schemes should stop.
Agarwal of Anand Rathi expects the MF industry to remain under pressure till the time there is uncertainty around job losses and normal business cycle.
Thomas of Emkay Wealth said the outflows from equity were negligible and it could stabilise over the next few months.
"While we may see the current trend continuing to prevail in the shorter term, the course may be steadied on the availability of more macro data in the coming months,” Thomas said.
"It is the net increase in outflows from Rs 13,520.03 crores in June to Rs 16,622.01 crores in July that resulted in net negative outflow for the previous month. Therefore, there are investors who sense the opportunity in the current market scenario and continue investing while there are classes of investors who look to liquidate their investments in order to safeguard their principal during this time of job and business uncertainty," she 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.