Equity mutual funds have been witnessing net outflows for the last five consecutive months even as equity markets extended their rally.
As per a report by brokerage firm JM Financial, equity MF schemes (ex-arbitrage) witnessed the fifth consecutive month of net outflows of Rs 7,300 crore in October (cumulative outflows of Rs 26,600 crore from June 2020) as the redemption pressure continued.
At the time when the equity market continued rising, the outflow from equity MF schemes appears perplexing.
"The outflows from equity mutual funds has been driven by two broad factors. The first being profit-booking by both HNIs and retail investors before the US election results and second significant outflows from multi-cap funds due to regulatory changes," said Jharna Agarwal, Head, Anand Rathi Preferred.
A strong rally in the equity market is also seen as a reason for outflow from equity MF funds.
"It clearly appears that investors are using recent rebound in markets to exit and might be participating directly in the equities, which is evident from the record number of new demat accounts in recent months. In our view, a subpar return of mutual fund schemes over the last couple of years has dented investors’ sentiments," said Binod Modi, Head Strategy at Reliance Securities.
Jyoti Roy- DVP- Equity Strategist, Angel Broking believes that this trend of withdrawal from equity MF may be largely attributed to the pandemic.
Investors could be withdrawing their money from equity mutual funds due to various reasons including concerns over the health of the economy.
"Given the fact that there are still some concerns on the economy due to resurgence of the virus in developed economies, investors could be withdrawing money from equities and parking it in other safe avenues like fixed income till the time they have more clarity on the markets," said Roy.
"It has been seen in the past that post large crash investors tend to take out money from equities once their investments have achieved breakeven. We believe that it is a short-term phenomenon and we should see investors come back into the markets in case there is any correction in the markets," Roy said.
Is the MF route still better?
Agarwal of Anand Rathi Preferred highlighted that mutual funds offer an organized and disciplined approach to investing in the equity market which explains the increase in SIP inflows to the category.
The AUM through SIPs has increased in October on a month on month basis.
"While we may continue to see outflows due to profit-booking as markets surge to new heights, inflows through SIPs into equity mutual funds is expected to continue," said Agarwal.
Modi of Reliance Securities believes the MF route will continue to remain better than direct investing given a pool number of investors are still ignorant about equities but wants to generate better returns.
Further, the MF route gives the flexibility to play in a large number of stocks by investing a minimum sum, Modi pointed out.
As the market is expected to do well in the medium to long run, Roy of Angel Broking believes that one should remain invested in equities as an asset class.
"The MF route is better for investors who do not have the time or the expertise to do their own research on stocks. In such a case it is better to let an expert take decisions on their behalf," Roy said.
"However, for experienced investors, it would make sense to take the direct equity route for investing in the equities. However, even they can look at deploying part of their equity allocation in mutual funds given that provide them some diversification," said Roy.
Roy added that for traders, the MF route is may not be an option and it would make sense for them to take the direct equity route for trading.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.