Mutual fund equity inflows rise despite weak markets; SIP flows at all-time high in July

Assets under management (AUM) of the mutual fund industry stood at Rs 24.5 lakh crore at July-end, up by a percent month-on-month (MoM), data from Association of Mutual Funds in India (AMFI) showed.

Mutual funds (MFs) saw a total inflow of Rs 87,087 crore in July, mainly driven by large inflows into equity, liquid and money market funds and exchange-traded-funds (ETFs) while credit risk fund saw capital outflows.

While the inflows were healthy, overall AUM growth in July was almost flat as equity markets saw the worst performance with Nifty falling by 7 percent in July.

But despite weak equity markets, inflows into equity schemes increased by 7 percent MoM in July. Equity SIPs continued to steadily inch up, reaching an all-time high.

Inflows into liquid funds Liquid and money market funds had inflows of around Rs 56,000 crore in July after an outflow of over Rs 150,000 crore in June. This was on expected lines. Corporates that are active investors in liquid funds tend to redeem their investments to meet advance tax payment ahead of June deadline and return to investing in the subsequent month.

Equity inflows on an upswing Open-ended equity schemes saw inflows of Rs 8,113 crore, while there was a small outflow of Rs 21 crore in close-ended equity plans, taking total equity inflows of Rs 8,092 crore in July. Investors seem to have opportunistically used the correction in markets to invest into equities.

Within the equity universe, large and mid-cap funds saw strong inflows in July. The pattern of equity flows in July indicate that investors probably are expecting a faster recovery in large and mid-cap stocks while they remain disinterested in small caps. SIP inflow a bright spot While overall equity flows can be erratic, investment in equity funds through systematic investment plans (SIPs) comes as a silver lining, with a tally of Rs 8,324 crore in July, an all-time high. The rising clout of SIP has been a standout feature and is key to the success story of the mutual fund industry as the flows are stickier and lend high visibility and predictability of AUM growth. If the current monthly run rate of SIP at Rs 8,000 crore is maintained, the MF industry is expected to see equity inflows of nearly Rs 100,000 crore in 2019-20, which is sizeable by any standard.Underlying trend positive, flows seems structural Monthly equity inflows have come off significantly from the high of Rs 20,308 crore in November 2017. That said, the underlying trend is very encouraging. Mutual Fund industry was for long considered cyclical with fortunes linked to vagaries of capital markets. The spike in equity flows despite the lacklustre union budget and a strong bout of FPI selling in July 2019 indicates that cyclicality in the flows, though inherent to MF industry, has largely reduced. As a matter of fact, structural factors are driving the growth of the AUM. The gradual but steady shift of household savings away from physical to financial assets have been the key catalyst for MF growth. The trend, referred to as “financialisation of savings” received fillip after demonetisation resulting in a sharp uptick in inflows for MF industry which many believed to be a one-off effect. However, the increasing share of mutual funds within financial savings is not a mere chance. MFs have now become a mainstream investment vehicle with households increasingly favouring MFs to bank deposits which hitherto were the most preferred vehicle for parking savings. Consequently, individual investors now hold a higher share of MF assets at around 54.3 percent as at end June as per AMFI. Resilient SIP inflows also point towards buoyancy in retail flows. Retail investors, who traditionally took out money following a year of negative returns, are now a changed lot. Historically, Indian equity markets have moved in tandem with FPI fund flows which are relatively volatile. Thanks to strong equity MF inflows in FY19 and year to date, domestic mutual funds are playing a balancing role and smoothening out the volatility to a large extent caused by the exit of FPI money. Follow @nehadave01For more research articles, visit our Moneycontrol Research page