Redemptions from equity funds and sustained investments in debt and gold funds in July suggest a continuing trend of profit-taking as markets rally, and a move towards relative safety.
Equity and hybrid schemes saw net outflows of Rs 2480.35 crore and Rs 7301.29 crore, respectively in July, compared to inflows of Rs 240.55 crore and Rs 355.82 crore in June as per data released by the Association of Mutual Funds in India (AMFI).
Barring tax-saving schemes and focused equity funds, all other categories were hit by redemption pressure. “This could be largely attributed to investors taking profits, given the surge in the equity markets,” says Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.
Cashing out on rallies
The broader market Nifty 500 TRI has gained 47.93 per cent from the March lows. Weak economic growth projections for the financial year 2020-2021 and poor earnings announcements by some companies, as well as elevated valuations, have added to investors’ worries. The PE ration of Nifty 500 has risen to 33.7 from 19.4 in March. “Investors have lost interest in actively managed equity mutual funds as most schemes offered low single-digit returns over the past 3-5 years,” says Ashish Shah, founder of Wealth First Portfolio Managers. “Many investors are redeeming from mutual funds and investing directly in stocks,” he adds.
But SIP investors haven’t turned away from funds. About 11 lakh new systematic investment plans were registered in July compared to the 9.13 lakh reported in June. The total SIP amount, however, has reduced to Rs 7830 crore.
While investors are cautious on equity, they have not dumped mutual funds altogether. Inflows into gold exchange traded funds doubled to Rs 921.19 crore compared to Rs 494.23 crore in the previous month. “Investors looking for safe haven in uncertain times, have been investing in gold ETFs,” says N. S. Venkatesh, chief executive officer, Association of Mutual Funds in India.
The rush for debt funds
Investors have taken to debt funds in search of better returns, given that bank fixed deposits offer pretty low interest rates. “As equity markets turned volatile, many investors shifted from equity to bonds and initially opted for fixed deposits and RBI saving bonds. However, as the rates on these instruments fell, they chose to get into debt funds in search of better returns,” says Nikhil Naik, founder and CEO, Naik Wealth.
Liquid funds and overnight funds have delivered low returns. Investors shifted their preference to ultra short term and low duration debt funds. Fixed income investors with a bit longer time frame opted for investments in corporate bond, banking & PSU debt, and short term bond funds. These three categories put together saw net inflows of Rs 29743 crore.
Clearly, investors seem to prefer debt funds over their equity counterparts in recent times.