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Investors start warming up to debt funds, equity flows continue to be strong: AMFI

The MF industry collected Rs 13,686.23 crore through SIPs in February 2023. Though marginally lower than the previous month’s inflows, AMFI CEO NS Venkatesh attributes this to a shorter month.

March 10, 2023 / 08:53 PM IST

The Indian mutual funds industry continued to attract inflows, but investors got choosy in February 2023 given the highs that equity markets appear to have reached and interest rates that, too, appear to have reached their peak levels. Here are six key trends that emerged in the way investors put money in—and withdrew from—the Rs 40 trillion Indian mutual funds (MF) industry.

Equity funds’ inflows bounce back

Equity funds saw strong inflows in February 2023. These funds got net inflows (more money came in than went out) to the tune of Rs 15,686 crore in the month. The last time they got such strong inflows was in May 2022 at Rs 18,529 crore.

These inflows came on the back of strong flows in mid- and small-cap funds as well as multi-cap funds. In February, multi-cap funds got Rs 1,977 crore as net inflows, mid-cap funds got Rs 1,817 crore and small-cap funds got Rs 2,246 crore as net inflows.

Last minute tax-savings

As the March-end deadline to plan income taxes got closer, investors continued to invest in equity-linked savings schemes (ELSS), more popularly known as tax-saving mutual fund schemes. ELSS got net inflows worth Rs 981 crore in February 2023. ELSS had got Rs 1,414 crore in January 2023 and 564 crore in December 2022.

Sector funds and thematic funds get attention

Another segment within equity funds that have shown some good inflows is sector and thematic funds. These funds collectively got new inflow worth Rs 3,856 crore. NS Venkatesh, Chief Executive Officer, Association of Mutual Funds in India, attributes this to investors’ rising appetite towards select sectors like banking and financial services and even pharmaceuticals. “Some fund houses have reported rising investors’ interest in ‘business cycle’-themed funds. These funds invest in sectors that are better placed for an uptick in their respective business cycle,” says Venkatesh.

Investors warm up to debt funds

Although debt funds saw a net outflow (more money went out than came in) for the third straight month—and to the tune of Rs 13,815 crore—retail investors appear to be investing in line with how debt funds are poised in the present interest rate environment.

In February 2023, the Reserve Bank of India (RBI) increased the repo rate by 25 basis points. A 100 basis points is equal to a percentage point. While some experts on bond street are vocal that the central bank is close to the peak in interest rates this cycle, many feel that the current interest rate hike cycle is over. And investors seem to have taken the cues.

As per AMFI data, investors put Rs 412 crore into short-term debt funds, as opposed to a net flow of Rs 3,859 crore a month ago. This was the first net inflow in five months in short-term debt funds. Similarly, dynamic bond (Rs 502 crore) and long-term bond funds (Rs 343 crore) also saw some net inflows.

Long-term bond funds saw their highest net inflows in nearly four years, clearly signalling a move in investors’ preference. Similarly, investors warmed up to government securities funds as well.

ETFs sees profit-booking

As per AMFI data, exchange-traded funds (ETF) saw a net inflow of just Rs 29 crore. Index funds, on the other hand, saw strong net inflows worth Rs 6,244 crore.

A closer look tells us that it isn’t that investors aren’t investing in ETFs. In fact, in February 2023, investors invested Rs 14,801 crore in ETFs and Rs 9,476 crore in index funds. They just took more money off the table in ETFs than in index funds. While investors withdrew Rs 3,232 crore from index funds, ETFs saw a withdrawal of Rs 14,772 crore in February. Hence the low net inflows for ETFs in February.

“The new funds also contributed to the inflows in index funds”, says Venkatesh. In February, the Indian MF industry launched 11 index funds that collectively mobilised Rs 863 crore. On the other hand, there were three new ETFs launched in February; these collectively garnered Rs 17 crore.

SIPs continue, unabated

Investors continued to invest in MFs through systematic investment plans (SIPs). In February, the MF industry got inflows worth Rs 13,686.23 crore through SIPs. This was lower than the previous month’s SIP inflows by Rs 169 crore. But Venkatesh isn’t perturbed, saying February had “only 28 days and therefore this was expected”.

Venkatesh says that over the past few years, inflows from SIPs have helped equity market sustain as retail inflows have negated the effects of foreign institutional investor outflows that bring the markets down. “This shows that retail inflows have acted as a stabilising force in the equity markets,” he says.

Kayezad E Adajania
Kayezad E Adajania heads the personal finance bureau at Moneycontrol. He has been covering mutual funds and personal finance for the past two decades, having worked in Mint and Outlook Money magazine. Kayezad was the founding member of Mint’s personal finance team when it was set up in 2009.
first published: Mar 10, 2023 02:25 pm