Equity inflows slump 16% in March as smallcap funds see first outflows in 30 months

Contributions via systematic investment plans (SIPs) remained above the Rs 19,000 crore level for the second straight month in March.

Smallcap mutual funds saw outflows for the first time in 30 months in March, as investors turned cautious after the capital markets regulator the Securities and Exchange Board of India (SEBI) raised concerns over "froth" in the segment.

Inflows into open-ended equity mutual funds slumped 16 percent to Rs 22,633 crore in March, led by outflows in smallcap funds, data released by the Association of Mutual Funds of India (AMFI) on April 10 showed. 

Inflows into equity funds have remained in the positive zone for the 37th straight month.

Meanwhile, contributions via systematic investment plans (SIPs) remained above the Rs 19,000 crore level for the second straight month. As per AMFI data, SIP book was at Rs 19,271 crore against Rs 19,187 crore in February.

“The consistent surge in SIP flows, surpassing Rs 19,000 crore for the second consecutive month, signals a promising trajectory. I anticipate this momentum propelling to achieve a milestone of Rs 25,000 crore by the end of 2024," said Swarup Anand Mohanty, Vice Chairman and CEO, Mirae Asset Investment Managers.

Equity funds

Smallcap funds saw a net outflows of Rs 94 crore in March against net inflows of Rs 2,922.45 crore in February. The last time smallcap funds saw net outflows, of Rs 249 crore, was in September 2021.

Further, inflows into midcap funds slumped 44 percent to Rs 1,018 crore against net investments of Rs 1,808.18 crore in February, the AMFI data showed.

There was a reversal of flows to largecap funds as inflows into the category jumped 131 percent to Rs 2,128 crore in March.

Over February 27-28, SEBI had instructed mutual funds to dig deep in their small and midcap fund portfolios to gauge how liquid and volatile they were compared to their benchmarks among other such indicators.

The markets regulator asked all fund houses to conduct stress tests to determine how long would it take to liquidate 50 percent and 25 percent of their small and midcap portfolios.

According to the results of the first stress test, which came out around March 15, it would take an average of about six days for midcap funds to liquidate 50 percent of their portfolios and about 14 days for smallcap funds to do the same if the markets were to crash and investors rush for redemptions.

"Rising market led to profit booking by investors while SIPs continue to be encouraging. We witnessed investment rebalancing where investors seem to have moved from small-cap schemes to large-caps. Fixed-income flows were negative due to year-end phenomenon,” said Manish Mehta, National Head - Sales, Marketing & Digital Business, Kotak Mahindra AMC.

Debt funds

In the fixed-income category, debt mutual funds saw net outflows of nearly Rs 2 lakh crore. Within the category, liquid funds saw net selling of Rs 1,57,970 crore followed by ultra-short duration at Rs 9,135 crore.

"March saw some interesting changes in mutual fund flows.  The entire debt category was negative across with the exception of long-duration funds.  Usual balance sheet build up in the year-end led to outflows in the liquid ultra-category.  Tight liquidity situation led to outflows despite short-term yields peaking led to outflows. Quarterly seasonality of tight liquidity coinciding with the year-end led to even more pronounced outflows," said Anand Vardarajan, Business Head – Banking, Institutional Clients, Alternate Products and Product Strategy, Tata Asset Management.

The outflows were more broad-based with all the categories except for three witnessing net outflows. Long Duration Fund, Banking and PSU Fund and Gilt Fund with 10-year constant duration were the three categories which witnessed net inflows.

Categories such as Long Duration Fund and Gilt Fund with 10-year constant duration, which houses funds that tend to maintain higher maturity profile, found favor among investors.

"The flow trend in these segments suggests that investors have preemptively started to show interest in funds from these categories, largely driven by expectation of interest rate cut in the later part this year. This could have also led investors to liquidate some of their investments from categories having shorter duration profile such as Ultra Short Duration, Low Duration and Money Market Fund," said Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India.

Hybrid funds

Hybrid schemes saw net inflows of only Rs 5,584 crore, a 69 percent fall from the Rs 18,105 crore in February.

"With strong moves in commodities, real estate and equity markets, investors continue to opt for multi-asset allocation funds, pouring in Rs 2,681 crore in March. The AUM of the hybrid schemes category was at Rs 7.22 lakh crore," said Gopal Kavalireddi, Vice President of Research at FYERS.

New fund offerings (NFOs) were also on the downtrend, mobilizing only Rs.4146 crore from 21 schemes. Five sectoral/thematic funds launched by AMCs - Baroda BNP Paribas, Canara Robeco, Edelweiss, Kotak and Union - collected Rs.3,074 crore.

Due to the net outflows from debt funds, overall assets under management of the Indian mutual fund industry dipped to Rs 53.40 lakh crore against Rs 54.50 lakh crore in February.