Changes in taxation of non-equity funds, equity markets nearing a new high and interest rates at a crucial juncture make investing difficult. Volatility in mutual fund inflows is an indication of the same. Moneycontrol spoke with some of the leading distributors to understand investor sentiment and uncovered some interesting trends.
Mutual funds are a mixed bag
Monthly data from the Association of Mutual Funds in India (AMFI) showed net inflows in equity funds had dropped to Rs 6,480 crore in April compared to Rs 20,534 crore in March, a fall of 68 percent. Debt funds saw inflows of Rs 1.06 lakh crore in April compared to an outflow of Rs 56,884 crore in the prior month. Most experts acknowledge that the March-end outflow in debt funds is attributable to the typical quarter-end phenomenon where most corporates pull out money from debt funds to pay bills and taxes and spruce up bank balances.
Inflows in equity mutual funds, however, is an interesting game. “Broad equity market indices nearing all-time high, relative uncertainty in the financial system due to diverse views on interest rates both globally and locally, and drop in new fund offers and collections are some of the reasons why equity fund inflows have come down,” says Nirav Karkera, head, research, Fisdom, a mutual fund distribution platform.
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Experts say that investors have understood that systematic investment plans (SIPs) are the better way to invest in equities. Contributions to SIPs stood at 13,728 crore in April compared to Rs 14,276 crore in the previous month. The total number of SIP accounts outstanding on the other hand stood at 6.42 crore in April 2023 compared to 6.35 crore in March. Anup Bhaiya, founder and managing director of Money Honey Financial Services, says, “Investors are showing initial signs of worry over muted equity returns, but there is no shift from equity to debt.”
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Most advisors agree that investors are not redeeming aggressively from equity funds. The recent uptrend in the equity market should also soothe most first-time investors, as it pushes up equity mutual funds returns for the last year. For example, large-cap and flexi-cap equity funds have given 15.22 and 15.89 percent in the year to May 12, 2023, as per Value Research.
Fixed deposits shine
Though institutional investors continue to repose their faith in very short-term-oriented debt mutual fund schemes, individual investors are clearly looking for better alternatives. Fixed deposits have emerged as the undisputed beneficiaries of the decision to put debt funds at par with fixed deposits on the taxation front. Distributors and financial advisors say that incremental investments in fixed income are going into fixed deposits than into debt funds.
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Bhaiya sees the decision to double the investment limit to Rs 30 lakh for the Senior Citizen Savings Scheme (SCSS) as a big draw for older people. “Many senior citizens are investing their money in SCSS as the rate on offer is higher than most other fixed deposit schemes and yields on debt funds,” he adds.
Even bank fixed deposits and corporate fixed deposits are in high demand. “Fixed deposits issued by some good banks and top-notch corporates are offering rates that are higher than government bonds of comparable tenures, which makes many investors consider investments in fixed deposit products,” says Feroze Azeez, deputy CEO of Anand Rathi Wealth.
Karkera says, “Peak interest rates are available on two- to three-year fixed deposits. Many debt funds’ portfolios are offering similar durations and that makes investors opt for fixed deposits.” Investors looking for long-term allocation to debt are also considering traditional investments such as National Savings Certificates, he adds.
Hybrid funds: The next big thing
Due to changes in tax rules, some investors find it unattractive to invest in debt funds and gold exchange-traded funds (ETFs). Over a period of time, experts foresee investors opting for hybrid funds investing in a mix of equity and debt and other commodities including gold and silver.
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Though the inflow numbers, for now, do not show any material pick-up in inflows in such funds, Azeez says there are early signs of investors moving to multi-asset allocation funds that invest in stocks, bonds and gold.
Sanjay Shah, founder and managing director of Prudent Corporate Advisory Services, sees no shift from equity to debt but acknowledges, “Multi-asset allocation funds are slowly catching up as taxation of non-equity products turns unattractive.”
As stocks quote near all-time highs and investors become nervous about valuations, some may want to allocate money to dynamic asset allocation funds instead of diversified equity funds.
What should you do?
Investing at this juncture may sound too difficult if you are keen to time the market. But it won’t be the case if you stick to your asset allocation. Do not get overly worried about what others are doing. Debt funds are in a sweet spot as market participants expect a fall in interest rates. In the three months to May 12, long-duration funds and gilt funds on average have given 4.52 percent and 3.1 percent returns, respectively, as per Value Research. Despite this, do not ignore your asset allocation and invest all your money in debt funds alone or in equities.
“Debt looks attractive for now, but in the long term, equity should offer better returns. The current stage of lukewarm returns in equity mutual funds is temporary in nature and investors need to continue with their SIP in equity funds,” says Shah.
Also, if you have forgotten to rebalance your asset allocation, now is a good time to do so.
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