Comment | What falling equity MF inflows mean for investors and markets

Ravi Ananthanarayanan

Net equity mutual fund inflows have fallen for three months in a row. One part to this story is gross equity inflows, or purchases of units by investors in equity and equity-linked saving schemes (ELSS) schemes. That has shown a rising trend. In January, gross inflows were Rs 17,555 crore compared to Rs 15,614 crore in November. Money coming in is a good sign.

But not everyone is buying. People are also redeeming some of their MF investments. This should not be a surprise. Mutual fund schemes have been under-performing, not just in small and mid-cap schemes but also in large-cap schemes. Even SIP investors, who have been a main source for inflows in recent years, may be worried at their portfolio returns. Naturally, there may be investors who want to take some money off the table. The pace of outflows has increased, at Rs 11,397 crore in January compared to Rs 7,921 crore in November. That is a worry.

Now, December and January also saw ELSS inflows jump, due to the tax-planning season, which may continue till the financial year ends. If you consider equity schemes alone, then the decline in inflows is sharper.

In sum, net inflows into equity schemes are showing a declining trend. That can become a concern. Rising gross inflows show there is still a large base of investors who remain committed, while SIP inflows are no doubt a major support. There may be those investors who may be selling in some schemes and buying others.

What should investors do? If investors have a long term financial plan and are being disciplined in their periodic portfolio reviews, then there’s perhaps nothing more they need to do.

What about equity markets? Mutual fund inflows have been a source of support for equity markets, especially when foreign investors were sellers. In January, for example, mutual funds’ net purchases were Rs 6541 crore while foreign institutional investors’ were net sellers at Rs 505 crore. In 2018, mutual funds were net buyers at Rs 1,13,333 crore while FIIs were net sellers at Rs 73,212 crore.

If mutual funds also become net sellers, the fear is the effect that can have on stocks. There are multiple factors that influence equity markets and perhaps, if MFs turn net sellers, other factors could compensate. Still, what can be said is that a period of higher uncertainty lies ahead for the equity markets, if MFs face continued redemption pressure.