As a mutual fund (MF) investor, each rupee you invest gets captured as part of the overall inflows into the MF industry. The Association of Mutual Funds in India (AMFI) puts this data out in the public each month. So, when the data for June 2020 revealed that open-ended debt, equity, and hybrid funds posted a whopping 95 per cent decline in June over May, this came as a shocker to everyone. June wasn’t a particularly bad month for equities; the domestic market went up by 7.5 per cent in June. For debt and hybrid pieces of the MF mart, nothing seemed out of place. Then, what explains the 95 per cent staggering fall? In this article, we will look at the factors behind this seemingly big drop.
The Big Number
In June 2020, open-ended equity fund net inflows fell to Rs 240.55 crore. This is 95 per cent lower than Rs 5,256 crore in May 2020. In the case of open-ended debt funds, net inflow fell 95 per cent from Rs63,665 crore to Rs 2,862 crore. In hybrid funds, the net inflow fell by 95 per cent to a mere Rs 355.82 crore in June from Rs 8,652 crore in May. As you can see, all the three main categories of mutual funds, saw the 95 per cent drop. Before we go to understand how the 95 per cent drop happened in each fund category, let us understand what is net inflow. Net inflow is the number that you get when you subtract total redemptions from total purchases. The net inflow number can become small when either the total purchases become small or total redemptions are high. If total redemptions exceed total purchases, net inflow becomes net outflow.
With this understanding, let us try to understand what happened in June 2020 that led to the net inflow number for the main fund categories fall by 95 per cent.
Equity category: The total net inflow number of Rs 240.55 crore is a reflection of what happened broadly. The truth becomes clear when we dig deeper. In multi cap funds, the biggest sub-category of equity schemes, there was a net outflow of Rs 778 crore. This means more amount of redemptions happened in multi-cap funds than purchases. The net outflow situation happened in four of the 10 equity fund sub-categories. Apart from multi cap funds, net outflows were also seen in large cap funds, dividend yield funds, and value/contra funds.
In fact, six out of the 10 equity fund sub-categories actually saw net inflows. This includes large and mid-cap funds, small-cap funds, focused funds, ELSS funds, and sectoral/thematic funds. “ELSS as a category has seen higher AUM, thanks to the extensions provided by the authorities for investment in tax saving instruments,” says G Pradeepkumar, CEO, Union AMC.
At the headline level, the 95 per cent fall in net inflows may make it seem investors were in no mood to buy, but actually there was no wide-spread panic. Because some investors pulled out funds from multi-cap, large-cap, dividend yield, and value/contra funds, the effect seems magnified. Since stock markets jumped over 30 per cent after hitting lows in the fourth week of March, some profit-taking was always in the order. Some industry experts in fact argue that this is a rational response in a fast rising market. It highlights that domestic investors have truly matured.
The SIP number in June ended below the Rs 8,000 crore psychologically important mark at Rs 7,927 crore. Some portion of the small downtick in SIP contribution could be due to the SIP pause facility used by investors. “The dip in SIPs is primarily because of the Covid impact as cash flows have got affected. Also, because the mutual fund industry provided SIP pause facility which was opted by people due to which inflows have fallen marginally,” says Omkeshwar Singh, Head - Rank MF, Samco.
However, things haven’t been that bad in SIP book, which draws a lot of inflows into equity funds. “That the monthly SIP contribution has been slowing down is worrying, but it is not completely unexpected given the strain on cash flows and incomes experienced by many investors on account of the Covid-19 situation. Once the economic situation improves, the flows should also pick up,” says Pradeepkumar.
At least till last month SIP number was steady at Rs 8,000 crore. “I would like to believe it would remain steady around that number, simply because it’s very granular at nearly 3.2cr SIP accounts, so discontinuing of few thousand SIPs will also not reduce the overall SIP inflow significantly,” says Sachin Shah, Fund Manager, Emkay Investment Managers
Debt/fixed income category: The total net inflow number in June 202 for debt/fixed income category stood at Rs 2,862 crore. Again, this number is a broad reflection of what happened. To understand what really happened, we must look at what happened in the 16 sub-categories.
Out of 16 sub-categories in debt/fixed income, 13 reported net inflows. Only three reported net outflows. One was liquid funds, which posted a net outflow of Rs 44,226 crore. June being the last month of the first quarter, corporates and treasury teams take out money from liquid funds to boost cash-balances in their result reports. This money again comes back in July. So, there was nothing out of the ordinary. The second category, which drove the overall lower net inflows number is credit risk fund. This category has suffered a lot in the last few months. In June, credit risk funds on a whole saw nearly Rs 1500 crore net outflows. The third category which saw net outflows was medium duration funds. But the chief damage to debt/fixed income funds came from liquid funds, which follow a cycle. In May 2020, liquid funds saw net inflows worth over Rs 61,870 crore.
As investors hunted for safer investments, corporate bond funds witnessed a net inflow of Rs 10,737 crore, the highest for the category since April 2019, according to CRISIL. However, some beaten down categories in recent months also saw a sharp rise in investor interest. For instance, low duration funds and short duration funds saw a net inflow of Rs 12,236 crore (the highest among debt fund categories) and Rs 8,324 crore in June.
Hybrid funds: Hybrid funds saw net inflows of only Rs 355.82 crore in June compared to Rs 8652.04 crore in May. This is was over 95 per cent month-on-month. If you look deeply, you can again understand what went wrong in June.
Out of six hybrid fund sub-categories, five saw net outflows. In June, conservative hybrid funds saw net outflows of Rs 61.69 crore. Aggressive hybrid funds saw high net outflows of Rs 1,704.81 crore. Dynamic asset allocation or balanced advantage funds saw net outflows of Rs 941.41 crore. Multi-asset allocation funds saw net outflows of Rs 72.90 crore. Even, equity savings funds saw net outflows of Rs 401.02 crore. The only saving grace was arbitrage funds which clocked net inflows of Rs 3,537.65 crore. Arbitrage schemes saw net inflow of ~Rs 3,538 crore in June, compared with Rs 10,806 crore in May (which was the highest for the category since April 2019), as per Crisil.
Spike in equity ETF investment; gold ETFs continue to shine
Equity exchange-traded funds (ETFs) saw a sharp rise in investor interest in June, helped by gains in the underlying asset class. The category witnessed a net inflow of Rs 4,093 crore in the month, sharply up from Rs 1,018 crore seen in May.
Meanwhile, inflows remained positive for gold ETFs for the third straight month, although lower at ~Rs 494 crore. Their asset base, however, advanced ~Rs 755 crore in June, as sentiment for the yellow metal continued to remain firm. The Crisil Gold Index gained 2.26 per cent during the month.
Despite the bleak net inflow situation for equity, debt, and hybrid funds, mutual funds’ assets keep on growing. Indian mutual funds’ assets increased by nearly four per cent in June due to mark-to-market gains, despite muted net inflow. Total assets under management (AUM) of the industry rose ~Rs 94,091 crore to Rs 25.49 lakh crore during the month.
Speaking on the June 2020 Mutual Fund Monthly data, N S Venkatesh, chief executive, AMFI, said: “Reducing interest rates, gradual unlocking of economic activity with expected return to normalcy has seen renewed buoyancy in markets leading to Mutual Fund AUMs crossing Rs 25 lakh crore mark for the first in the last three months of this fiscal, FY2020-21.”
Markets in review
June turned out to be another month of spectacular equity gains after the sharp pullback of April. The S&P BSE Sensex jumped 7.5 per cent during the month. India’s performance for the month was better than emerging market peers. MSCI Emerging market index gained 7.3 per cent during the month (in the same currency). On a year to date basis, BSE Sensex declined 15 per cent. This is on account of sell-off in March following Covid-19 fears.
Small and mid-cap stocks fared better than the narrower index of BSE-30. The Mid-Cap index rose 10.4 per cent during the month. Small-Cap index has a gain of 13.7 per cent during the period. On YTD basis as well they have performed better.
Cyclical sectors such as banks, auto, and real estate were best performing for the month. Many data points suggested economic recovery. Bank and finance companies are indicating lesser borrowers taking moratorium benefit, helping stock performance. Telecom, FMCG, and healthcare were among the sectors that didn’t participate in the rally.
“FIIs pumped in $2.5 billion in the month of June. On a year-to-date basis, FIIs have pulled out $2.4 billion from Indian stocks. Domestic institutions (DIIs) were net buyers of $0.3 billion during the month. Within DII, mutual funds were sellers of $0.5 billion stocks while insurers contributed the balance. DIIs have invested $11.8 billion in the equity market so far in 2020. The Indian rupee gained 0.14 per cent against US dollar during the month,” says Atul Kumar, head (equity) at Quantum Mutual Fund.
The writer is a journalist with 14 years of experience