Net inflows into equity funds have fallen, yet, mutual fund houses are not so perturbed.
The net inflows into equity mutual fund schemes fell 44 percent to Rs 15,890 crore in April from Rs 28,463 crore a month back. The April numbers appear to underline the cautious approach of investors. The prospect of interest rate increases may be pushing investors to dump their investments in medium-duration funds, short-duration funds and gilt funds.
“The volatility arising out of interest rate hikes plays on the minds of investors but there are no panic reactions as such. Many investors are still waiting on the side-lines for the market to stabilise,” said G Pradeepkumar, Chief Executive Officer of Union Asset Management Company. “We have not seen many redemptions or cancellations of SIP (systematic investment plans) as of now.”
Equity scheme redemptions fell about 7 percent to Rs 16,726 crore in April from Rs 17,944 crore in March.
However, investors with very short-term investment horizons dabbling in stocks and equity mutual funds may hit the exit button after seeing losses.
“While there may be some near-term impact on lumpsum flows due to increased volatility, we believe the medium-term outlook on equity flows remains robust as mutual funds as well as demat accounts have seen strong growth in last few years,” said Suresh Soni, chief executive officer of Baroda BNP Paribas Asset Management India.
There have been outflows from debt schemes investing in long-tenure bonds in the past few months as investors prepared for interest rate hikes. When interest rates go up, bond prices fall and debt fund returns suffer. The US Federal Reserve initiated the rate hike cycle in March this year. The Reserve Bank of India increased the repo rate by 40 basis points on May 4. This is expected to keep inflows in duration products under check as of now. However, the situation may change sooner than expected.
“We may see some serious inflows in the next two-three months at higher yield levels in advisory-driven channels into dynamic bond funds and gilt funds as high net worth individuals may want to allocate some money to these products gradually,” said Ajit Menon, chief executive officer of PGIM India Asset Management.
In volatile times, the silver lining is the SIP book. SIP contributions declined about 4 percent to Rs 11,863 crore in April from Rs 12,327 crore in March. The number of SIP accounts rose to 53.9 million from 52.7 million in this period.
In the past few years, individual investors used SIP to allocate money to equity funds. SIP is also a big driver of the growth in MF assets under management.
“With rising awareness about mutual funds and benefits of rupee cost averaging through SIP among investors and distributors, the monthly SIP book of the industry is going to go up as more investors are onboarded and existing investors are expected to continue their investments,” said A Balasubramanian, managing director of Birla Sun Life AMC.
Investors are not only using SIP to allocate money to equity funds as stocks declined, they are also deploying spare cash.
“Lumpsum investments and systematic transfer plans are being used by some investors to take advantage of the volatility in the stock markets,” said Pradeepkumar.
Most mutual fund houses told Moneycontrol they expect large-cap equity funds, flexi-cap equity funds and balanced advantage funds to get inflows.
While challenges such as rising interest rates, inflation and slowing economic growth make investors cautious, mutual funds also face two key issues.
Curbs on NFOs
In April, the Securities & Exchange Board of India, the financial markets regulator, banned the launch of new fund offers for three months so that the sector has time to ensure that money from investors goes directly into mutual funds instead of being pooled by distributors and other intermediaries.
New fund offers had played a vital role in mutual fund inflows. The inability to launch new funds is seen by some as an impediment for growth in mutual fund assets, especially for new fund houses.
“Suspension of new fund offers will also suppress inflows relative to past quarters as new fund offers contributed to the sizeable flows we saw for most of last year,” said Menon.
However, Balasubramanian said there won’t be much impact.
“Most of the fresh inflows do come to existing products and hence inability to launch new fund offers will not hurt inflows on the industry level,” he said.
The other issue is the suspension of fresh investments in schemes that invest in stocks overseas because the limit set by the regulator has been reached. As of April 30, funds of funds investing overseas managed assets worth Rs 20,540 crore compared to Rs 13.66 lakh crore managed by open-ended equity funds. This comes when stocks in India and the US have been falling.
Not being able to invest in schemes focused on international stocks may not materially impact overall inflows numbers, but it is an opportunity loss for investors, Menon added.
Going forward, investor response to price movements of various assets and the performance of mutual funds in such volatile times will decide the level of inflows into mutual fund schemes.