MF industry badly hit by slowdown in equity flows

In April, the inflows into equity schemes dropped 60% compared to the previous month to Rs 4,608 crore, the lowest since Sept 2016.

Illustration: Uttam Ghosh/Rediff.com

The Rs 24-trillion mutual fund (MF) industry, grappling with the issue of debt exposure, has been hit hard by a sharp slowdown in equity inflows.

In April, the inflows into equity schemes, including tax-saving ones, dropped 60 per cent compared to the previous month to Rs 4,608 crore, the lowest since September 2016.

The slowdown came despite the Sensex and the Nifty50 climbing to record highs last month.

The benchmark indices have declined about 5 per cent each since then.

Industry players attribute the drop in equity allocations to election result uncertainty coupled with a spike in market volatility.

“We expect May to also see tepid flows as investors are likely to stay cautious ahead of election outcome,” said Sunil Subramanian, managing director and chief executive officer (CEO) of Sundaram MF.

Experts say if weakness in equity flows continues, it could hurt the profitability of MF players as equity products typically offer higher yields.

Compared to the last 12-month average of Rs 9,321 crore, April’s inflows are 50 per cent lower.

Overall, the equity schemes have seen Rs 12,830 crore redemptions while garnering more than Rs 17,000 crore in fresh flows in April.

Experts say the sharp drop in flows is a cause for worry as the net equity inflows are significantly lower than the flows coming through systematic investment plans (SIPs).

“If it was not for SIP flows, the figures could have been in negative for the industry, which is not a good sign,” a senior industry official said, requesting anonymity.

In April, the contribution through SIPs stood at Rs 8,200 crore, which was 2 per cent higher than the previous month.

On a year-on-year basis, the SIP contribution was 22 per cent higher.

According to industry estimates, the bulk of SIP money is directed towards equity schemes, but the exact amount could not be ascertained.

In the case of debt schemes, credit risk funds continue to see redemption pressure due to the fears of downgrades and credit events.

In April, these funds saw Rs 2,248 crore redemptions while fresh flows only stood at Rs 994 crore.

On a net basis, the outflows for the category were around Rs 1,200 crore.

“What we are seeing is a knee-jerk reaction from investors in this category. Since the Infrastructure Leasing & Financial Services (IL&FS) crisis, there have been instances of downgrades and defaults in some cases.

"These have led to risk aversion among investors,” said NS Venkatesh, chief executive of the Association of Mutual Funds in India.

Overall, the debt-oriented schemes garnered Rs 1.2 trillion of net inflows in April, with liquid schemes getting the bulk of these inflows.

Liquid schemes - used by corporate and institutional investors to keep short-term money - got Rs 89,778 crore of net inflows in April.

Among close-ended schemes, fixed maturity plans saw over Rs 17,000 crore of net outflows, largely due to maturing of schemes and investors deciding against re-investing in these schemes.

Besides election-related volatility, the MF industry has had to grapple with regulatory changes, with the Securities and Exchange Board of India scrapping the upfront commission and reducing the fees charged by the industry to investors. However, industry players say things seem to have stabilised.

“The SIP numbers indicate that the uncertainty around expenses and commissions is out of the system. In February and March, the SIP numbers showed weakness, but the April numbers indicate that people are getting back to business and things are back to normal," said Swarup Mohanty, CEO of Mirae Asset Management Company.

The industry’s assets under management at the end of April stood at Rs 24.78 trillion, which was 4 per cent higher than the previous month.

Of this, the equity schemes accounted for Rs 7 trillion of assets, 16 per cent lower than the previous month.