Mutual funds emerge from the shadow of last crash

Money flowing into the equity schemes of mutual funds is back at a level last seen before the 2008 financial crisis, when the stock market tanked 60 per cent.

In July, mutual fund managers received Rs 10,845 crore (Rs 108.45 billion) from investors, the most in a month since January 2008. This was also when the BSE Sensex had risen as much as 50 per cent to 21,000 in a year.

Last year, investors pulled out about Rs 10,000 crore (Rs 100 billion) from mutual funds but were back with Rs 20,000 crore (Rs 200 billion) in the three months ended July, following the Narendra Modi-led National Democratic Alliance government coming to power at the Centre in May. 

Sources said money had been flowing into equity mutual funds, owing to a surge in the market.

"Some fixed-income money has started shifting to equities. A reasonable proportion is through switches," said Ajit Menon, executive vice-president of DSP BlackRock Mutual Fund.

A change in tax rules for debt funds in Union Budget 2014-15 has also made fixed-income investments less attractive.

"New money is flowing in, as the outlook for equity is positive. Systematic investment plans have nearly doubled through the last three months. This is a strong trend," said Milind Barve, managing director of HDFC Mutual Fund.

In the recent past, India's Rs 10-lakh-crore mutual fund sector has been under tremendous pressure. Equity schemes saw a net outflow of Rs 26,000 crore (Rs 260 billion) in the previous two years. Investors, who had burnt their fingers in the stock market crash of 2008, have been selling mutual fund investments at every given opportunity.

"Money started shifting to equities around the beginning of the year and accelerated after the elections and recent tax changes," said Niranjan Risbood, director (fund research), Morningstar India.

"The interest in equities is from across the spectrum. Recently, retail investors started increasing equity investments because of the poor performance of other asset classes such as real estate and gold," said S Naren, chief investment officer, ICICI Prudential Asset Management Company.

However, a 40 per cent rise in the stock market since last August has made fund managers cautious. "The returns delivered through 10 months have built expectations among investors. To moderate this, we term our stance on equity as cautiously bullish," Naren added.