After difficult September, mutual fund industry witnesses strong flows

Equity schemes see best month in FY19; liquid schemes see some recovery

Equity mutual fund schemes continued to see strong inflows from investors despite a sharp correction in the markets in October. On the other hand, liquid schemes saw some recovery.

This category had seen its worst monthly redemptions in over a decade amid fears of a spillover from the IL&FS default.

After seeing an outflow of Rs 2.11 trillion in September, the category saw inflows of Rs 500 billion in October. However, these inflows are still one-third of what they were in August before IL&FS was downgraded several notches to default status.

While liquid schemes try to regain favour, equity schemes continue to scale new highs despite volatility in the equity market (see chart). The monthly data released by the Association of Mutual Funds in India (Amfi) shows that inflows into equity schemes in October stood at Rs 126 billion, making it the best month for equity schemes in FY19. If arbitrage schemes are taken into account, the tally stands at Rs 147 billion, making it the best month since March.

Industry officials say certain savvy investors started making big investments after benchmark indices fell 15 per cent from their peaks. “Towards the end of October, high net worth individuals (HNIs) started to believe that markets have bottomed out with Nifty hovering around the 10,000 mark,” said Rajiv Shastri, chief executive officer of Essel Mutual Fund.

Moreover, the growth of systematic investment plans (SIPs) has provided a steady stream of inflows into equity schemes. Industry players say that at least 90 per cent of the SIP flows are towards equity schemes. In October, the contribution through SIPs rose to Rs 79.85 billion, up 42 per cent compared to the same month last year.

Industry players say liquid schemes can see a quick turnaround. “We expect the parity to return to liquid schemes by the end of this month. Investor concerns should subside as companies are meeting their repayment obligations. Also, we may see liquid scheme portfolios getting aligned to the investors' risk-appetite,” said Swarup Mohanty, chief executive officer of Mirae AMC.

While the mutual fund (MF) industry was anticipating meaningful outflows in September for advance tax payments, the large quantum of pullback came as a surprise. The pullback from liquid schemes accounted for more than eight per cent of the industry assets. The MF industry’s assets under management (AUM) shrunk from the Rs 25 trillion-milestone in August to Rs 22 trillion in September.

Industry officials said besides improvement in sentiment around non-banking financial companies (NBFCs), the money in liquid schemes could come back as a host of variables normalise.

“Liquidity had also dried up as the Reserve Bank of India (RBI) was intervening in the forex market by selling dollars and buying the rupee. Besides this, the cash circulating in the system had gone up due to the festive season,” Shastri said.

Meanwhile, income schemes continue to remain weak. This was the sixth month in a row where income schemes saw net outflows. Between May and October, the category has seen net outflow of around Rs 1.2 trillion with October seeing an outflow of Rs 376 billion.

Experts said once fear of rising interest rates and the schemes’ credit exposures subsides, this category of schemes should also see some recovery.

Overall, the industry AUM rose marginally from Rs 22 trillion in September to Rs 22.23 trillion in October.