Retail investors firing up flows into equity MFs despite market volatility

Often heavy buying by mutual funds (MFs) gets highlighted. But it is the individual investors who provide the firepower to domestic fund managers. Equity MFs have not seen a single month of net outflows in the past year. 

Since March 2021, investors have poured Rs 1.45 trillion into equity-oriented MF schemes. And, there have been months when flows have exceeded $3 billion. Further, inflows through the so-called systematic investment plan (SIP) route have been consistently above Rs 10,000 crore since September 2021. Consequently, in the past 12 months, inflows of Rs 1.2 trillion have come through the SIP route.

Low yields from other asset classes and the steady influx of young investors are seen as the factors behind the sustained inflows into MFs.

Investors have continued to pour money into stocks despite periods of sharp volatility triggered by events, such as the US Federal Reserve’s hawkish pivot, geopolitical tensions, and state elections.

According to industry players, retail investors by continuing their SIPs and lump-sum investments are showing maturity and understanding of the benefits of buying during periods of drawdowns.

“I think the long trend for India has been in favour of capital market adaptation. Over the past two decades, there has been a structural decline in interest rates and other asset classes, especially real estate, have gone through regulatory disruption and underperformance. Demonetisation and Covid proved to be accelerators for the capital markets and digitisation-linked capital market adoption,” said Aashish Somaiyaa, CEO, WhiteOak Capital Asset Management.

Industry players also believe that thrust on investor education, sharp recovery post-Covid crises in the markets, and the arrival of a new set of investors have led to steady flows into equity funds. Strong flows into such funds can also be partly attributed to the success of new fund offers (NFOs).

“The markets recovered sharply after the pandemic-led crisis, and many who withdrew from equities missed out on the significant rally after the March-April 2020 correction. Investors who stayed invested have gained confidence from the positive earnings momentum and are willing to look at the longer-term structural positives, which can help the equity asset class over the medium term,” said Vishal Kapoor, CEO, IDFC AMC.

The real persistence of investors will be tested when the markets move side-ways for prolonged periods or when there are sustained periods of negative returns.

In the past year, the average return of large-cap funds is at around 13 per cent, but in the last three months, it has turned negative at 4.13 per cent. 

“The recovery after the first wave of the pandemic has given investors an idea of how the market reacts and bounces back. Investors will have to continue doing detailed research to understand the scheme, fund managers involved, sector, and companies of exposure before investing,” said Jaikrishnan G, partner, financial services consulting at Grant Thornton Bharat.

Industry players said investors should look to create wealth over a meaningful investment time frame. They say sharp corrections, like the one seen this month, can be used as an opportunity to top up on their investments through the lump sum route.

MF players are confident that positive flows into equity schemes will continue. 

“In addition to traditional face-to-face distribution models, digital, and fintech models have rapidly increased access. Systematic, goal-based investing with investors taking a long-term approach to wealth creation is now better established. Experience and advocacy of existing investors remain strong. Given these structural factors, we see inflows into equity funds, including through SIPs, continuing steadily over the years ahead,” said Kapoor.