Market meltdown to weigh on equity flows, dent financial health of MF firms

The improvement in equity flows in recent months may reverse, with mutual fund (MF) players expecting slowdown in fresh equity flows as markets continue their downward trajectory amid Coronavirus scare.

“While so far redemptions have not picked up, fresh flows will come under pressure if market correction deepens further,” said Nithin Kamath, founder and chief executive officer of Zerodha, which runs the MF platform Coin.

According to market participants, MF investors could decide to sit on the sidelines as several equity schemes have seen their net asset values (NAVs) dip sharply in February.

According to data from Value Research, large-cap schemes have given negative returns of more than eight per cent in one-month period and mid- and small-cap schemes have given negative returns of seven per cent each in the same period.

“Recent meltdown in markets has also dented the experience of investors in equity schemes, which so far were able to stay in green despite sharp market volatility,” said a fund house's senior executive who didn't wish to be named.

A slowdown in equity flows can hurt the financial health of fund houses, with cut in total expense ratios or management fees forcing fund houses to turn to a more volume-driven business model.

MF players have already seen equity flows significantly shrink in the current financial year.

So far in FY20, equity flows have aggregated to Rs 61,264 crore, which is 48 per cent lower than previous financial year.

Meanwhile, industry participants say continued contribution through systematic investment plans (SIPs) will mitigate the impact of flows receeding in the MF industry.

SIP flows have continued to hover around Rs 8,000-crore levels even as markets have seen high volatility in the past year.

However, industry participants say they are watchful of any spike in SIP closure ratios. In January, the SIP closure ratio dipped to 49 per cent after climbing to 61 per cent in previous month.

In January, equity flows improved by 75 per cent after seeing slowdown in preceeding months. In November 2019, the flows had dipped to three-and-a-half year low of Rs 1,311 crore.

Industry participants add that investors may refrain from redemptions immediately as they'd want to wait for some recovery to cut losses on their investments.

Meanwhile, advisors have urged investors stay put. “We have asked investors to keep continuing their goal-oriented investments. Unless they are close to meeting their goals, they can take a call on whether they want to take out their investments at this juncture,” said Amol Joshi, founder of Planrupee Investment Services.