Mutual funds see record outflow in October; may turn net sellers in 2020

Analysts attribute this withdrawal trend to the nervousness ahead of US presidential elections and the fact that the markets raced ahead even as the economic recovery remained fragile back home

Mutual funds continued their selling spree for the fifth straight month in October, pulling out Rs 14,344 crore from the equity markets during the month, as per Sebi data. This is the highest single-month withdrawal since March 2016 when they had pulled out Rs 10,198 crore.

Thus far in the calendar year 2020 (CY20), mutual funds’ net inflows stand at Rs 2,671 crore. If the pace of withdrawal continues, they are likely to turn net sellers for the first time in seven years. Earlier, in CY13, mutual funds had sold equities to the tune of Rs 21,082 crore.

In the past five months (since June 2020), mutual funds have sold equities worth Rs 37,388 crore. In April, they had recorded net outflow of Rs 7,996 crore, while in May they had invested a net Rs 6,522 crore in equities. Prior to the withdrawal, mutual funds invested a net Rs 41,533 crore in stock market during January – March 2020, Sebi data show.

Analysts attribute this withdrawal trend to the nervousness ahead of US polls and the fact that the markets raced ahead even as the economic recovery remained fragile back home.

"Mutual funds have played it safe since the past few months. Moreover, most retail investors started investing on their own during the lockdown. Given the uncertain macro-economic environment and the fact that the markets were not in sync with the economic reality also created some confusion in the mind of investors. As a result of these factors, mutual funds too preferred to remain on the sideline," explains G Chokkalingam, founder and chief investment officer at Equinomics Research.

Even though mutual funds have been on a selling spree, foreign portfolio investors (FPIs) have been investing heavily. During October 2020, FPIs put in Rs 19,541 crore, or $2.66 billion, till October 29 – their biggest single-month investment in the past 11 months, NSDL data show. Their investment in CY20 till date stands at Rs 47,887 crore or $6.46 billion. In this backdrop, the S&P BSE Sensex has slipped 1.54 per cent in CY20, however it gained 58 per cent since its 52-week low of 25,639 points touched on March 24, 2020.

Year	Net Investment (Rs crore)
2014	23,942
2015	72,199
2016	48,170
2017	1,18,778
2018	1,20,674
2019	52,219
2020*	2,671

*Mutual funds net investments till October 30, 2020
Source: Sebi

The sharp rise in equity markets has now made analysts cautious from a short-term perspective, who believe most of the positives are factored in. That said, they remain bullish on the road ahead for equities from a medium-to-long term perspective, but caution against intermittent corrections.

"The market recovery is more durable now. A good part of the demand recovery seen post the lockdown should sustain, provided interest rates remain low. A sharp drop in oil prices over the past few months has acted another stimulus and helped economy revive. However, on their part, markets have priced in a large part of this recovery. The indices are nearly back to where they were pre-Covid-19. My big call is to put money into high dividend yield stocks of stable companies. That’s the best investment at the current juncture," says S Naren, executive director and chief investment officer at ICICI Prudential AMC.