January equity redemptions spurt over talk of LTCG tax in Budget 2018

Investors seem to have taken their money off the table, amid a sharp surge in equity markets in January.  Equity mutual fund (MF) units worth Rs 318 billion were redeemed in January, twice the monthly average of Rs 159 billon in 2017. This was also the highest monthly gross redemption in almost a decade.  

According to industry expectations, speculations over the government's decision to alter the capital gains tax framework could have prompted some investors to redeem their units.

"There were mainly two factors that led to higher than usual redemptions. First, of course, the markets were at historic highs. Second, the fear of the tax on long-term capital gains did play a role in raising the redemption pressure," said Aashish Somaiyaa, chief executive officer (CEO) of Motilal Oswal Mutual Fund.

Fund executives said a lot of tactical money had also come into equity funds through arbitrage schemes. These funds were short term in nature and they contributed to the redemption tally.

"There was quite an amount of tactical money that was playing in the market. These investors were mainly high net worth individuals (HNIs) who booked profits. Retail money is still intact and it will only grow from here," said Sundeep Sikka, CEO of Reliance Nippon Life Mutual Fund.

equity story graph

Despite unusually high redemption of equity units, overall inflow into the category on a net basis remained in positive territory at Rs 154 billion. 

Inflow through systematic investment plans stood at Rs 6.5 billion. 

Inflows were also strong due to the increased gross sales of equity products and continuous popularity of mutual funds among new investors. Of the total assets under management (AUM) of Rs 22.4 trillion, equity assets are about Rs 9 trillion.