Mutual funds turned cautious in April despite strong investor inflows

Mutual funds sharply reduce equity purchases in April despite steady inflows, as fund managers adopt a cautious approach amid market rebound and geopolitical uncertainties

Mutual funds (MFs) appeared to tread cautiously in equity markets through April, despite continuing to attract strong inflows.

 

MFs bought equities worth about ₹26,000 crore on a net basis last month (as of April 28), a sharp slowdown from nearly ₹1 trillion deployed in March, according to data from the Securities and Exchange Board of India (Sebi). The moderation came even as net inflows into active equity schemes remained broadly stable.

 

Industry watchers said the sharp decline in net equity purchases by fund managers reflected not weaker inflows but a tactical recalibration amid a strong market rebound and intermittent buying by overseas investors.

 

According to two senior MF executives, familiar with the industry’s aggregate estimates, net inflows are expected to top ₹35,000 crore in April, against the ₹40,450 crore mobilised in March.

 

The shift in MF investment behaviour coincided with a sharp reversal in market sentiment. Benchmark indices -- the Nifty 50 and the BSE Sensex -- ended April with strong gains after suffering an 11 per cent slide in March amid the West Asia conflict. The Nifty 50 advanced 8.3 per cent during the month, while the Sensex climbed nearly 7 per cent.

 

Analysts said persistent geopolitical uncertainty, coupled with the onset of the earnings season, may have pushed fund managers to adopt a cautious stance.

 

“The extension of the West Asia conflict could have led to a greater degree of caution among fund managers. In addition, the onset of the earnings season may have resulted in a ‘wait and watch’ approach by fund managers to assess which sectors and stocks show greater or lesser crude impact on fourth-quarter earnings and on guidance for the 2026-27 financial year. This quarter is crucial in arriving at a one-year forward price-to-earnings estimate for the market. Fund managers could also have raised cash for future deployment as the earnings season progresses,” said Sunil Subramaniam, market expert and founder of Sense and Simplicity.

 

While equity fund managers are required to remain largely invested, they retain flexibility to hold some cash in anticipation of more attractive buying opportunities. Many managers had already deployed part of their cash reserves during the sharp market correction in March. As a result, the aggregate cash holding of equity schemes fell to a 21-month low of 4.7 per cent in March, according to a report by BNP Paribas.

 

Beyond shifts in cash balances and flows into active equity schemes, MF equity deployment is also shaped by flows into passive and hybrid schemes. In particular, changes in the equity allocation of hybrid funds can have a significant effect on overall market deployment by mutual funds.