Equity mutual fund net outflows approach 2013 levels

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For the second month in a row, equity mutual funds as a category saw net outflows in August 2020. AMFI has just published its monthly data on mutual fund outflows and inflows, which shows that the mutual fund industry is currently facing redemption pressures on several fronts.

At Rs 4,000 crore, the equity mutual fund outflows is not only higher than the previous month but also more than the October 2013 outflow of Rs 3,225 crore.

August 2020 also marked the third month of overall net outflows in mutual funds for the calendar 2020. February and March were the other months where the industry witnessed net selling this year.

Equity funds redeemed across the board

Investors redeemed their holdings across nearly all equity segments  – large-cap, mid-cap, and multicap – save for limited inflow into sector funds and some tepid investment in ELSS. Within the equity fund categories that saw fell to investors moving out, multicap funds saw the maximum redemption. This was followed by the midcap fund category and value/ contra funds. Sector funds bucked the trend, with net inflows of Rs 370 crore, as investors looked for direct bets through sector funds.

The redemption could be explained by two possible triggers: one, the markets getting increasingly disconnected from the economic situation and corporate fundamentals, which could have pushed investors into profit booking. Two, a real need to take some money out given a likely situation of pay cuts/job losses for individuals. 

In the hybrid space, both arbitrage funds and hybrid aggressive funds saw severe redemption pressure as well. While the former category has seen returns shrink given poor spreads in arbitrage, the latter may have been punished for poor performance as many hybrid funds failed to contain declines in the March correction and fell more than even large-cap funds.

Interestingly, the strong inflows seen in ETFs in earlier months has also dwindled – but even so, this category managed to end the month with net inflows, unlike active equity funds.

Gold ETFs on the other hand, managed to keep their net flows ticking thanks to a phenomenal returns surge. The recent decline in gold return rate do not appear to have dented investors’ attraction to the metal by much.

Mutual fund outflows in debt, too

In the debt space, the heavy inflows since March 2020 into the gilt category reversed in August. Gilt mutual fund outflows stood at a net outflow of Rs 1,122 crore (and it was Rs 25 crore for constant maturity funds). The 10-year gilt yield moved up sharply from 5.8% to  6.2% in less than a month while 3 and 5-year gilts rose even higher (read more about this here).

This caused the returns of gilt funds to drop sharply and could likely have contributed to the selling witnessed in the gilt categories. Increasing concerns over inflation, supply side constraints and government borrowing may also be sending signals to the market that there may not be much of a rally left in this space, triggering profit booking.

The overnight and liquid space too saw outflows – likely from companies dipping into their treasury money to meet stretched working capital requirements, as a result of the lockdown. Other debt categories, however, managed to garner inflows in August, albeit at a much lower rate than in the July month.

It is not just redemption pressure and mutual fund outflows that is a challenge to the industry. Investments too have dwindled as suggested by SIP inflows. SIP inflows as of July 2020, at Rs 7,831 crore has fallen to levels seen 2 years ago. This is now providing fresh challenges for AMCs to grow their assets.

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