MF industry sees strong surge in equity flows on improved market sentiments

Equity-linked savings schemes see first annual contraction in five years | Illustration: Ajay Mohanty
The mutual fund (MF) industry saw a strong surge in equity flows in March as market sentiment improved, but the picture was not rosy for equity-linked savings schemes (ELSS), which witnessed the first annual contraction in five financial years.

Experts attribute the uptick in equity flows to the fear among investors of missing out on a possible election-linked rally. “In the last few weeks, mid- and small-cap funds have seen a recovery. This has made investors fear the possibility of missing out if the markets continue to trend upwards. This could have led to a sudden spurt in inflows,” said Swarup Mohanty, CEO of Mirae Asset Management Company.

The BSE Midcap Index gained 8 per cent in March, while the BSE Smallcap Index moved up nearly 10 per cent. The equity flows garnered Rs 11,756 crore in March — more than double of the last month’s tally.

However, the slip in flows in ELSS has got industry players concerned as the category had witnessed strong back-to-back growth in previous four financial years.

In 2018-2019, the tax-saving schemes garnered flows of Rs 12,771 crore, which was 10 per cent lower than the previous year's tally.

Industry players say de-growth in the ELSS category could be due to a combination of distributors' interest waning after change in commission structure and heightened volatility in the markets.

In 2018, mid-cap funds gave negative returns of 12 per cent, while small-cap funds on an average fell by 18 per cent.

The overall equity category saw a drop in flows. In 2018-2019, these schemes drew Rs 1.1 trillion in flows, which was two-thirds of the previous year's tally.

On the positive side, the income category saw an inflow of Rs 13,856 crore, showing a strong reversal from Rs 4,200 crore outflows in the previous month. “Investors are moving into income schemes due to the dovish monetary policy stance of the Reserve Bank of India (RBI),” observed NS Venkatesh, CEO of Association of Mutual Funds in India.

The category has had a challenging year due to credit events and rising interest rates in the first half of the financial year. However, the 50-basis point rate cut by the RBI in recent months has improved sentiment on the interest-rate scenario.

Meanwhile, the balanced category continued to see outflows, with Rs 3,181 crore being pulled out by investors in March. For 2018-2019, the category saw Rs 6,865 crore of inflows — the lowest in five years. Moreover, this is just 7 per cent of the inflow reported in the previous financial year.

Lower dividend payouts, falling returns and additional tax burden from the dividend distribution tax have taken the shine off these schemes, experts say. Liquid schemes, which had come under pressure due to the liquidity crunch in debt markets, saw outflows worth Rs 51,343 crore in March. Since the Infrastructure and Leasing Financial crisis hit the markets in September, these schemes have seen outflows of Rs 1.8 trillion.

According to experts, institutional investors are likely to stay selective on their choice of liquid schemes. "Investors would prefer to allocate funds to larger-sized schemes backed by parent organisations perceived to have better risk-management practices," said a fund manager.

Industry players say future flows could get influenced by how fund houses absorb the revised fee structure that has become effective in April and how much of the cut is passed onto the distributors.

"We would have to wait and see how flows move in April to assess the possible impact of the new fee structure," said Radhika Gupta, CEO of Edelweiss MF.

The monthly investment plans, which are better known as systematic investment plans or SIPs, saw a marginal dip in March. These plans contributed Rs 8,055 crore, as against Rs 8,095 crore in February. At the end of March, the number of SIP accounts stood at 26 million compared to 25.9 million in the previous month.

The overall assets managed by the industry stood at Rs 23.79 trillion at the end of March, which was 2 per cent higher than in the previous month.

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