By Sunil Subramaniam, Financial Sector Veteran & Ex-MD of Sundaram Mutual Fund, Chennai
Let us compare the m-o-m change in retail flows that have come into the Domestic Mutual Funds (DMFs).
The month of July brought in 24,697 cr in Active Equity mutual funds a 15% drop compared to June. While the Gross inflows were up 2.8%, a sharp 16% spike in redemptions (profit booking of 6,197 cr) was the main source of the problem. SIP inflows remained resilient at 46% of gross inflows at the verge of 32 K cr.
Among Active equity schemes where did the increase or decrease their allocations? As the table below shows, Large Cap schemes bore the brunt of the decrease due to a combination of a 27% drop in fresh inflows and a 36% spike in redemptions!! At the other extreme, Smallcap funds received a 2166 cr jump in net inflows driven by a 11% increase in gross purchases and almost 20% drop in redemptions!! A clear shift asway from safety into risk!
How have investors behaved in passive schemes? (which are by and large, largecap oriented). Did the outflow in active large cap schemes imply that they were shifting to low cost passives ?
Well you might think so, because, Index funds have seen an increase in net flows but a deeper look shows that this was driven more by a reduction in redemptions as gross purchase were down 1.5%! An ETFs bear out this pointas there was a 3,726 cr fall in net inflows driven by a 14% drop in gross purchases.
So the disenchantment with large caps was across both active and passive schemes!!
Now, let us turn our attention to Hybrid schemes (which also tend to be equity oriented in significant measure) which are seen as less volatile and safer asset classes. Well Hybrids also showed a drop m-o-m across all categories (I have excluded arbitrage as it is largely only a tax efficient liquid scheme substitute). Here again the story is on of a sharp double digit spike in redemptions. Clearly investors are booking profits in safer asset classes.
Specifically, the recent volatility in gold and silver prices seems to have driven investors reduce their gross purchases as well as book profits in multi asset allocation schemes.
So then what of the purer alternative – Gold ETFS ?
The same story…..An almost 1900 cr drop in nett inflows driven by a sharp 42% drop in gross purchases though profit booking was 13% less.
To summarize the overall picture of mutual fund flows for July in comparison with June: there has been a 10,000+ cr drop (almost 20%) in inflows driven by a combination of a 3.6% drop in gross purchases and a 7.7% increase in profit booking.
From an equity market perspective, this has meant approximately 7,349 cr less money in the hands of domestic fund managers (partially reflected in their decrease in support to domestic equites in the past few weeks).
Finally to take a look at why the drop and specifically in the large cap space if we look at the returns of the three prominent indices – therein lies part of the answer : Over the past 1 year and 3 years there has been a sharp divergence in the performance of the cap curve indices – which investors are being cognizant of in their decision making .
About the author:
Sunil Subramaniam, Former Managing Director and CEO of Sundaram Mutual Fund, is among the most seasoned voices in India’s investment management industry, with a career spanning over four decades across banking, insurance, and asset management. Currently, he advises several investment firms and financial institutions on macroeconomic trends, market strategy and asset allocation among others. He also runs a YouTube channel, ‘Sense and Simplicity by Sunil’, where he breaks down complex market trends, macroeconomic developments, and investment strategies into accessible insights for retail investors.
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