Large-cap schemes saw monthly outflows for the first time since December 2023 as net inflows into equity mutual funds fell 15% month-on-month in July, according to data released by the Association of Mutual Funds in India (AMFI).
This came as foreign investors, who heavily invest in large caps, returned to Indian stocks after four months in July, likely allowing other investors to book profits after an improved month for the Indian stock market, according to Chief Executive Venkat N Chalasani.
Equity flows moderate
Overall inflows into equity-oriented mutual funds fell to Rs 24,697 crore in July, with large-cap funds seeing an outflow of Rs 1,322 crore. Mid-cap, small-cap, and multi-cap schemes saw inflows increase from the previous month as these sections of the market outperformed the overall market in July.
For context, the Nifty 50 gained around 2.2% in July, which was its best monthly performance since April.
Broader markets outperformed, with the Nifty Small-cap and Nifty Mid-cap indices gaining around 2% during the month.
Fewer negative shocks from West Asia, revival of foreign inflows during the month, and better-than-expected corporate earnings in the April-June quarter helped markets score better.
“Large-cap stocks have moved to reasonable valuations but are saturated at the moment in terms of growth potential. At a time when investors are handpicking growth-oriented stocks, we are seeing the blue chips see less interest, while money pours into mid- and small caps,” an investment head at a domestic fund house said.
Ankur Punj, the MD and business head at Equirus Wealth, also echoed a similar view.
“The trend (of fall in equity MF inflow) also highlights ongoing portfolio rebalancing amid evolving valuations, with investors favouring segments that offer stronger long-term return potential while remaining mindful of associated risks,” he said.
The contributions from systematic investment plans (SIPs) remained robust, remaining above the Rs 30,000-crore level for the 5th consecutive month with inflows of Rs 31,961 crore in July, higher than the Rs 31,781 crore in June.
Some sections of the market are cautious on equity funds due to the heavy dependence on the retail segment and lower returns in recent times.
“While flow is positive largely through the 30k crore strong SIPs, we feel there is a cautious stance on equity-oriented MFs given lower returns over the past 2-year period. We also believe flows to some extent moving towards SIF’s (special investment funds) and arbitrage products which are to be low risk and absolute returns,” according to Akhil Chaturvedi, executive director and chief business officer at Motilal Oswal Asset Management Company.
Data from AMFI shows flexi-cap equity funds, which comprise stocks from every section of the equity market, have provided an average return of around 12% over the last five years.
In comparison, many multi-asset hybrid funds have delivered returns of 15-22% over the last three years, rewarding investors who have diversified into other asset classes.
ETFs fall, debt flows bounce back
Flows into exchange-traded funds (ETF) fell nearly 34% to Rs 11,071 crore in July after inching up last month. Flows into gold ETFs fell nearly 55%. However, flows into index funds turned positive to Rs 1,537 crore, compared to an outflow of 58 crore last month.
Flows into debt schemes turned positive at Rs 1.88 lakh crore in July compared to outflows of Rs 10.91 lakh crore a month ago. With debt funds making up more than half the flows of the overall mutual funds industry due to the presence of institutional players and corporates, this uptick led to the industry receiving net inflows of Rs 2.4 lakh crore during the month, compared to outflows of Rs 52,949 crore last month.
The debt inflows during the month were due to a slight moderation in bond yields as fresh shocks from West Asia became less frequent.
‘Wait and watch’ on UPI charges impact
AMFI’s Chalasani said the industry would have to “wait and watch” for further directives from the government on whether investments through the Unified Payments Network (UPI) may be chargeable.
“We’ll have to wait and watch as the finance minister mentioned that it may not have an impact on the small remittances.
But we’ll have to wait and watch. It’s too early for us to comment on that,” he said.
While a large chunk of SIP inflows come through UPI, there are other methods too like RTGS and NEFT, which makes it too early to determine how any charges on UPI may affect the industry.
Finance Minister Nirmala Sitharaman has assured that there will be no higher costs on personal transactions, there is still no clarity on how much transactions with or within businesses will be charged.
Data from AMFI shows flexi-cap equity funds, which comprise stocks from every section of the equity market, have provided an average return of around 12% over the last five years. (Image generated using AI) 
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