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Explained: Why big outflow in equity funds

July has seen the biggest monthly net outflow since Oct 2013 — the result of both falling income levels due to stress in the economy, and profit booking as markets have recovered.

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi |
Updated: August 14, 2020 8:55:28 am
Explained: Why big outflow in equity fundsThis was the biggest monthly outflow in nearly seven years; a bigger net outflow – Rs 3,542 crore — was seen as far back as in October 2013.

After over four years, equity mutual funds have witnessed their first monthly outflow – investors pulled out a net Rs 2,480 crore in July, even as the benchmark indices rose around 7.5 per cent.

This was the biggest monthly outflow in nearly seven years; a bigger net outflow – Rs 3,542 crore — was seen as far back as in October 2013.

While the industry continued to see positive inflows following the spread of the Covid-19 pandemic and the sharp decline in the market in February and March of this year, the net outflow reflects growing concern among investors over cash flows, and the stress on incomes in line with the stress in the overall economy.

How have the numbers moved over the past few months?

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In February and March, when the markets witnessed sharp falls, investors continued with their investments — and equity schemes witnessed net inflows of over Rs 10,000 crore in each of those two months. Over the next four months, however, the reality of the crisis started to hit investor incomes and their capacity to invest — this, even as the markets started to recover, the fragility of the economy notwithstanding.

So in April, net equity inflows fell to Rs 6,212 crore, and in May and June, it came down to Rs 5,256 crore and just Rs 240 crore respectively. And in July, inflows turned into net outflows as the industry saw redemptions overtaking gross inflows. (See table)

According to figures released by the Association of Mutual Funds of India (AMFI), eight out of 10 equity-oriented mutual fund categories saw net outflows in July — with multi-cap funds registering the worst outflows to the tune of Rs 1,033 crore. Mid-cap funds witnessed outflows of Rs 579 crore.

So, are redemptions rising?


The net outflow in July is the result both of a fall in inflows from investors, and profit booking by existing investors following the recovery in the markets.

While redemptions in April and May were Rs 8,000 crore on average, they rose to Rs 13,520 crore in June, and to Rs 16,621 crore in July. And gross monthly inflows into equity schemes, which averaged Rs 20,000 crore for FY’20, came down to an average Rs 13,480 crore between April and July 2020.

According to AMFI, inflows through SIPs declined to Rs 7,830.66 crore in July, as against Rs 7,917 crore in June. After the high of Rs 8,641 crore in March 2020, inflows have been declining month-on-month. Investors anticipating a decline in corporate performance and the general economy, seem to have booked profits when the market recovered in July.


What is the reason for the fall in gross inflows and rise in redemptions?

Market participants say this is a result both of falling income levels and profit booking. While falling income levels on account of the stress in the economy is nudging investors to stop monthly SIPs and instead keep liquidity and contingency funds with them, a sharp recovery in the markets is forcing investors to book some profits as they see their old investments again giving positive returns.

“There is stress among a big section of investors — both salaried and self employed — who are witnessing a decline in their income levels, and that is forcing them to stop their investments in equity mutual funds. Also, with the Sensex recovering nearly 50 per cent since its lows in March 2020, many existing investors want to book profits as their old investments have turned profitable and want to keep liquidity with them,” said the CEO of a mutual fund.

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Is the trend of outflows and redemptions likely to continue?


While the rising Covid-19 case numbers in India has been a cause of concern and is playing on the minds of investors who have been hit by the decline in income levels, market experts feel that a medical solution to the pandemic will arrest a lot of the anxiety, and will signal the return of retail investors across the country.

“The outflows from equity are quite negligible and may stabilise over the next few months. While we may see the current trend continuing to prevail in the shorter term, the course may be steadied on the availability of more macro data in the coming months,” Joseph Thomas, Head of Research, Emkay Wealth Management, said. Most economists and analysts have forecast a recovery in the economy in 2021-22 after the contraction in the current fiscal.


AMFI Chief Executive N S Venkatesh said: “Investor confidence in the markets continues to be robust, going by the rising net fresh SIP registrations… The outlook for the mutual fund flows for the rest of 2020-21 would continue to be encouraging, with rising digital-driven inflows, an accommodative stance on interest rates by the RBI, improving macro-economic environment, and pick-up in economic activity on the back of easing of the lockdown.’’

But where is the money going now?


A good chunk of money is now going into fixed deposits of banks, despite the fall in interest rates. RBI data show that bank FDs had risen by Rs 5,78,141 crore to Rs 125.28 lakh crore between April 1, 2020 and July 17, 2020 as against an increase of Rs 2,63,203 crore during the same period last year. This is happening at a time when one-year FD interest rates have declined to 5-5.10 per cent. This could be an indication that investors are looking for safety of their capital in uncertain times.

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First published on: 14-08-2020 at 12:52:50 am
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