Net inflows into equities decline to a 2-yr low: What should investors do?

Mutual fund industry sees two-year low net inflows in May

Despite total assets under management (AUM) rising to a new high of Rs 43.2 lakh crore in May 2023, net inflows into the mutual fund (MF) industry fell to a two-year low of Rs 3,000 crore. This was due to a sharp increase in redemptions, which rose 36.6% month-on-month to Rs 31,100 crore.

Investors pulled out Rs 27,569 crore from equity schemes in May, the highest since September 2021. This led to net inflows into equity schemes declining to Rs 3,240 crore. In April too, net inflows into equity-oriented schemes dropped by nearly three times to Rs 6,480.29 crore from Rs 20,534.21 crore in March.

This suggests that investors may be taking a wait-and-see approach and are waiting for a correction in the market before investing.

“Inflows (ex-NFOs) into equity schemes have declined sharply in the last two months,” said Sachin Jain, research analyst at ICICI Securities. “Inflows in March were at Rs 16,693 crore, which declined to Rs 4,868 crore in April and further declined to Rs 3,066 crore in May. As markets move higher, flows have reduced as investors turned cautious at higher market levels.”

Equity AUM for Indian mutual funds rises 4.3% in May, but net inflows dip to two-year low

Equity assets under management (AUM) for domestic mutual funds (including ELSS and index funds) increased 4.3% month-on-month to Rs 18.4 trillion in May 2023. This was driven by a rise in market indices (Nifty up 2.6% MoM) and an increase in equity scheme sales (up 21% MoM to Rs 134 billion).

However, redemptions also spiked 36.6% month-on-month to Rs 311 billion. Consequently, net inflows dipped to a two-year low of Rs 30 billion in May 2023.

“The sharp rise in redemptions can be attributed to profit booking by investors,” said Motilal Oswal, a brokerage firm. “The market has been on a bull run for the past few months, and investors may be looking to book some profits.”

Despite the dip in net inflows, the overall AUM for Indian mutual funds is still at a record high. This suggests that the Indian mutual fund industry remains attractive to investors, despite the recent volatility in the market.

As seen above, redemptions in equities spiked in May’23 (up 36.6% MoM).

ETFs continue to see inflows, while balanced advantage funds see lower inflows/outflows

According to brokerage ICICI Securities, exchange-traded funds (ETFs) saw inflows of Rs 4,524 crore in May 2023, down from Rs 6,790 crore in April 2023. However, systematic investment plans (SIPs) continued to rise, reaching an all-time high of Rs 14,749 crore in May.

On a month-on-month basis, the weights of NBFCs, technology, automobiles, consumer, retail, and insurance increased, while the weights of private banks, public sector banks, utilities, oil & gas, metals, and media moderated.

Here are some of the reasons why ETFs are still seeing inflows:

• ETFs are a low-cost investment option.
• They are easy to buy and sell.
• They track a specific index, which gives investors exposure to a broad range of stocks.

Here are some of the reasons why balanced advantage funds are seeing lower inflows/outflows:

• These funds are a hybrid of equity and debt funds.
• They have underperformed the market in recent months.
• Investors may be looking for more growth potential in their investments.

Overall, the Indian mutual fund industry is still seeing positive inflows. However, there is some evidence that investors are becoming more cautious and are looking for more diversified investment options.

Top performing equity mutual funds in May 2023

A recent analysis by Motilal Oswal showed that HDFC Small Cap Fund, Axis Midcap Fund, Nippon India Small Cap Fund, HDFC Mid-Cap Opportunities Fund, and Nippon India Multi Cap Fund reported the highest month-on-month increase in NAV (net asset value) in May 2023.

HDFC Small Cap Fund saw its NAV increase by 6.8%, Axis Midcap Fund by 6.7%, Nippon India Small Cap Fund by 6.7%, HDFC Mid-Cap Opportunities Fund by 5.9%, and Nippon India Multi Cap Fund by 5.9%.

These funds invest in small-cap and mid-cap stocks, which have been outperforming large-cap stocks in recent months. This is due to a number of factors, including strong corporate earnings growth and positive investor sentiment.

The performance of these funds is a positive sign for the Indian equity market. It suggests that investors are still confident in the long-term prospects of the Indian economy and are willing to invest in riskier assets, such as small-cap and mid-cap stocks.

IT and small cap funds outperform in May

IT funds staged a comeback in May after underperforming significantly in the last one year. This was due to investor interest in the sector at lower levels. Banking funds have been at the forefront in terms of performance in the last one year.

Consumption funds have also outperformed in the last two months. This is due to sector rotation, with interest coming in segments like FMCG, auto, and retail. Banking funds continued to perform well, while pharma funds lagged in performance in the last one month.

Here are some of the reasons for the outperformance of IT and small cap funds:

• IT companies have been reporting strong earnings growth.
• The sector is expected to continue to grow in the long term, driven by factors such as digital transformation and the growth of the cloud computing market.
• Small cap stocks have been outperforming large cap stocks in recent months. This is due to a number of factors, including strong corporate earnings growth and positive investor sentiment.

Here are some of the reasons for the underperformance of pharma funds:

• The sector has been facing headwinds from factors such as rising input costs and competition from generic drugs.
• Some of the major pharma companies have been facing regulatory issues.

Small cap funds continue to outperform

Small cap funds have continued to outperform in the recent rally from the lows in March 2023. In the last two to three months, the BSE Small Cap Index was up 18%, while the S&P BSE Sensex was up less than 10%.

There are a few reasons for the outperformance of small cap funds.

• Small cap stocks have been outperforming large cap stocks in recent months. This is due to a number of factors, including strong corporate earnings growth and positive investor sentiment.
• Investors are looking for more growth potential in their investments. Small cap stocks are typically seen as having more growth potential than large cap stocks.
• Small cap funds are more volatile than large cap funds. This means that they can experience larger swings in price, but they also have the potential to generate higher returns.

It is important to note that past performance is not a guarantee of future results. Investors should always do their own research before investing in any mutual fund.

Here are some of the factors that could drive the performance of small cap funds in the coming months:

• Corporate earnings growth: If small cap companies continue to report strong earnings growth, it will be positive for small cap funds.
• Investor sentiment: If investor sentiment remains positive, it will be positive for small cap funds.
• Volatility: Small cap funds are more volatile than large cap funds. This means that they can experience larger swings in price, but they also have the potential to generate higher returns.

Investors have now become more selective when it comes to equities

After a period of strong inflows across all equity fund categories, investors have become more selective in May 2023. This is not surprising considering the elevated levels of the market.

Here are some of the key findings:

• Overall, equity funds saw net inflows of Rs 3,240 crore.
• Small cap funds saw inflows of Rs 3,283 crore.
• Mid-cap funds saw inflows of Rs 1,195 crore.
• Large & mid-cap funds saw inflows of Rs 1,133 crore.
• Large cap funds saw net outflows of Rs 1,362 crore.
• Focused funds saw net outflows of Rs 944 crore.
• ELSS funds saw net outflows of Rs 505 crore.
• Flexi-cap funds saw net outflows of Rs 367 crore.

There are a few possible reasons for this shift in investor behavior:

• Valuations: The equity market is near an all-time high, and investors may be uncomfortable with the valuations.
• Opportunities in other asset classes: Investors may be seeing better opportunities in other asset classes, such as debt funds.
• Investors are looking for alpha: Investors may be looking for funds that can generate alpha, or excess returns, over the market. Small cap and mid-cap funds have a better chance of generating alpha than large cap funds.

What should retail investors do?

• Stay invested: The stock market is volatile, but it is important to stay invested in the long term. The market will go up and down, but over time, it has always trended upwards.
• Rebalance your portfolio: As the market goes up and down, it is important to rebalance your portfolio to make sure that it still aligns with your risk tolerance and investment goals.
• Invest in a diversified portfolio: Don’t put all your eggs in one basket. Spread your money across different asset classes, such as stocks, bonds, and cash.
• Don’t panic sell: When the market takes a dip, it is tempting to sell your stocks. However, this is usually the worst time to sell. Instead, stay calm and focus on the long term.
• Invest regularly: Rather than trying to time the market, it is better to invest regularly, such as through a monthly SIP. This will help you to average out your costs and reduce your risk.

Also, 2023 is likely to be a year of volatility for the stock market. However, if you stay invested, rebalance your portfolio regularly, and invest in a diversified portfolio, you should be well-positioned for long-term success.

Systematic investment plans (SIPs) are a great way to build wealth over a long period of time. But what if the market is volatile? Should you stop your SIPs?

Here’s what some experts have to say:

• Ajinkya Kulkarni, Co-Founder and CEO of Wint Wealth, says that SIP investors should ignore day-to-day market movements. Instead, they should focus on their long-term goals and stay disciplined with their investments.
• Gurmeet Singh Chawla, Director of Mastertrust, agrees. He says that investors should continue with their SIPs, even if the market is down. He believes that the Indian economy is still strong and that the market will eventually recover.
• AUM Capital’s Kochar also believes that SIPs should not be stopped. He says that the best way to ride out market volatility is to stay invested and keep adding to your investments when the market is down.
• Naveen Kukreja, Co-Founder & CEO of Paisabazaar, says that SIP investors should only stop or pause their investments if they are nearing their financial goals, their risk appetite has changed, or the funds they are invested in are not performing well.

So, what should you do? If you’re a SIP investor, the best thing to do is to stay calm and stay invested. Don’t let market volatility derail your long-term financial goals.

Additional Resources

Adani Total Gas, Nykaa, Zomato and more: Top large caps MFs bought in May

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