Tide set to turn for equity MF after persistent outflow


Informist, Friday, Feb 19, 2021

By Ajay Ramanathan

MUMBAI – Open-ended equity schemes of mutual funds saw net outflows for the seventh consecutive month in January, even as the benchmark share indices touched record highs.

Association of Mutual Funds in India Chief Executive Officer N.S. Venkatesh attributed the outflow of funds to profit booking.

In January Alone, Investors Redeemed Nearly 334 Bln Rupees From Open-ended Equity Funds, While Nearly Of 1.4 Trln Rupees was Redeemed In The Previous Six Months

His assessment is not without merit. In the Jul 1-Jan 31 period, the Nifty 50 and Sensex rose nearly 31%. On Jan 21, the Sensex hit a lifetime high of 50184.01 points and the Nifty 50 hit a record high of 14753.55 points.

For mutual fund investors, this was an opportunity to redeem their investments, which they had delayed due to the correction in March amid COVID-19 pandemic, resulting in negative returns from various equity schemes.

In January alone, investors redeemed nearly 334 bln rupees from open-ended equity funds, while nearly of 1.4 trln rupees was redeemed in the previous six months.

The outflows are happening because the net asset values of mutual funds have returned to pre-lockdown levels after correcting sharply in March, said the managing director of a leading fund house, but added that the profit booking was also an indication that investors were still cautious.

Though the outflow from open-ended equity funds was spread across categories over the past seven months, multi-cap funds were the biggest losers in July, September and October. Net outflows were highest from large-cap funds in August, November and December, while the flexi-cap schemes, which were tracked for the first time, saw the highest net outflow in January.

The outflows were also said to be on account of job losses and pay cuts because of the COVID-19 pandemic, due to which a few investors exited from mutual funds, said a fund manager with a mid-sized fund house.

Part of the outflow from multi-cap and flexi-cap schemes was on account of change in the structure of these schemes. These added to the overall outflows from equity funds, resulting in a stressful couple of months for managers in terms of meeting redemptions.

"Once the Nifty 50 crossed its pre-COVID-19 high, many investors turned sceptical of the market run. Some have been redeeming a part of their investments at every 10% rise in the market," said Kedar B., fund manager at Composite Investments Pvt Ltd.

The rally in the equity market in the latter part of 2020 was aided by Joe Biden's victory in the US Presidential Elections, success in the making of COVID-19 vaccines, and steady inflow from foreign institutional investors, but there is a view among market participants that the market is currently "over-valued" and that there is a lot of "exuberance".

This is evident from the returns as well, which reflected that gains were sporadic and limited to a few themes or sectors that continued to perform well during the pandemic. Technology funds were the top performers in July, September, December and January, while banking funds were the best performers in October and November. Small-cap funds gave the highest returns in August, according to data by

Equity schemes also have to deal with more constraints than alternative investment funds and portfolio management services in terms of scrutiny, generic portfolios, asset allocation mandates, lock-in periods, higher assets under management, and managing redemption pressures or cash flows. This usually hampers their ability to significantly outperform the benchmark indices, especially in times of increased volatility.

Hence, high net-worth individuals who are seeking "customized and differentiated equity portfolios" drift away from standardised mutual fund portfolios, a money manager said.

As on Jun 30, 83.08% of equity large-cap funds underperformed the S&P BSE 100 index, 88.37% of equity-linked savings schemes underperformed the S&P BSE 200 index, and 40% of equity mid-cap and small-cap schemes underperformed the S&P BSE 400 MidSmallCap Index over a three-year period on an absolute return basis, according to a S&P Dow Jones Indices report.

The report, titled the 'SPIVA India Scorecard Mid-Year 2020' compared the performance of actively managed Indian mutual funds with their respective benchmark indices over one-, three-, five- and 10-year investment periods ended June.

However, India Inc's strong performance in the December quarter suggests that the economy is on the road to recovery from the impact of COVID-19, which money managers believe could lift sentiment and potentially bring investors back to mutual funds.

"As the economic news and the earnings outlook gets better, the outflows should slow down in the coming months," said Sunil Subramaniam, managing director at Sundaram Mutual Fund.

Credit Suisse has upgraded its rating on India to "Overweight" from "Market Weight (neutral)" owing to encouraging economic recovery and decline in coronavirus cases, and Edelweiss Securities believes that earnings growth of companies would become more broad-based across sectors going ahead.

"...investors are now optimistically talking about the possibility of a secular earnings growth for the first time in many years. If the market delivers on earnings expectations, all segments of the asset management industry are likely to do well," Kedar B. said.  End

(With inputs from Shreejit Nair)

Edited by Ashish Shirke

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