Equity MF inflows drop 23% in This autumn amid dangerous markets

During January-March, equity mutual fund inflows fell by 23% to $5.9 billion from $7.7 billion, consistent with AMFI, nodal affiliation for MFs.

The latest info confirmed consumers have turned cautious because of prolonged ongoing weaknesses inside the dwelling equity market inside the wake of world uncertainties. And, this has migrated retail MF consumers from equity schemes to safer debt-oriented MF schemes.

During March quarter, debt MFs recorded a significant rise in inflows at $9.4 billion versus net outflows of $3.5 billion seen within the similar quarter of FY22.

“Debt MFs (excluding MF schemes meant for institutional consumers) seen significantly elevated inflows in March due to taxation norm changes, and accordingly, inflows in all open-ended debt lessons (temporary time interval, firm bonds, banking and PSUs, and so forth.) seen inflows of in any case ₹40,000 crore in March and ₹670 crore in February. Additionally, debt index funds incrementally seen ₹20,000 crore inflows in March,” said ICICI Securities in a report on Thursday.

A deeper analysis showed that while banking, software and finance continue to be the top three favourite sectors since last year among Indian fund managers, allocation of investors’ money in pharmaceuticals and consumer non-durable sectors has slowed in FY23 as compared to FY22.

During FY23, fund managers allocated more funds into companies in petroleum products and consumer durables space, as compared to the FY22 trend of keeping pharmaceuticals and consumer non-durables in the top five sectors for fund allocation.

According to the Securities and Exchange Board of India (Sebi) data, during February, the top five sectors in terms of assets held under equity MF schemes were stocks of banks (21.94%), finance (8.32%), software (6.78%), petroleum products (4.82%) and consumer durables (3.56%). In January too, the industry showed a similar fund allocation trend.

This is different from the allocation in FY22.

According to Sebi, under equity MF schemes, during January-March 2022, pharmaceutical and consumer non-durables sectors were among the top five sectors in terms of asset allocation. During January-March 2022, the MF industry’s holdings in these two sectors used to be around 6% each under equity MF schemes. Now in the same period of FY23, only around 3% of the total assets are held in these two sectors by equity fund managers.

The increased focus on shares of companies in the consumer durables and petroleum products sector may influence the investment returns for MF investors. This is because in FY23, the consumer durable index of the BSE lost 11.3% as compared to a 28.8% gain in FY22. On the other hand, due to rising crude oil prices, operating margin has got squeezed for companies in the petroleum products space, which may result in lackadaisical revenues leading to a downward pressure on their stocks.

MFs, however, continue to hold 37-42% of their assets in banks, software and finance companies both in FY22 and FY23.

The industry has total assets of around ₹40 trillion.

In FY23, the bank Nifty Index returned 9.31%, while the Nifty IT Index lost 21.03%. The FMCG Index (which includes consumer non-durables) returned 25.04%, while the Pharma Index lost 11.51% in the fiscal ended 31 March 2023.

The ICICI Securities report said infrastructure and banking funds outperformed, while IT and pharma funds underperformed in FY23.

The report predicts that Indian equity markets are likely to trade in a range-bound manner in the near term, with a trend of buying at lower levels and selling pressure at higher levels.

Indian equity markets have bounced back in the first half of April 2023 after being under pressure during the December-March period.

“Initially, midcap and small cap stocks underperformed, but later on gained momentum as overall markets stabilized,” said a report by ICICI Securities.

An analyst said a sharp revival is imminent and this can compel fund managers to allocate more money into companies inside the small and mid-cap space.

Also, infrastructure funds have seen renewed curiosity because of elevated authorities give consideration to infrastructure spending, consistent with ICICI Securities.

However, consumers keep cautious about richly valued consumption-oriented sectors and shares, which in flip has benefited infra funds.

Banking funds, after having outperformed significantly, witnessed income reserving in the previous few months.

“Banking funds had significantly outperformed in CY22, with a one-year return of 15% compared with the 2% return delivered by large-cap funds,” said the ICICI Securities report.

As the latest trend, this year, debt and index funds are recording significant inflows.

The MF industry saw ₹60,000 crore fresh inflows in debt funds (excluding liquid and ultra/short) due to taxation changes, said the report by ICICI Securities.

Global capital markets, particularly debt markets, have been volatile.

After the closure of two medium-sized banks in US, the fear of contagion risk is gripping the financial sector.

“However, yields have again inched up as markets begin to discount one more rate hike of 25 bps in its May policy meeting. Domestically, the RBI Governor indicated that it may not be the end of the rate hike cycle, and the next policy move will depend on incoming data,” added ICICI Securities.

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