Equity mutual funds inflow drops 42% in July, debt funds see net withdrawals amid volatility, inflation woes

High volatility in the stock market, concerns over inflation and rate hike expectations in the past few weeks took a toll on investors, both equity and mutual funds. In the month of July, inflows in equity mutual funds dropped by 42 per cent to Rs 8,898 crore, according to the data released by the Association of Mutual Funds in India (AMFI). Despite the decline, this was the 17th straight month of positive inflow in equity mutual fund schemes. Inflows into equity mutual funds fell for the second straight month as a volatility in global crude prices, persisting geopolitical issues, soaring inflation and foreign selloff continue to impact investor sentiment, according to Deepak Jasani, Head of Retail Research, HDFC Securities.

Mutual fund folios at all-time high

The total assets under management (AUM) for the industry rose to Rs 37.74 lakh crore as July 31 from. Meanwhile, the debt funds witnessed net inflows of Rs 4,930 crore in July compared to net outflows of Rs 92,247 crore in the previous month, the AMFI data showed. The overall mutual fund folios was at an all-time high of 13.55 crore, and retail folios also peaked to a record high of 10.8 crore, the AMFI report showed. The number of SIP accounts stood at the highest-ever at 5.61 crores, and monthly SIP contribution was Rs 12,140 crore. The number of new SIPs registered during July stood at 17.42 lakh. The SIP AUM stood at Rs 6.09 lakh crore for the month under review.

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As markets rose in July, investors sold some of their gains

“The amount contributed through systematic investment plans, the favoured method for individual investors to invest in mutual funds, decreased slightly from the previous month to Rs 12,275 crore to Rs 12,139 crore in July. As markets rose in July, it appears that investors sold some of their gains. Debt funds experienced net withdrawals as in an effort to combat inflation, RBI is boosting interest rates and investors may have pulled out of debt funds since duration funds tend to underperform,” said Mohit Nigam, Head – PMS, Hem Securities.

SIP contributions fall, all equity-oriented categories witness net inflows

AMFI data also showed that contributions through SIPs (systematic investment plans) fell marginally to Rs 12,140 crore in July compared to Rs 12,280 crore in the previous month. All the equity-oriented categories witnessed net inflows with the Small Cap Fund category being the biggest beneficiary receiving net inflow of Rs 1,780 crore, followed by the Flexi Cap Fund fund that witnessed Rs 1,381 crore net infusion in July. On the other hand Large Cap Fund, Large & Mid Cap Fund and Mid Cap Fund saw over Rs 1,000 crore net inflow each.

However, the Gold Exchange Traded Funds (ETFs) experienced a net outflow of Rs 457 crore in July compared to a net infusion of Rs 135 crore seen in June. Overall, the mutual fund industry registered a net inflow of Rs 23,605 crore during the month under review, a contrast compared to net withdrawal of Rs 69,853 crore. This was mainly on account of higher levels of redemptions from debt mutual funds. “July seems to be month where investors has taken some profits off as markets went up, the net sales in equity has plummeted to 8,898 crore Vs. 15,497 crore, momentum was coming down all through last few months as the markets were correcting but July was a steep fall and excluding  SIP numbers, we might have witnessed actual net negative sales in July,” said Akhil Chaturvedi, Chief Business Officer, Motilal Oswal AMC.

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“Even the hybrid category has slowed down with both dip in gross sales and higher redemptions. We are seeing markets recovering and FII returning although it is early to say that this trend will be consistent but if it is then I hope for the retail investors’ confidence to return once again,” he added. As investors are conservative enough to take a hit from monetary policy tightening, it’s based on the RBI’s commitment to withdraw its accommodative stance and counter inflation, which has resulted in the highest inflows to Ultra-Short Funds in the debt category, according to Akshat Garg, Manager- Research, Choice Wealth.

“It is apparent from the high turnover and very low net inflow in overnight funds that the category is being used primarily for cash parking by institutional investors, especially after exit load was imposed on liquid funds if redeemed before 7 days. With better YTMs in the low duration funds, equity taxation in the arbitrage category is no longer enticing to investors, who have outflowed Rs 6,407 crores. In equity mutual funds, it seems the party is over for the sector/thematic funds as investors now better understand the risk and return properties served with these highly risky specific bets, and many investors have probably booked their profits with the fact that the market is once again moving towards a resistance level of 18,000.Tax inefficiency of dividend funds has been a major setback to its ‘Growth story’.” Garg said.

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