Domestic mutual funds under redemption pressure

The redemption pressure is mounting on the domestic mutual funds even though the benchmark indices have regained most of the lost ground over the past few months and are closer to the pre-pandemic levels. These funds sold equities worth Rs 21,838 crore in the September quarter, the highest quarterly outflow in two decades, the data from Sebi showed.

The data includes the exposure of local funds in equities ranging from pure equities, hybrid instruments and arbitrage funds. Their previous quarterly peak selling was worth Rs 14,810 crore in the September 2010 quarter. They have been net sellers in equities for the past four consecutive months.

The outflow mirrors the trend in the pure equity mutual funds, which reported net outflow in July and August amounting Rs 7,820 crore. This was the first time since 2014 that the equity funds had outflow for two consecutive months.

In the twenty quarters before the September 2020 quarter, local funds had invested Rs 4.2 lakh crore in equities.

The three-month rolling average of gross buying-to-sales ratio of the domestic funds dropped to 89% in the September quarter compared with the past 10-year average of 110%. The ratio is the lowest since April 2014.

The total equity exposure of the local funds was Rs 11.9 lakh crore at end of August 2020 compared with Rs 12.1 lakh crore in December 2019 according to the NSDL data.