Under pressure, MFs look for change in new year

For equity investors, 2020 turned out to be a roller coaster year full of volatility. While the S&P BSE Sensex, on monthly average grew 16% at the end of 2020, compared to December 2019, the 30-stock benchmark index grew 62% compared to March 2020, when Covid-19 uncertainties drastically brought down both—the market and investor confidence.

Alongside the bull-run in the latter part of 2020, the Sensex, in particular, is busy hitting new life–highs on almost daily basis. While foreign portfolio investors (FPIs) have been mopping up equities, Indian mutual funds have been in a sell–mode as far as equities are concerned.

And the reason behind this? Investors of mutual funds (MFs) are using the record highs on the markets as a strong reason to redeem their investments. “I have used every high on the market to sell equity,” says Nilay Purohit, a Mumbai–based trader–cum–investor for nearly two decades. “I am waiting for the big fall, and the buying opportunity that big fall will bring,” adds Purohit.

The mindset of MF investors is not different at all. And, MFs are no strangers to the current investor attitude. After all, data from the Association of Mutual Funds in India (AMFI) shows that redemptions in the last six months (June to December) have exceeded the monthly fund mobilisations. While November saw redemptions worth ₹27,113 crore, December set a record of ₹36,220 crore from equities alone.

“If markets keep on rallying, investors will book profits,” says N. S. Venkatesh, CEO, AMFI. Against an annual mobilisation of ₹2.21 lakh crore, redemptions totalling ₹2.12 lakh crore left MFs with an annual positive inflow of ₹9,102 crore only. Interestingly, between January and June, the industry witnessed cumulative inflows of ₹42,106 crore. But, since July, the redemptions have surpassed mobilisations in all of the six months leading to a cumulative outflow value of ₹33,004 crore.

However, buying low and selling high is usual investor behaviour, and neither the MFs, nor AMFI, are calling it a crisis. Thanks largely to to the bull–run, the underlying assets within the AUM are valued higher, and hence, the MF industry's AUM touched an all–time high of over ₹31 lakh crore during December.

“While net-inflows in equity and hybrid funds are indeed negative, on the back of profit-led redemptions, the gross inflows are a healthy ₹36,000 crore in these two categories,” argues Venkatesh. For the record, equity and hybrid funds saw net outflow of ₹10,147 crore and ₹5,932 crore each in December, against respective mobilisation of ₹26,073 crore and ₹10,777 crore. The monthly redemption across equity and hybrid schemes worked up to ₹36,220 crore and ₹16,709 crore respectively.

“MF industry's AUMs at an all-time high, increase in retail folios, and also SIP folios, is reflective of investor confidence in mutual fund asset class,” Venkatesh adds. On the debt side, he expects the Reserve Bank of India (RBI) to continue maintaining accommodative stance and keep rates at current levels for economy to play a catch up, which is reflected in positive flows in corporate bond funds owing to the schemes holding quality paper and also shorter duration strategies including floater and dynamic bond schemes.

The silver lining in December 2020 was the come–back seen in the equity systematic investment plans (SIPs) which recorded inflows of over ₹8,418 crore, which is 15.3% higher than ₹7,302 crore mopped up in November. However, given that the last three days of November were non-business days, AMFI’s Venkatesh disclosed that around ₹500 crore due on those three days have been accounted for in December.

The gold exchange traded funds too depicted a different investor behaviour in December, as against the mobilisation of over ₹455 crore, the redemption was just ₹24.7 crore, thus, leaving a net inflow of over ₹430.6 crore in December. November, however, had seen a net outflow of ₹141 crore, on the back of redemptions worth ₹616.8 crore, against monthly mobilisation of ₹475.8 crore.

The steep price correction in the gold prices in December is one reason for the lower redemption, and AMFI's Venkatesh argues that gold has not lost its safe haven appeal, “because risk has not gown away from the system.” Clearly, the mutual fund industry has a tight-rope to walk in 2021.