Are eq­uity fund flows dry­ing up?

No, they are mod­er­at­ing as they are bound to when past re­turns de­te­ri­o­rate

The Hindu Business Line - - THINK - AARATI KR­ISH­NAN

Lat­est data on money flows into eq­uity mu­tual funds from the As­so­ci­a­tion of Mu­tual Funds of In­dia (AMFI) have popped the happy bub­ble in the mu­tual fund com­mu­nity.

In De­cem­ber 2018, net in­flows into eq­uity-ori­ented funds at ₹4,487 crore were 60 per cent lower than the Novem­ber flows of over ₹11,000 crore. This is also the low­est monthly fig­ure recorded since de­mon­eti­sa­tion opened the flood­gates for re­tail flows into mu­tual funds in end-2016. At­tribut­ing this dip to year-end hol­i­day­ing doesn’t cut much ice be­cause last De­cem­ber saw eq­uity funds draw in ₹25,800 crore.

So, what’s caused the dip? Is it tem­po­rary, or a sign of in­vestors get­ting tired of eq­uity funds? A deeper dive into the AMFI data pro­vides some an­swers.

No crash, but a grad­ual dip

Gross in­flows for eq­uity mu­tual funds are far more use­ful to gauge in­vestor ap­petite for eq­uity funds, than the widely-used data on net in­flows. After all, net in­flows into funds are just the arith­metic re­sult of one set of in­vestors pour­ing in money while an­other set is pulling out in any given month.

Gross monthly pur­chases of eq­uity-ori­ented funds over the last two years show that do­mes­tic in­vestors’ pur­chases didn’t sud­denly fall off a cliff in De­cem­ber 2018. They in fact peaked in Jan­uary 2018 and have been on a grad­ual slide since.

Here, we add up data for pure eq­uity, ar­bi­trage, tax sav­ing ELS and bal­anced funds (65 per cent eq­uity al­lo­ca­tion) to an­a­lyse in­vestor be­hav­iour in eq­uity-ori­ented funds.

The data show that in­vestors made their big­gest splurge on eq­uity funds in Jan­uary 2018, with gross pur­chases of over ₹58,650 crore. This mod­er­ated to ₹29,00035,000 crore be­tween April and Oc­to­ber 2018 be­fore sink­ing to ₹23,000-25,000 crore in the last cou­ple of months. The bulk of tax sav­ing (ELSS) in­vest­ments are made in Jan­uary-March, and so one can ex­pect a ₹2,000-3,000 crore bumpup to the num­bers in the rest of the fis­cal.

But even ac­count­ing for this, re­tail flows into eq­uity funds seem to be pretty closely track­ing the Sen­sex graph. In 2017, own­ing In­dian eq­ui­ties was a one-way street with the BSE Sen­sex climb­ing with­out a pause from 26,000 to 34,000-plus. But 2018 saw mar­kets sub­ject­ing in­vestors to an up-and­down ride. The Sen­sex peaked out at 36,000 in end-Jan­uary, plum­meted be­low 33,000 in March, jumped back to over 38,000 in Au­gust and has been cor­rect­ing since.

It may not be text­book be­hav­iour for in­vestors to make record eq­uity pur­chases when in­dices are at highs, and to go all cau­tious when they are head­ing for lows. But then, the phe­nom­e­non of re­tail in­vestors chas­ing past re­turns is preva­lent even in the most de­vel­oped mar­kets. In In­dia, past cy­cles have shown that re­tail flows into eq­uity funds typ­i­cally peak when their past oneyear and three-year re­turns are sky-high. Presently, one-year re­turns for most eq­uity funds are in the red. That will have to change for eq­uity flows to re­vive.

Pure eq­uity wasn’t worst hit

But the sur­prise is that it is not pure eq­uity funds, the most buf­feted by stock mar­ket swings, that saw the max­i­mum shrink­age in in­flows. It was ar­bi­trage and bal­anced funds.

Gross pur­chases of pure eq­uity funds fell 33 per cent in AprilDe­cem­ber 2018, com­pared to the same pe­riod in 2017. De­spite dicey mar­kets, ELS funds at­tracted 6 per cent more money this year. But pur­chases of bal­anced funds shrank by 52 per cent in April-De­cem­ber 2018. AMFI has be­gun dis­clos­ing sep­a­rate data for ar­bi­trage funds only from April 2018. But judg­ing by the net flows, ar­bi­trage funds have seen a more than 90 per cent dip in their pa­tron­age.

That bal­anced funds, which are less volatile than pure eq­uity funds, have had in­vestors flee­ing, sug­gests that the cat­e­gory was mis-sold quite heav­ily in the last cou­ple of years. Post-de­mon­eti­sa­tion, many risk-averse in­vestors were lured to make a big switch from bank de­posits to bal­anced funds with mis­lead­ing prom­ises of dou­ble-digit re­turns and tax-free monthly div­i­dends. But re­cent dents to bal­anced fund NAVs have ex­posed their risky na­ture, dis­il­lu­sion­ing in­vestors.

Ar­bi­trage funds, which take po­si­tions in cash and stock fu­tures for debt-like re­turns, at­tracted droves of HNIs in 2016-17 mainly for their tax-free re­turns. But with the 2018 Bud­get im­pos­ing a 10 per cent long term cap­i­tal gains tax on all eq­uity funds, the tax edge has been whit­tled down. HNI in­vestors there­fore ap­pear to be fly­ing the coop. On a net ba­sis, bal­anced funds saw their in­flows dip from ₹70,312 crore in the first nine months of 2017 to just ₹12,075 crore this year. Ar­bi­trage funds saw their net flows shrink from ₹26,272 crore to a mere ₹1,668 crore. The dip in net flows for pure eq­uity funds, from ₹99,440 crore to ₹81,211 crore was much milder.

This goes to show that in­vestors who bought eq­uity funds for all the wrong rea­sons were the ones that were most spooked by mar­ket gy­ra­tions and tax changes.

No panic re­demp­tions

While in­vestors did mod­er­ate their fresh pur­chases of eq­uity funds in a see-saw­ing mar­ket, the good thing is that they didn’t rush to re­deem their older in­vest­ments.

AMFI data on gross pull-outs from eq­uity funds show that the months that saw the high­est re­demp­tions in the last two years, were De­cem­ber 2017, Jan­uary 2018, March 2018 and Au­gust 2018.

In­vestors seem to have rushed to book prof­its on their eq­uity funds in March last year to avoid pay­ing the new cap­i­tal gains tax, ef­fec­tive April 1. But for that episode, re­demp­tions peaked when­ever the Sen­sex hit new highs. The votaries of long-term in­vest­ing may not like this re­tail ten­dency to book prof­its on eq­uity funds. But given the whim­si­cal na­ture of the stock mar­ket and the su­per-heated val­u­a­tions at which stocks were trad­ing, the de­ci­sion to take money off the ta­ble was a sen­si­ble one.

Gross re­demp­tions from eq­uity-ori­ented funds, which peaked at over ₹42,000 crore in March 2018, have since halved to ₹20,200 crore in De­cem­ber 2018.

What’s ahead

In­vestor be­hav­iour so far sug­gests that should the Sen­sex con­tinue its di­rec­tion­less me­an­der­ings this year, one can ex­pect bal­anced and ar­bi­trage flows to mostly dry up. ELS funds may con­tinue to re­ceive steady flows and pure eq­uity funds may get away with a 20-25 per cent dip in in­flows. Re­demp­tions are un­likely to pick up in fall­ing mar­kets.

Though in­dus­try in­sid­ers ar­gue that monthly flows through the SIP route, at ₹8000 crore now, will hold rock-steady even in a fall­ing mar­ket, this ap­pears un­likely. Monthly SIP flows were at ₹3,880 crore two years ago and well over half of the cur­rent SIPs have been kicked off in ris­ing mar­kets. So, if these SIPs de­liver losses or un­der­per­form lump­sum in­vest­ments, stop­page of SIPs and fewer sign-ups can­not be ruled out.

Given In­dia’s de­mo­graph­ics, every bull mar­ket in­evitably draws in hordes of new­bie in­vestors who haven’t ex­pe­ri­enced a down-cy­cle. They are bound to de­velop cold feet if mar­kets mis­be­have.

Based on these as­sump­tions, a ball­park cal­cu­la­tion in­di­cates that net eq­uity fund in­flows could still hold up at ₹1-1.2 lakh crore in the year ahead. This isn’t a bad num­ber given that just five years ago, eq­uity funds were strug­gling to meet net re­demp­tions of over ₹12,000 crore. But this is pro­vided the Sen­sex doesn’t launch into a 2008-style cor­rec­tion, in which case all bets would be off.

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