Equity Fund Inflows See 40% Drop Due To High Valuations, Market Volatility

The Indian equity markets have been witnessing volatility in tandem with the global markets for quite some time. On one hand, there are domestic key events such as the Union Budget and the Reserve Bank of India (RBI) monetary policy report, while on the other hand, there is the high possibility of interest rate hikes by the US Federal Reserve, and the growing concern between Ukraine and Russia, which are weighing on the market. All these factors have led to a decline in global equity markets, including India.  

Valuations, Volatility Pull Down Inflows 

In line with the market fall, inflows into equity-oriented also witness a sharp fall in inflows in January 2022, with a net inflow of Rs 14,887.77 crore. Last month, in December 2021, equity-oriented mutual fund schemes had seen the highest net inflows (Rs 25,076.71 crore) in this financial year despite market corrections caused by the spread of Omicron variant.  

Experts also attribute the fall in equity inflow to higher valuation and volatility in the equity markets. “Concerns over ‘new’ variants across the globe, the relatively high valuations and rising inflation have been placing some pressure on the economy. These factors, among others, have likely led to a reduction in the magnitude of flows over the past month,” says Kavitha Krishnan, senior analyst, manager research, Morningstar India. 

Balanced Advantage Funds Rule The Roost  

In the hybrid schemes category, balanced advantage schemes once again saw the highest inflow of Rs 2,762.95 crore in January. Equity hybrid funds, which are popularly known as balanced hybrid funds, stood at number two with an inflow of Rs 1,539.80 crore.  

Investors consider these two categories safer than pure equity, especially when markets are volatile. “Retail investors adopt a rotational investment strategy in the event of rate hike and shift their savings to the hybrid category,” said N.S. Venkatesh, chief executive officer, Association of Mutual Funds in India (Amfi), in a statement.  Read more about how to choose balanced advantage funds here

SIPs Stay Strong 

Systematic investment plans (SIPs), which allow you to invest in mutual funds on a regular basis, bucked the trend and saw robust inflow in January. The contributions through SIPs rose to a historical high of Rs 11,516 crore from Rs 11,305.34 crore in the previous month.  

SIP inflows have seen a steady rise in the last three months. This number will grow further, believes Venkatesh. “Retail mutual fund investor confidence in the India growth story, as reflected through continued all-time higher quantum of monthly SIP flows and with (the) economy expected to rise at a projected 9.2 per cent, has overshadowed the uncertainties arising out of external factors like Fed rate hike or Foreign Institutional Investor (FII) outflows,” said Venkatesh. 

Other factors such as Budget-led capex spending leading to overall economic growth, rising job creation avenues, and healthier corporate earnings growth will spur higher quantum of savings into the mutual fund industry, Venkatesh added. 

The Indian mutual fund industry’s net asset under management (AUM) as on January 31, 2022, stands at Rs 38,01,209.63 crore, and the average AUM is at Rs 38,88,570.79 crore.