The Changing Landscape of Mutual Funds: Record Inflows in Debt, Slump in Equity Oriented Schemes

The mutual funds industry in India witnessed a notable shift in investor behavior during the first month of FY23, with inflows reaching a three-year high of over ₹1.21 lakh crore. However, the surprising aspect of this performance was the substantial decline in inflows into equity-oriented schemes, which dropped nearly threefold on a month-on-month basis.

Data from the Association of Mutual Funds in India (AMFI) indicates that debt-oriented schemes were the primary drivers of market performance, attracting a staggering ₹1.06 lakh crore in April 2023. Among these, liquid funds accounted for 60% of the total inflows. In contrast, equity-oriented schemes recorded a meager inflow of ₹6,480.29 crore, marking a significant decrease from the previous month's figure of ₹20,534.21 crore. This downward trend occurred despite the positive movement of benchmark indices such as Sensex and Nifty 50, which posted gains during the same period.

Several industry experts have provided insights into these diverging trends. Gopal Kavalireddi, the Head of Research at FYERS, highlighted the strong flows in debt mutual funds, particularly in liquid schemes, amounting to ₹1.06 lakh crore. He attributed this influx to the current interest rate cycle nearing its

peak and favorable inflation data, which encouraged investors to gravitate towards debt-oriented schemes. Similarly, Himanshu Srivastava, Associate Director - Manager Research at Morningstar India, suggested that corporates, after meeting tax liabilities in March, parked their excess investible funds in liquid and ultra-short duration fund categories, leading to substantial inflows.

While equity-oriented schemes experienced a decline in net flows, there were notable exceptions within specific categories. Mayank Bhatnagar, Chief Operating Officer of FinEdge, pointed out that large-cap funds suffered the most, with inflows dropping from ₹911 crore in March to just ₹53 crore in April. However, midcap and smallcap schemes displayed year-on-year growth of 15% and 27%, respectively, which was relatively healthy compared to the overall decline in equity-linked schemes.

Despite the decrease in flows across equity categories, no category, except for focused equity, witnessed net outflows. Himanshu Srivastava noted that given the recent upward trend in the markets, investors might have opted to wait for more favorable investment opportunities rather than actively investing in equities. This cautious approach could explain the reduced flows in equity-oriented schemes.

Various factors contributed to the decline in net flows for equity-oriented schemes. Sriram BKR,

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Investment Strategist at Geojit Financial Services, attributed the drop to a significant decrease in gross purchases and a simultaneous increase in redemptions. The rise in valuations may have deterred investors from making fresh investments or prompted them to capitalize on the rally by withdrawing funds. In contrast, debt funds attracted a net inflow of ₹1.05 lakh crore, reflecting investors' preference for fixed income investments over equity-oriented options.

Moreover, hybrid schemes witnessed a positive inflow of ₹3,316.99 crore in April 2023. These schemes, which blend both equity and debt components, seem to have attracted investors seeking a balanced approach to their investments. Additionally, solution-oriented schemes recorded an inflow of ₹193.57 crore, indicating a preference among investors for long-term investment solutions, such as retirement or child education funds. Other schemes, encompassing a range of categories not specified in the data, posted a significant inflow of ₹6,945.22 crore.

Overall, the mutual funds industry experienced a robust inflow of ₹1,21,434.81 crore in April 2023, signaling a promising start to FY24. This positive trend can be attributed to various factors, including favorable market conditions, increased interest from foreign institutional investors (FIIs), declining crude oil

in-line earnings of major companies, and optimistic projections for the Indian economy by the International Monetary Fund (IMF).

Looking ahead, industry experts anticipate that May will continue to deliver favorable returns to investors, supported by the sustained inflow of funds from FIIs and retail investors. While certain sectors may face challenges due to lower demand and pricing pressure, the overall market sentiment remains positive. The ongoing earnings season, coupled with the market's upward trajectory, indicates potential opportunities for investors.

It is important to note that the views and recommendations provided by individual analysts or broking companies mentioned in this article do not represent the views of Mint. Investors are advised to consult certified experts before making any investment decisions.

In conclusion, the mutual funds industry in India witnessed a notable surge in inflows for debt-oriented schemes, primarily driven by liquid funds. Conversely, equity-oriented schemes experienced a significant drop in inflows. Hybrid schemes, solution-oriented schemes, and other categories demonstrated positive performance, attracting investor interest. The industry's overall strong inflows, along with favorable market conditions and optimistic economic indicators, point toward a promising outlook for the mutual funds sector in the coming months.