Dissecting the mutual fund flows

The mutual fund industry has managed to close FY19 with strong asset growth despite it being a hair-raising one for the financial markets. During the year, the stock market paused in its bull run on slowing growth fears, even as the new capital gains tax on equity kicked in. The bond markets and consequently debt funds, were roiled by the IL&FS default and the NBFC liquidity crisis. Data from the Association of Mutual Funds of India (AMFI) nevertheless show that the industry witnessed a 11.4 per cent expansion in assets under management to ₹23.79-lakh crore in FY19.

Though retail investors kept faith with mutual funds, three trends show that they weren’t unaffected by rising risks. In the equity category, net subscriptions at ₹1.11-lakh crore were 26 per cent lower than the previous year’s figure of ₹1.50-lakh crore. Fund purchases varied sharply from month to month depending on how stock markets fared. After hovering at ₹8,000-12,000 crore between April-October, they dwindled rapidly to ₹5,100 crore in February 2019 before doubling again in March. This suggests that investors continued to take an opportunistic approach to their equity allocations. Inflows into balanced funds fell precipitously from ₹89,700 crore in FY18 to ₹6,800 crore in FY19. Clearly, fixed income investors who were widely mis-sold balanced funds for their ‘regular’ monthly dividends were caught unawares by market risks. The debt category, shaken by both rate uncertainty and default events, saw investors withdraw money from long-term products to park it in the ostensibly ‘safer’ liquid funds. Overall, it was the healthy net flows of ₹1.11-lakh crore into equity funds and the ₹43,350 crore influx into ETFs from the EPFO that powered much of the asset expansion this year. Sustained monthly flows via SIPs armed domestic fund managers with enough firepower to counter-balance foreign investor pull-outs.

While sustained flow into mutual funds in a difficult year is good news, the above trends flag three problem areas that the industry needs to address on a war footing. One, despite routine disclaimers about market risks, many first-time investors into both equity and debt funds come in with little understanding of the risks to their capital Two, debt mutual funds have done a poor job of conveying their inherent risks to retail investors, with supposedly ‘safe’ products such as Fixed Maturity Plans and liquid funds suffering default events. There is thus a strong case for the industry’s investor education efforts to veer away from campaigns promoting SIPs or debt funds, to an honest discussion of how market risks work. Finally, with asset sizes scaling up manifold and the performance gap between active and index products shrinking, the industry needs to get more proactive about lowering costs, without regulatory intervention.

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