MF blues

The incessant outflows from equity-oriented mutual funds, for five consecutive months, may appear bewildering, especially against the backdrop of foreign portfolio investors flooding equity markets with funds and domestic retail and HNI investors rushing to open trading/demat accounts to make the most of the market rally. But the outflows seem driven by a combination of factors that are likely to be transient. It is also heartening to see that mutual fund investors are being more circumspect about the surge in equity prices that is at odds with the underlying economic reality. Equity-oriented MFs have recorded consistent outflows, of around ₹25,000 crore, between July and November, even as debt funds and other categories witnessed inflows in some months. Almost all categories of equity-oriented funds, including large-cap, multi-cap, mid-cap and value funds, witnessed net redemptions in this period.

It is, however, not necessary to get too worried about this trend. The outflows seem primarily due to financial stress being faced by individual investors due to pay-cuts, job-losses, etc., which were the effects of the extended lockdown. Almost 88 per cent of equity-oriented schemes is held by individual investors whereas institutions hold chunks of liquid/money market schemes and debt-oriented schemes. The tight liquidity conditions of individual investors is also apparent from the decline in the monthly inflows through SIPs from ₹8,641 crore in March to ₹7,302 crore in November. With basic necessities taking precedence, possibly monthly investments into MF schemes have been halted; these flows can resume once the economy revives and incomes move back to pre-Covid levels. The other category of investors who could be redeeming their equity MF investments could be those worried about the unwarranted exuberance of the markets. This cautious attitude is a sign of maturity and should be encouraged. These investors could resume their purchases once they are comfortable with the market levels again.

It is the third category that needs to be cautioned — investors who may be moving money out of MFs to invest directly in the stock market or in other assets such as real estate. With most MF schemes failing to beat their benchmarks, some investors could be losing patience. Also, the steep rally in some stocks could be luring investors to direct investing or derivative trading. Both the mutual fund industry and the market regulator should step up their awareness campaigns, highlighting the importance of disciplined investing. The importance of systematic investment through market-cycles for long-term wealth building needs to be highlighted. The MF industry has gained investors’ confidence in recent years and should retain this, even if additional allocations have to be made for this. The market regulator can help by not giving additional reasons to investors to move out of funds through unnecessary regulations such as the recent one on multi-cap funds.