Mutual Funds Channel Checks: Equity Flows Into Mutual Funds Muted

Motilal Oswal interacted with a few large Mutual Fund distributors (having AUM in excess of Rs 10 billion) and institutional sales representatives to sense the pulse of customer behavior in the current environment.

According to a report by Motilal Oswal, over the past couple of months, a few major trends have emerged: a) absence of NFOs because of the regulation, b) decline in AUM, c) sustained high outflows from the debt segment and d) decline in new SIP account openings. Our interactions with the channel partners indicate the following key points: 1) slowdown in flows is emerging from the business community where there are working capital-related pressures, 2) commission payouts have not been increased, 3) slowdown in SIP accounts owing to Fintech players, 4) HNI's inclination towards longterm debt funds is improving and 5) large institutions are expecting further rate hikes and will commit to substantial investments in due course

"There has been a slowdown in business for large distributors in the recent past, wherein the flows into the mutual fund equity products have weakened. The key factors behind this slowdown include: a) a steep correction in the equity markets and 2) increased working capital needs for small businesses given the rise in commodity prices," a report by Motilal Oswal has stated.

With respect to redemptions, no major trends have emerged yet. However, as observed in the past cycles, the redemptions gather momentum when there is a sharp bounce back in equity markets.

SIPs see closures

The number of SIP closures increased in the recent past as the customers sourced by the Fintech companies had enrolled for SIPs of much shorter duration (six months to one year). Further, most of the customers were young students and hence to sustain investments every month is a challenge for them.

Direct equity to equity mutual fund transition likely in the medium term

According to Motilal Oswal, from a medium-term perspective, distributors see an opportunity to shift funds from direct equity investments to equity mutual fundschemes especially in these volatile times.

"The surge in the number of demat accounts over the past three years provides significant business opportunities. On the other hand, if the banks raise interest rates on Fixed Deposits to 7.5- 8.0%, there could be a flight to these products from mutual funds," Motilal Oswal has said in a report.

It has also noted that AMCs have not increased commission payouts in the current slowdown phase. Distributors earned large commissions during the past couple of years on the back of NFOs, which saw high payout ratios. The commission payouts currently are at normalized levels.

"Competition from new/small AMCs can increase especially if they hire Fund Managers with a superior track record. Distributors bet more on the Fund Managers' performance as compared with the overall brand of the AMC," the brokerage has said.

As far as debt mutual funds are concerned, Motilal Oswal has noted that with another 50 basis points hike or if the 10-year G-Sec yield reaches 8%, the flows on the debt side could move to longer duration assets, translating into better yields on the debt side.