For the last few years, the interest in mutual funds, particularly equity mutual funds was rock solid and the backbone of the stock markets. When Foreign Institutional Investors sold large amounts after the March Covid-19 pandemic, domestic institutions lent heavy support to the markets, thanks to inflows into mutual funds.
But, the inflows into equity mutual funds now seems to be falling, as two months data points out, even as the Covid-19 pandemic spreads. Of course, many investors may now jobless because of business disruption, while others may have taken salary cuts, while others maybe weary of investing, after the collapse in the markets.
What does mutual fund data show?
Inflows into equity schemes was just Rs 240 crores in June, which was at a new 4-year low. Inflows through the SIP route also fell to in June to Rs 7,927 crore from Rs 8,123 crore in the previous month.
Multicap and large cap funds in fact saw an outflow of Rs 778 crores and 213 crores, while interestingly small cap funds saw an inflow of Rs 249 crores.
|Type of Equity Fund||Net inflows|
|Multicap fund||- Rs 777.60|
|Large cap fund||- Rs 212.78|
|Large and midcap fund||- Rs 88.03|
|Small cap fund||Rs 249.23|
Why this could be worrisome?
The two major investors in the Indian markets are domestic institutions, which are largely mutual funds and Foreign Portfolio Investors (FPIs). Over the last few years, whenever FPIs have sold equities, domestic institutions led by mutual funds have gone ahead and bought, which has lent support to the markets.
In the month of March, when FPIs sold into equity shares to the tune of Rs 65,000 crores, domes tic institutions net bought to the tune of Rs 56,000 crores, thus supporting the markets. Similarly, in Feb, when FPIs net sold stocks worth Rs 13,000 crores, domestic institutions bought stocks worth Rs 17,000 crores.
The worry now is with inflows into equity mutual funds drying up, and if there is sudden selling pressure from FPIs, domestic institutions led by mutual funds may find it difficult to support the markets, as they may not have the money.
Will investors return to mutual funds anytime soon?
While it is easy to advise mutual fund investors to stay invested for long, it's never easy to implement. Somebody who has lost a job is going to encash his investment, a businessmen who has is cash flows disrupted is going to redeem his mutual fund investments. For other investors, the panic is enough to encash and stay invested in cash.
The Covid-19 pandemic infections, do not seem to wane. India has today reported a record number of daily infections, which has now crossed the 26,000 mark for the very first time. For the next few months at least, we are unlikely to see inflows into mutual funds improving dramatically.
If you have already invested in equity mutual funds in the last 2-years, you are probably sitting on a loss. It's best to stay invested, if you do not need the money and have a steady cash flow.