Passives and SIPs were the big story in mutual fund flows

The big story of September 2022 was once again the SIP flows at a record level of Rs12,976 crore. The second good news was that the new fund offerings (NFOs) are gathering steam and in the month of September, the NFOs managed to collect Rs8,374 crore, largely dominated by sectoral and flexi-cap funds. Let us quickly turn to the AUM story for September 2022. Assets under management is the combination of flows and capital accretion and includes the AUM of equity, debt and hybrids.

Data Source AMFI

The overall AUM of the mutual fund industry as of the close of September 2022 stood at Rs38.42 trillion. Here are some key trends that emerge from the AUM analysis as above.

·         The overall AUM has been in a very narrow range for the past one year, although it has gyrated sharply with the swings in the equity markets and the interest rate movements.

·         If you compare the AUM of active equity funds with that of active debt funds, there has been a complete reversal of roles in the last one year. Just a year back, active debt had an overall AUM of Rs14.15 trillion and active equity an AUM of Rs12.80 trillion. As of September 2022, the overall AUM of active debt has fallen to Rs12.42 trillion while the AUM of active equity has gone up to Rs14.63 trillion. It is a complete reversal of roles.

·         The biggest takeaway is that alternate assets AUM has built heft from Rs9.13 trillion to Rs11.12 trillion in the last one year. It is not just that there has been a clear preference for passive funds as active fund managers have struggled to outperform the indices. There is also the emergence of alternative fund classes as a distinct asset class with AUM well above the Rs10 trillion. Here alternative assets include hybrids and passives.

Let us now turn to the mutual fund flows for the month of September.

Debt fund flows face treasury pressure in September 2022

In the current fiscal year, debt fund flows have been under pressure for majority of the months. Even for the month of September 2022, debt funds saw net outflows of Rs65,372 crore. Normally, at the end of each quarter, debt funds see outflows due to treasury operations of corporates as they need funds to pay their advance taxes. However, there has also been the pressure of rising rates, which has put a lot of pressure on debt fund flows.

Here is a quick summary of the colour of debt fund flows in September 2022. The funds that saw positive inflows include Overnight funds Rs33,128 crore and long duration funds Rs111 crore. Obviously, the flows were biased towards the sell side as is evident from the huge net selling number for debt funds. Treasury managers have been cautious about longer term debt due to raising interest rates and have preferred debt of shorter maturity.

We now turn to the category of debt funds that saw outflows in September 2022. Big selling was visible in Liquid funds Rs59,970 crore, Money Market Funds Rs11,232 crore, ultra-short duration funds Rs8,454 crore, Low Duration Funds Rs7,660 crore, Banking & PSU funds Rs4,225 crore, Corporate Bond Funds Rs2,926 crore, floater funds Rs1,118 crore and short duration funds Rs1,031 crore. With bond yields moving above 7.5%, the pressure on debt funds is quite obvious. Even the RBI does not seem to be relenting on its hawkish stance.

NFOs and SIPs boost equity fund flows in September 2022

Equity fund flows in September 2022, more than doubled to Rs14,010 crore. The big thrust to equity flows came from Rs5,826 crore of NFO flows and Rs12,976 crore of SIP flows. Now for the equity fund inflow story! During September 2022, sector funds led the way with Rs4,419 crore of inflows. The combination of Multi-cap funds plus flexi-cap funds saw inflows of Rs3,126 crore. Among other key contributors, Mid Cap funds collected Rs2,151 crore, small cap funds got inflows of Rs1,825 crore, large & mid cap funds saw inflows of Rs1,469 crore and value attracted flows of Rs519 crore. There was not a single category of equity funds that saw negative flows in September 2022.

One parameter that tells you the story of equity fund flows very eloquently is folio accretion. Folios are MF investor accounts and give a good idea of the retail spread of demand. As of the close of September 2022, equity folios touched an all-time high of 924.21 lakh folios out of total mutual fund folios of 1,380.87 lakhs; or 66.93% share of overall folios.

Hybrid flows lag while passive flows still rule the roost

Hybrid funds saw outflows of Rs2,688 crore in September 2022. This is similar to the trend that we have seen in last few months. Two factors impacted hybrid fund flows. Firstly, NFOs have just started and the highly popular BAFs are yet to pick up. The focus is on equity and passive funds now. Secondly, arbitrage funds saw heavy outflows of Rs4,023 crore. Other hybrid categories like aggressive hybrids and BAFs saw net inflows in September 22.

Passive funds were again the big story of September 2022, witnessing healthy inflows of Rs13,623 crore as investors looked for lower cost alpha. The passive surge was led by equity & debt index ETFs at Rs10,808 crore followed by index funds at Rs2,317 crore. Index ETFs got an NFO boost this month. Gold ETFs and FOF (fund of funds) also saw marginal inflows during the month of September 2022.

Three key takeaways from the September 2022 MF flows

The story of mutual fund flows in September 2022 can be summed up in 3 key takeaways that emerge from the MF flows data.

a)      Equity fund flows have largely become decoupled from the equity market conditions. In a month when stock were very volatile, SIP flows touched an all-time record.

b)      Debt fund needs a new narrative. Corporate investors are looking for alternatives and that is not good news for active debt funds. There is the need to change the narrative.

Lastly, alternate classes like hybrids and passive funds are the big story. They are today sizable in terms of AUM and number of folios.