Inflows in equity mutual funds continue to rise, SIPs at all-time high. Can they give inflation-beating returns?

According to AMFI data, inflows in the overall mutual funds market stood at ₹14,046.98 crore in October 2022. Meanwhile, Net assets under management (AUM) came in at around ₹39,50,323.28 crore as of October 31, 2022.

Inflows in the mutual funds market were driven by consistent flows in equity-oriented schemes and a slowdown in outflow in debt-related instruments.

The data showed that outflows in the debt market were around ₹2,817.79 crore in October compared to an outflow of a huge ₹65,372.40 crore in September month. The easing in an outflow of debt instruments was due to a strong inflow in liquid funds around ₹19,084.60 crore in October 2022 versus an outflow of ₹59,970.30 crore in the previous month.

Gopal Kavalireddi, Head of Research at FYERS said, “Mutual fund data for the month of October 2022 indicates a net inflow of Rs.14,047 crore as compared to the net outflow of Rs.41,404 crore last month, mainly due to lower outflows from debt schemes. Higher inflows of Rs.19,084 crore into liquid funds was the bright spot in the debt category, as investors continued their redemption from various duration funds on account of rising interest rates. Overnight, floater funds including Banking & PSU funds had large outflows.”

Meanwhile, Kavitha Krishnan, Senior Analyst – Manager Research, Morningstar said, a rising interest rate environment that’s been in place since May 2022 has likely resulted in investors preferring to move out of the debt markets in favour of investing in equity. Macro indicators like a rising current account deficit, driven by the central bank’s measures to regulate the local currency, and a rising import bill are factors that have possibly had an impact on the interest rate scenario in India. Rising commodity, food, and fuel prices have also had an impact on the economy.

Also, Priya Agrawal, Money Coach, LXME (neo-bank for women) said, “Within the debt segment, most of the schemes witnessed a net outflow of funds, with a significant outflow from Overnight Funds of ₹7505 crores, followed by Low Duration Funds and Short Duration Funds. This move could be a result of Debt Markets being volatile owing to the rising interest rate scenario.”

Coming to equity oriented schemes, the inflow was around ₹9,390.35 crore in October compared to an inflow of ₹14,099.73 crore in September. Thematic funds, large-cap, smallcap and midcap funds contributed to the inflows in the latest month.

In equity mutual funds, Krishnan highlighted that large and Mid-Cap, Mid Cap and Small Cap funds too witnessed significant inflows during the month. Although the magnitude of net flows has reduced slightly as compared to September 2022, this reduction is likely driven by outflows to the tune of ₹8.29 crore by foreign portfolio investors. There also seems to have been some profit booking by investors as markets surged forward in the month of October 2022.

FYERS expert pointed out that the inflows last month in equity MFs were buoyed by larger multiple new fund offerings. He added, “total net flows into the equity category since the beginning of this calendar year accounted for ₹151,482 crore, with ₹88,425 crore in the current financial year. This shows the rising risk appetite of investors, with a preference for equity investments.”

Notably, on the inflows in equity MFs, Agarwal believes that such indicates that, despite market volatility, investors have continued to invest their money in equity-oriented schemes with the aim of generating inflation-beating returns in the long run.

Furthermore, inflows in SIPs clocked an all-time high of ₹13,040 crore — after staying above the ₹12,000 crore mark since May this year.

What’s ahead?

According to Kavalireddi, during the current earning season, owing to lower volume growth, high-cost inventory, and subdued demand, the operating and net profit margins of most companies were on the lower end. This could result in earnings downgrade by analysts across many sectors. Based on the second quarter results announced to date, the banking and financial sector is seen to be the one bright spot, with almost all public and private sector banks showing excellent growth.

Morningstar’s Krishnan said, the global environment remains volatile, driven largely by multiple factors including the geopolitical instability in Europe, the slowdown in China, and the rising inflation in the U.S. Despite this, Indian stock markets witnessed an upturn in the month of October 2022, with a broad-based rally across sectors.

She added, “India continued to surge forward, likely driven by the growth in private spending after a long lull. The increase in demand has also likely led to a growth of the overall markets, as most sectors posted positive returns for the month of October 2022. Having said that, challenges continue to exist in the form of rising interest rates, higher inflation, and a depreciating rupee.”

Whereas Kavalireddi added that while the volatility in markets continues, as the benchmark indices are currently placed at a throwing distance from their lifetime highs, investors have reposed faith in Indian stock markets and continue to opt for equity investments through direct equity, as well as systematic investment plans of mutual funds.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.