Lump sum flows into MF equity schemes lowest since Nov 2020

The slowdown has been on account of large high net worth individuals (HNIs) waiting for a better entry point as the equity market is close to a new high, weakness in flows from lower-end customers in rural areas, and reduced NFO activity by large fund houses in the equity segment, the report said.

As per Motilal Oswal Financial Services (MOFSL), redemptions in the equity segment have been steady.

“As seen in the past cycles, redemptions gather momentum when there is a sharp rally in the equity market and the share of equity in the portfolio allocation models of wealth managers rises above certain thresholds (based on the customer risk appetite),” the report said.

MOFSL interacted with a few large mutual fund distributors and institutional sales representatives to gauge customer behavior in the current environment.

As per the financial services company, over the past couple of months, a few major trends have emerged: resurgence of NFOs in 2QFY23 after a hiatus, steady trends in overall AUM, sustained high outflows from the debt segment, and new highs in monthly SIP inflows.

The report also highlighted that HNIs have shown a rising propensity towards investing in the passive segment, driven by the formalization of their investment process as the next generation takes over.

HNIs also prefer to invest in alternate assets (such alternative investment funds and portfolio management services) as they offered relatively better returns in the past couple of years. This, despite the high cost that HNIs have to bear, when compared with mutual funds.

According to MOFSL, traditional fixed income products may attract attention now.

“With the RBI raising interest rates (by 190 basis points over the past seven months), fixed deposit rates have moved higher. Weighted average term deposit rates have risen by 35bp/30bp for private/PSU banks. With the expectations of further rate hikes, fixed deposits may find favor with HNI customers,“ the report said.

The report said that large corporates are the key drivers of flows into the debt segment.

Currently, they are anticipating further hikes, at least until March 2023. Institutions are also considering investments in fixed deposits and non-convertible debentures (NCDs) versus debt funds to avoid a notable mark-to-market impact. With another 50 bp hike, or if the yield on the 10-year G-Sec touches 8%, flows may shift to long duration debt assets, translating into better yields.