Lump sum flows into MF equity schemes lowest since November 2020

The slowdown has been on account of high net worth individuals (HNIs) waiting for a better entry point as the stock market nears the record high, weakness in inflows from rural customers, and reduced NFO activity in the equity segment, the report said.

According to 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 behaviour in the current environment.

According to the financial services company, over the past couple of months, a few major trends have emerged: resurgence of NFOs in the September quarter 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 had 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 alternative assets (such as alternative investment funds and portfolio management services) as they have offered relatively better returns in the past couple of years. This is despite the fact that HNIs have to bear higher costs than 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 favour 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 increase, or if the yield on the 10-year G-Sec touches 8%, flows may shift to long-duration debt assets, translating into better yields.