Mutual fund flows may face two key risks in the coming months
For the month of March 2020, AMFI reported total mutual fund outflows to the tune of Rs.212,000 crore. That is the highest single-month outflows seen in mutual funds. Of course, this was led by outflows from debt funds even as equity fund flows were robust.
Liquid fund outflows
The month of March was marked by heavy outflow from short duration funds and arbitrage funds. Clearly, the funds which corporates and institutions used for treasury management were worst hit. Institutional investors were playing it safe ahead of the end of the fiscal year and the lockdown over COVID-19 and that led to a major redemption from the shorter duration funds. Even the normally staid PSU Banking funds saw outflows during the month. It appeared to be a clear shift to low risk liquidity.
SIPs hold the equity story
Despite the huge outflows in debt funds and arbitrage funds, equity funds saw inflows of over Rs.11,700 crore. This was, however, led by SIP flows of Rs.8,600 crore. The SIP AUM now accounts for nearly 50% of the overall equity AUM and that has provided a degree of stability to the overall equity fund flow picture. Surprisingly, in the midst of all the volatility over the last few years, the monthly SIP collections have steadily grown. But there are two major areas of concern for MFs.
Risk to debt flows
Institutional investors have been wary of debt funds for a couple of reasons. Firstly, the solvency pressure on Indian companies is beginning to show and the situation has only worsened since IL&FS in 2018. With the lockdown likely to lead to business disruption, risk of corporate debt looks a lot more elevated. The second big risk is the risk of yields going up higher. One may wonder why yields would go up when the RBI has cut rates by 75 bps. But, that is what happened. With the government expected to run a huge fiscal deficit in 2021, the pressure on bond yields will be huge. That could lead to higher yields and negative impact on debt returns. That is obvious with the GOI borrowing at 200 bps above the repo rate.
What if SIP flows taper?
That is a risk few are talking about. Remember that flows into equity funds were consistently negative between 2009 and 2014. The real test of the investor enthusiasm for SIPs will be gauged when these SIPs yield negative returns over a longer time frame. Also the lockdown is expected to lead to loss of jobs, lower income levels and lower capacity to spend. If the SIP story reverses, we hope not, then equity fund flows could face the first real challenge in the last five years. That could be the moment of reckoning because MFs may not be geared for that challenge!
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