Despite volatile markets, equity mutual funds see strong inflows in Jan driven by retail investors

Equity markets may have been volatile in the last few months, but mutual funds continue to see strong traction. More importantly, contributions via SIPs (systematic investment plans) in equity funds continue to rise, which suggests retail investor interest towards this asset class remains strong, even as markets have been choppy.

Data released by Association of Mutual Funds of India (AMFI) shows that equity mutual funds saw net inflows of Rs 12,546.51 crore in January 2023, with all categories—large caps, mid-caps, small-caps, multi-caps, sectoral funds, and flexi cap funds among others—seeing inflows. The net inflows in January were almost 72 per cent higher than the inflows of Rs 7,303.39 crore in equity MFs in December 2022.

On top of the inflows into equity MFs, hybrid funds saw inflows of Rs 4,491.97 crore in January, which was also higher than the Rs 2,255.26 crore inflows in this category in December, the AMFI data showed.

Monthly contributions via SIPs touched Rs 13,856.18 crore in January, up from Rs 13,573.08 crore in December. Over 9.20 lakh new SIP accounts were opened in January, taking the total number of SIP accounts to around 6.22 crore. Total SIP assets under management (AUM) last month stood at over Rs 6.73 lakh crore.

The strong SIP flows into MFs have, to an extent, offset the foreign institutional investor outflows over the last year, thus cushioning the equity market from falling sharply.

“The importance of investing in equity markets for long-term goals through SIP as a goal-linked route to create wealth is gaining awareness. This month, almost 23 lakh new SIPs were registered, which shows increasing investor belief in the instrument,” said N.S. Venkatesh, chief executive of AMFI.

Total mutual fund folios have hit an all-time high of more than 14.28 crore and the total MF AUMs stood at Rs 39.62 lakh crore in Jan.

“As investors make conscious investing decisions, their overall preference towards investing in dips is evident from the magnitude of flows into small and midcap stocks, considering that the Nifty Smallcap 100 index was amongst the worst performers in December 2022. On an overall basis too, the markets ended the month of January in red. Despite this, it is heartening to witness the levels of growth that we have been witnessing and the confidence that domestic investors have been placing in the markets,” said Kavitha Krishnan, senior analyst – manager research at Morningstar India.

Since the Covid-19, direct equity investing and equity funds gained strong traction as interest rates on bank deposits were cut sharply. However, amid increased competition for deposits, banks are raising interest rates even as equity markets are expected to give subdued returns this year.

The weighted average domestic term deposit rate on fresh deposits and outstanding deposits increased by 213 basis points and 75 bps respectively between May-December 2022, according to the Reserve Bank of India. The monetary policy committee of the RBI raised its repo rate by 25 bps on Wednesday to 6.50 per cent, which will further drive up lending as well as deposit rates in the near future.

In this scenario, one will have to wait and watch if the investors continue to keep faith in equity MFs.

“The mutual fund industry has grown by four times in less than a decade. The financialisation of savings is real and largely driven by AMFI and industry-led initiatives. This has also been supported by low interest rates in fixed deposits and lackluster returns in residential real estate. But, as interest rates rise, gold prices continue higher and the equity market returns stagnate, there is a real concern that retail clients will lose patience and reallocate resources back to fixed deposits, real estate and gold,” said Gautam Kalia, SVP and head super investor at broking firm Sharekhan by BNP Paribas.