Amid volatile stock markets, inflows into equity mutual funds drop 4 per cent in January

Equity markets have seen sharp declines in recent months amid a continued sell-off by foreign institutional investors, due to rising global trade tensions and a strengthening US dollar. But, domestic investors still seem to have kept their faith and have continued to pour money into equity mutual funds, although the enthusiasm appears to have been somewhat tempered.

Data released by the Association of Mutual Funds of India shows equity mutual funds saw inflows of almost Rs 39,688 crore in January 2025, down 3.6 per cent from the inflows of Rs 41,156 crore seen in December 2024. This was the 47th consecutive month of net inflows into the segment. 

While the inflows into equity funds have declined marginally, the net assets under management (AUM) of equity funds have come down to Rs 29.47 lakh crore in January from Rs 30.58 lakh crore in December due to the fall in equity markets. 

Overall, including other categories like debt funds, exchange-traded funds and retirement funds, the mutual fund industry saw inflows of almost Rs 1.88 lakh crore in January, compared with Rs 80,355 crore outflows in December. Typically, the end of the quarter sees huge outflows from liquid and overnight categories for advanced tax payments by corporates and that had led to outflows of Rs 1.27 lakh crore from debt funds in December. This was reversed in January, with inflows of Rs 1.29 lakh crore in debt funds.

From an equity mutual funds perspective, all the categories saw inflows continue in January. Sectoral/ thematic funds have seen huge traction in recent times, and these funds continued to get the highest inflows in January. However, the inflows in sectoral/ thematic funds were down 41 per cent at Rs 9,017 crore from Rs 15,332 crore. Also, worth noting is three new funds were launched in this space in January, barring which the inflows could have been even lower. 

In contrast, large-cap funds saw inflows increase to Rs 3,063 crore from Rs 2,011 crore. Midcap and smallcap also continued to see strong inflows, despite the correction this year and analysts warning about being cautious in this space amid the uncertain environment. While midcap funds saw inflows of Rs 5,148 crore in January, smallcaps saw inflows of Rs 5,721 crore. This contrasts with Rs 5,093 crore and Rs 4,668 crore flows these funds had received in December. 

"Domestic investors continued with their investment spree into the equity-oriented mutual funds in the month of January, taking correction in the market as an opportunity to build their exposure further," felt Himanshu Srivastava, associate director-manager research, Morningstar Investment Research India.

Viraj Gandhi, CEO of Samco Mutual Fund, pointed the markets experienced intermittent bouts of volatility, driven by sluggish economic growth, rising protectionist tendencies, and geopolitical uncertainties. 

"These factors contributed to market jitters over the past few months. Despite these hurdles, the steadfast commitment of domestic investors through SIPs (systematic investment plans) underscored a deeper confidence in the long-term potential of the Indian economy," said Gandhi.

However, analysts say investors, especially those continuing to channel money into sectoral and thematic funds need to be cautious.

"Sector/ thematic funds are typically cyclical in nature and are largely meant for investors who either are in a position to track a sector or understand the dynamics of a given theme, or they have resources at their disposal to do that for them. It is important to time their entry and exit from these funds as they can tend to be very volatile. They offer a very high-risk high-return investment proposition and investors should be wary of that while investing in them," said Morningstar's Srivastava.

Midcap and smallcap investors should also be wary of inherent risk in these segments and be judicious while investing, he added.