Equity MF Inflows Decline 16% in March

Equity MF Inflows Decline 16% in March: Are Investors Worried Amid Shifting Market Trends?

Mutual fund inflows into the equity category dropped nearly 16% on a month-on-month basis to ₹22,691 crore, according to data released by the Association of Mutual Funds in India (AMFI). This decline, from ₹26,703.06 crore in the previous month, marks a significant shift as investors pulled funds out of small-cap schemes for the first time in the financial year 2024. The small-cap category itself witnessed an outflow of ₹94 crore in March 2024, the data showed. Conversely, large-cap funds saw the highest inflows of FY24, amounting to ₹2,128 crore.

Reasons Behind the Downturn

Exploring the reasons behind this downturn, Anand Vardarajan, Business Head – Banking, Institutional Clients, Alternate Products, and Product Strategy at Tata Asset Management said, “The stress test results in the small and midcap space coupled with high valuations could be the reason for flows to ebb here. There is a slight rotation we are seeing where large cap and predominantly large cap funds like flexi cap or large and mid have benefited in flows at the margin as investors may be moving in here due to relative valuation comfort.”

Vardarajan’s insights suggest that investors are reevaluating their asset allocation strategies and gravitating towards larger-cap funds amidst concerns over the stress tests faced by mutual funds. The perceived safety and relative valuation attractiveness of large-cap funds appear to be driving this shift in investment preferences.

Notably, the recent stress test results of mutual fund houses unveiled disparities in liquidity between small-cap and mid-cap funds. Liquidity, in this context, refers to the ability of funds to sell stocks quickly to generate cash, particularly during times of high redemption demands. The stress test data indicated that small-cap schemes, due to their tighter liquidity situation, would take longer to liquidate their portfolios compared to mid-cap funds.

For instance, small-cap schemes with corpus sizes less than ₹10,000 crore would take approximately six days on average to liquidate 50% of their portfolios. This duration increases to about 24 days for schemes in the range of ₹10,000-20,000 crore and further extends to approximately 43 days for schemes larger than ₹20,000 crore.

Reassessing Investment Strategies

In light of these developments, investors should reassess their investment strategies, considering factors such as liquidity, valuation, and risk tolerance, experts say. A Balasubramanian, CEO at Aditya Birla Sun Life AMC, emphasized during a conversation with CNBC-TV18 that investors should avoid solely relying on stress test results for decision-making. Instead, they should take into account various factors such as portfolio concentration and investment duration to make a well-informed assessment of mutual funds.

As market trends continue to shift, it is crucial for investors to stay informed and adapt their strategies accordingly. By considering the liquidity, valuation, and risk factors associated with different fund categories, investors can make more informed decisions that align with their financial goals and risk appetite.