Why Mutual Fund Inflows Have Surged

Largecap, flexicap, and balanced advantage funds together recorded a net inflow of Rs 9,363 crore in August, representing a 70% increase from the previous month's total.

Mutual fund offerings that are believed to be safer investment options have witnessed a marked surge in inflows, reflecting a shift in investor sentiment amid concerns over a potential global slowdown and elevated valuations in the midcap and smallcap segments.

Largecap, flexicap, and balanced advantage funds together recorded a net inflow of Rs 9,363 crore (Rs 93.63 billion) in August, representing a 70 per cent increase from the previous month's total.

"Equity valuations have risen sharply over the past four years, with midcap and smallcap stocks particularly seeing elevated levels," said D P Singh, deputy MD and joint CEO of SBI Mutual Fund, the country's largest asset management firm.

"Investors are now looking for relative safety, which has led to increased inflows into largecap and balanced advantage funds," Singh added.

The Indian stock market faced turbulence during the early sessions of August, triggered by weaker-than-expected US employment data, a rate hike by the Bank of Japan, and other global factors that contributed to significant corrections worldwide.

However, the markets staged a sustained recovery in the latter half of the month.

In August, inflows into flexicap funds reached Rs 3,513 crore (Rs 35.13 billion), the highest since the category was introduced in December 2020.

Largecap funds attracted Rs 2,637 crore (Rs 26.37 billion), most since March 2022, while balanced advantage funds saw their best collection in 12 months at Rs 3,213 crore (Rs 32.13 billion).

The strong inflows into the largecap and BAF categories were supported by new fund offerings.

Flexicap funds, while they do invest in midcap and smallcap stocks, are considered largecap-oriented as their exposure to smaller stocks is typically limited to 30 to 35 per cent of the total portfolio.

With fund managers having the flexibility to further reduce this allocation, flexicap funds are regarded as lower-risk equity investments.

These three categories had struggled to attract significant inflows over the past two years, as investors flocked to high-risk options like smallcap, midcap, and thematic funds.

The average monthly inflows into largecap funds had been just Rs 144 crore (Rs 1.44 billion) in the previous 24 months, with net collections exceeding Rs 1,000 crore (Rs 10 billion) on only two occasions during this period.

Financial experts have been warning for several months about the elevated valuations in the midcap and smallcap segments, advising investors to rebalance their portfolios by increasing allocations to largecap and hybrid funds.

'Although India's macros look robust, valuations are not cheap. Valuations of largecaps are reasonable compared to mid and smallcaps,' ICICI Prudential MF stated in its latest factsheet.

'This warrants an investment approach towards hybrid and multi asset allocation schemes which can dynamically manage exposure to various asset classes,' ICICI Prudential MF added.

Other mutual fund houses and analysts echo this suggestion.

"BAFs dynamically allocate between equity and debt depending on market conditions. They can be a good option to take advantage of the expected volatility," explained Jiral Mehta, senior research analyst at FundsIndia.

"Instead of maintaining a static equity allocation, these funds automatically adjust their exposure based on market conditions," explained Mehta.

Singh of SBI Mutual Fund suggested: "Considering relative valuations and the current growth outlook, we also believe these funds are better suited to current market conditions."

"BAFs typically reduce allocations depending on market valuations, while largecap funds are better placed due to their favourability in earning and risk-reward at the moment vis-à-vis mid and smallcaps."

Despite this shift towards relatively safer equity and hybrid funds, the riskier midcap, smallcap, and sectoral funds continue to attract significant investments, albeit at a slower pace in recent months.

In August, midcap and smallcap funds saw a net inflow of Rs 6,264 crore (Rs 62.64 billion), while sectoral and thematic funds recorded inflows of Rs 18,117 crore (Rs 181.17 billion), with Rs 10,202 crore (Rs 102.02 billion) coming from new fund offerings.

Feature Presentation: Ashish Narsale/Rediff.com