Mutual funds' equity buys hit Rs 1.7 trn in 2023, defying market swing

Mutual funds’ equity buying remained elevated for the fifth consecutive month in December, taking the net equity purchase  past Rs 1.7 trillion in 2023.

The aggressive buying in December indicates that flows into equity funds are likely to have remained unaffected by the sharp run-up in the market last month.

Mutual funds (MFs) bought equities worth Rs 23,000 crore last month (until December 28) compared to Rs 18,000 crore in November, shows data from the Securities and Exchange Board of India (Sebi).

The equity market recorded the highest monthly gains in December 2023 in the past 17 months with key benchmark indices Nifty50 and Sensex surging close to 8 per cent.

MFs have deployed over Rs 18,000 crore into equities every month since August 2023.

This marks a reversal in trend seen in the first four months of financial year 2024, when the aggregate deployment was only Rs 10,700 crore.

Equity investment by mutual funds largely depends on the inflows they get in equity and hybrid schemes.

The net inflows into active equity schemes have been robust since August as inflows have picked up and redemptions moderated.

Investors poured in a net Rs 69,830 crore into equities during the August-November period compared to just Rs 26,000 crore in the previous four months, data from the Association of Mutual Funds in India (Amfi) shows.

Apart from the fresh investment, MFs’ equity buying depends on the changes in cash levels of equity schemes and a shift in debt-to-equity allocation in hybrid funds.

The Rs 1.73-trillion equity investment in 2023 is only slightly lower than the record Rs 1.82 trillion buying seen in 2022.

MFs have managed to ramp up their equity deployment in recent years on the back of strong inflows into equity schemes through the systematic investment plan (SIP) route.

Gross investments through SIPs, which stood at Rs 1.5 trillion in 2022, scaled up to Rs 1.66 trillion in 2023 (till November).

In 2023, foreign investors, too, have made net equity buying worth Rs 1.7 trillion, which combined with the domestic flows ensured a strong rally in the equity market.

Key indices Sensex and Nifty ended the year with gains of 18.7 per cent and 20 per cent, respectively.

The broader markets shone even brighter with the Nifty Midcap 100 and the Nifty Smallcap 100 gaining 46.6 per cent and 55.6 per cent, respectively.

“While foreign portfolio investors (FPIs) returned to the markets, it was the domestic institutional investors (DIIs) which took centre stage, pouring in $22 billion.

"The rapid mobilisation of household savings was another factor that worked in favour of DIIs.

"Monthly SIP inflows topped Rs 17,000 crore ($2 billion).

"Most of this was reflected in the inflows into mid and smallcap funds,” Axis MF said in a recent report.

DIIs include MFs, insurance firms and other domestic institutional investors.

In 2022, FPIs were net sellers as they pulled out Rs 1.2 trillion. Despite that, the market ended 2022 with gains on the back of domestic flows.

As the SIP flows remain consistent, experts see MFs as a strong support for the market during times of FPI outflows.

In its equity outlook for 2024, Kotak MF stated that considering the flows through the SIP and Employees' Provident Fund Organisation (EPFO) routes, domestic funds are now in a position to pump in Rs 3 trillion in a year into equities.

These will offset the sharp sell-offs from overseas funds.

The Rs 3-trillion estimate includes monthly SIP inflows of close to Rs 17,000 crore, about Rs 90,000 crore cash balance of actively-managed equity schemes, and Rs 40,000 crore of EPFO investments into equity exchange-traded funds (ETFs).

Also, around Rs 64,000 crore can be deployed into equities by balanced advantage funds (BAF) in case the valuations turn attractive after correction.