Rs 14,367 Crore: July's Record SIP Outflows

'Those satisfied with returns and not expecting further rally could be booking profits and also stopping SIPs.'

Redemptions from systematic investment plan (SIP) accounts scaled a new high of Rs 14,367 crore (Rs 143.67 billion) in July, indicating investors booked profits following back-to-back months of gains in the market.

Volatility triggered by Budget announcements also played on investor sentiment.

"July 2024 saw a peak in the Nifty, which may have prompted profit-booking among investors nearing the end of their goal tenure. This could be one of the reasons for the higher outflows of funds accumulated through SIPs," said Feroze Azeez, deputy CEO, Anand Rathi Wealth.

"Those who have been investing through SIP over the past few years have made handsome returns. Those satisfied with returns and not expecting further rally could be booking profits and also stopping SIPs," added Sriram BKR, senior investment strategist, Geojit Financial Services.

A part of the proceeds may have moved to new fund offerings (NFOs) that were open for subscription last month, according to industry officials.

Redemptions from SIP accounts have been rising for the last few months and have been outpacing growth in gross inflows.

As a result, even as gross SIP inflows have been making new highs, net inflows have been range-bound.

In July, net SIP inflows stood at Rs 8,964 crore (Rs 89.64 billion) as against gross SIP inflows of Rs 23,332 crore (Rs 233.32 billion). The net inflows were only 38 per cent of the gross tally, the lowest since December 2023.

The July SIP data is in continuation with the trend seen in the first six months of FY25.

Aggregate gross inflows in the first six months of 2024 came in at Rs 1.2 trillion, 41 per cent higher than the inflows in the same period last year.

However, the net SIP inflows registered only a 25 per cent growth at Rs 52,016 crore in the same period.

According to experts, while the gross outflow has gathered some pace, investor confidence in mutual funds and the equity market remains elevated.

"SIP inflows have consistently peaked over the last 12 months, indicating strong investor confidence in the market, with equity being the preferred investment mode," said Azeez.

"The number of new SIPs registered has also grown consistently, with nearly 7.2 million new plans registered in July," Azeez added.

Even as net SIP inflows have been subdued, aggregate net flows into equity mutual fund schemes have been making new highs in recent months.

According to industry officials, part of the proceeds from SIP account redemptions may also be moving to NFOs.

In June, new offerings in the active equity space collected Rs 14,370 crore (Rs 143.70 billion), the highest in a calendar month. Last month, the NFO collection stood at Rs 13,735 crore.

In the first half of 2024, mutual funds launched 30 active equity schemes, compared to 51 in the entire 2023.

Also, NFO collection by active equity schemes in 2024 has outpaced the 2023 total, with equity NFOs raking in Rs 37,885 crore (Rs 378.85 billion) by June, surpassing the Rs 36,657 crore (Rs 366.57 crore) collected during the previous year.

In 2022, 27 launches had collected Rs 29,586 crore (Rs 295.86 billion).

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Equity MF schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore in cash at the end of July 2024.

The cash held by equity mutual fund schemes went up sharply in July amid after-Budget volatility and concerns about elevated valuations.

Strong inflows into new fund offerings (NFOs) also kept cash levels elevated.

Equity MF schemes of the top 26 fund houses were sitting on nearly Rs 80,000 crore (Rs 800 billion) in cash at the end of July 2024, up 27 per cent from the June-end tally of Rs 62,700 crore (Rs 627 billion), according to a Motilal Oswal report.

As a result, the aggregate proportion of cash in these schemes rose to a 15 month high of 5.4 per cent. In June, cash accounted for 4.6 per cent of the portfolios.

According to MF executives, while the mandate is to stay fully invested, they have the leeway to keep funds available during times of uncertainty or excessive valuations.

Although valuation concerns, especially in the midcap and smallcap space, have persisted for nearly a year, equity MF schemes have continued to attract robust flows on a sustained basis.

The market, supported by MF inflows, has been on an extended bull run.

In July, the equity market delivered strong performance despite the Union Budget delivering a negative surprise by raising the capital gains tax on eq uities.

Benchmark indices National Stock Exchange Nifty 50 and S&P BSE Sensex ended the month with gains of 3.9 per cent and 3.4 per cent, respectively.

As of August 14, the Nifty 50 was trading at a 12-month forward price-to-earnings (P/E) ratio of 20.2x compared to its five-year average of 19.3x.

The P/E ratio of the Nifty Midcap 100 stood at 32.9x, vis- -vis a five-year average of 24.3x.

The Nifty Smallcap 100 was trading at a P/E of 20.6x compared to the five-year average of 17.2x.

In P/E terms, the Nifty 50 is trading at 89 per cent premium to the MSCI Emerging Markets Index, above its historical average of 50 per cent, Tata MF said in a note.

Volatility in the global market in August amid slowdown concerns in the US has added to fund managers worries.

Earlier this month, the markets posted their worst single-day fall since the election result day on June 4.

The global selloff comes against the backdrop of rich valuations and stretched sentiment readings on our proprietary indicator for Indian equities.

The sentiment index works as a contrarian measure and has an inv erse correlation to expected forward returns, especially at extremes, as is the case now.

Further, while we stay constructive on earnings in the med ium term, the near-term trajectory has been decelerating as commodity price tailwinds abate.

This mix, we believe, is ideal for a reduction in the thus-far-unabated speculative action in equity markets, SBI MF said in a note.

According to the Motilal Oswal report, Parag Parikh Financial Advisory Services (PPFAS) MF had the highest cash holding at 16.1 per cent, followed by Quant MF, which was 14 per cent in cash.

While PPFAS MF has been holding on to high cash levels for several months now, Quant MF s cash holding was only 7.2 per cent in June.

Other fund houses that have seen over a 1-percentage-point rise in cash holding include ICICI Prudential MF, Franklin Templeton MF, Sundaram MF, and Motilal Oswal MF.

SBI MF and Aditya Birla Sun Life MF were among the few fund houses that saw a considerable dip in cash holding.

MFs have been facing deployment challenges, especially in the smallcap space, as few funds invest in emerging sectors owing to the continued flow of fresh investments even as valuations have run up sharply.

According to experts, the strong collections in NFOs in July may have contributed to the cash holdings. They say that fund managers deploy the proceeds in a staggered manner if the collection is large.

Feature Presentation: Ashish Narsale/Rediff.com