Debt-focused funds saw net inflows of Rs 63,809 crore in February 2024, which was a second consecutive month of positive inflows. These funds saw an increase of Rs 76,469 crore in January 2024.
The Maximum Flows go to Liquid Funds
Liquid funds, corporate bond funds, and short duration funds were the most inflows into the open-ended category in February 2024, indicating a significant investor preference for these investment options.
"Corporates most likely temporarily moved excess investable cash into liquid funds after paying the advance taxes in December 2023, which is why there have been significant inflows throughout the past two months. Net inflows of Rs 83,642 crore were recorded by liquid funds, Rs 3,029 crore by corporate bond funds, and Rs 2,346 crore by short duration funds," said Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India Private Limited.
Funds that use an active duration approach have seen modest inflows recently. Due to the growing likelihood of interest rate decreases, investors are now demonstrating interest in long-duration, Gilt funds, and Dynamic Bond funds, as evidenced by the increased investment in these categories.
In January 2024, the debt fund types with the largest net withdrawals were the Overnight Fund, which saw outflows of Rs 17,376 crore, the Low Duration Fund, which saw outflows of Rs 4,100 crore, and the Floater Fund, which saw outflows of Rs 3,610 crore. The medium-term and credit-risk funds continue to show steady withdrawals.
The selling of debt funds fell on the other categories of medium duration funds, credit risk funds, and banking & PSU funds to a lesser degree. The taxing effect is putting pressure on most debt fund categories. More than half of the inflows in February came from debt funds.
According to data analyzed by brokerage IIFL, 53.91% of all fund inflows in February 2024 came from debt funds alone. Of the net inflows, equities funds constituted 22.7%, hybrids 15.45%, and passive funds 8.24%, among other categories. February 2024 had a slight net outflow from closed-ended funds. The net asset value (AUM) was Rs 54.54 trillion, or around $660 billion, at the end of February.
The most since March 2022, net inflows into equity mutual fund (MF) schemes jumped to Rs 26,860 crore in February. The strong collections from new fund offerings (NFOs) were the primary cause of the 23% month-over-month increase in inflows.
Launches eight new NFOs in February 2024
"The equity segment was also aided by 8 new fund launches during the month which cumulatively garnered Rs 8,692 crore. Among the equity asset class, the Sectoral/Thematic Funds category saw the highest inflows to the tune of Rs 11,262.7 crore. The category was aided by the launch of five new schemes during the month (Groww Banking & Financial Services Fund; quant PSU Fund; SBI Energy Opportunities Fund; WhiteOak Capital Banking & Financial Services Fund; WhiteOak Capital Pharma and Healthcare Fund) which cumulatively garnered Rs 7,178 crores during their NFO period," said Melvyn Santarita, Analyst, Morningstar Investment Research India Private Limited.
Due in part to the introduction of the Bajaj Finserv Large and Mid Cap Fund and the PGIM India Large and Mid Cap Fund, which together raised Rs 925 crore, the Large and Midcap category recorded the second-highest monthly flows of any equity category, totaling Rs 3,156.6 crore. The small-cap category continues to have strong flows despite the decline in net flows from prior months; in February 2024, it brought in Rs 2,922.4 crore, the third largest amount among the equity categories.
"Net flows dipped by 10% compared to last month where it witnessed Rs 3,256.9 crore. While gross purchases in the small cap category continued to be robust over the month, the redemptions in small cap category were the third largest among the equity categories possibly due to investors opting to book profits on the back of a sharp uptick in the performance of this category. Like the Small-cap category, the Midcap category too witnessed a drop in net inflows (-12% compared to January 2024) as it garnered Rs 1,808 crore," said Santarita.
The Focused Fund experienced net outflows of Rs 532.8 crore, making it the only equity category to experience such activity. It's interesting to note that with net inflows of Rs 921 crore in February 2024, the large-cap category experienced its third-highest flows in 20 months. Nevertheless, even though net inflows were positive, in February 2024 it saw the second-highest gross redemption among the equity categories.
"Both the midcap and the small-cap indexes have seen a sharp rally over the last 6 months and 1 year. Consequently, investors have also flocked to these categories with ever-increasing flows. Investors should note that while both the midcap and the small-cap categories have the potential to deliver good returns, these categories inherently are volatile with sharp drawdown risks. Therefore, investors should have a long-term time horizon while investing in these categories. Opting to invest in these categories via the SIP route is a good way by which investors can ride the volatility whilst dollar cost averaging over long periods," cautioned Santarita.
Other fund types with net inflows in February 2024 were mid-cap funds (1,808 Crore), value/contra funds (1,867 Crore), and flexi cap/multi-cap funds (5,207 Crore). The other contributions to equity funds weren't so big.
Strong Hybrid Fluxes; Passive Flows Increasing
With net inflows of Rs 18,288 crore, hybrid funds and solution funds together are becoming a significant flow generator. But in February 2024, just two fund categories accounted for the majority of hybrid flows.
"In the star hybrid category, net inflows into arbitrage funds stood at Rs 11,508 Crore and multi-asset allocation funds saw inflows of Rs 4,043 crore. In addition, equity savings funds saw net inflows of Rs 1,344 Crore and dynamic asset allocation funds (BAFs) saw inflows of Rs 1,287 Crore in February 2024. While arbitrage funds may be chipping away at liquid funds; the latest liquid fund flows numbers show that the arbitrage fund attractiveness for treasury may be saturating. We could see more money flowing back out of arbitrage funds into liquid funds. Multi asset allocation funds, BAFs and equity savings funds appear to be more of a bet on the asset allocation approach to mutual fund investing," said IIFL.
In the past month, ten passive investment schemes—six index funds, one gold exchange-traded fund, and three other ETFs—were introduced. These initiatives raised a total of Rs 1,278 crore.
Three key conclusions from the February AMFI data, according to IIFL:
-
The markets may be waiting for clarification on the direction of interest rates, as debt funds continue to see the majority of their activity in the short end of the yield curve.
-
Even as there has been a trend toward thematic funds and large and mid-cap funds, there has been a slowing in the inflow of capital into mid-cap and small-cap equity funds.
-
IIFL anticipates lower exposure to arbitrage funds and interest re-building in passive funds at higher Sensex and Nifty levels.
