Passive Mutual Fund flows dominated the September quarter

One way to assess the changing colour of investor preferences is to look at the flows into mutual funds. Here we take a look at the flows in the Q2FY23 quarter i.e. the quarter ended September 2022. Here is the broad picture. There was selling or redemptions in debt funds and that was largely on account of the expectations that rates would rise further. This is negative, especially for the bond funds that have longer duration since such bonds are at the highest risk of capital depletion due to rising interest rates. As of September 2022, the net AUM of Indian mutual funds stood at Rs38.42 trillion. 

The big story in September 2022 quarter was all about passive flows. Yes, debt funds aw outflows and equity funds saw net inflows. However, it was the passive funds or index based funds that saw the bulk of the inflows. As active fund managers struggle to beat the market indices on a consistent basis, the shift is visible. Investors are salivating at the combination of index returns and low costs that is being offered by these passive funds. What is material is that the Indian investors is coming of age and knows which side of the bread is buttered.

Read more: Are more mutual fund investors turning to passively managed funds?

Debt funds in Q2FY23, saw net outflows, albeit subdued

For the September 2022 quarter, debt funds were once again negative. However, the net outflows from debt funds in the quarter at Rs11,278 crore was much lower compared to Rs70,213 crore in June 2022 quarter and the fearsome Rs118,010 crore in March 2022 quarter. If you look at the AUM of debt funds overall, it has tapered by 231 points in terms of share and now stands at a measly Rs12.42 trillion. The share of debt funds in the sweepstakes has fallen sharply as investors sell out of debt funds and into equity and passive funds in India, where the promise is a lot higher.

There were gainers too in the MF debt fund flows with positive inflows of Rs36,642 crore into overnight funds. Typically, the medium and long duration funds were the worst hit. Big outflows were seen in the case of Liquid Funds at Rs17,567 crore, Banking & PSU Funds at Rs8,415 crore, Floater funds at Rs8,085 crore, Low Duration Funds at Rs5,341 crore and Corporate Bond Funds which saw net outflows of Rs4,835 crore. Overall, people were wary of rising rates and the chances of default in lower quality debt amidst very trying economic conditions.

Equity funds in Q2FY23, saw net inflows across all categories

Net inflows in the September 2022 quarter into equity funds overall stood at Rs29,118 crore. That is relatively lower compared to equity funds inflows of Rs49,918 crore in the June 2022 quarter, Rs50,363 crore in the March 2022 quarter and Rs41,912 crore in the December 2021 quarter. It was an all round performance with all categories of equity funds seeing net inflows during the quarter ended September. The buying truly appears to be broad based in the equity funds space. Total equity funds AUM at Rs14.86 trillion saw market share increasing by 202 basis points sequentially at 38.10%. 

The investors are getting a lot more choosy about the quality of funds purchased. For instance, the big inflows were seen in Flexi-Cap funds at Rs7,524 crore, mid-cap funds at Rs4,875 crore, small cap funds at Rs4,865 crore and sector funds at Rs3,367 crore. Even in the remaining categories of equity funds, the flows were still positive but much smaller. People are doing a lot of alpha hunting but the good news is that there is a lot more belief in equities and that must be largely attributed to the persistence of SIPs of late as well as the positive flows from NFOs or new fund offerings.

Passive funds in Q2FY23, were the real star of the flow season

Passive funds had another fantastic September 2022 quarter with net inflow much better than the active equity funds at Rs42,963 crore. That is almost at par with the previous quarters ended March 2022 and June 2022. In terms of specifics, Index Funds/ETFs saw inflows of Rs16,885 crore while the other ETFs saw inflows of Rs25,859 crore. But the real story was in the way the importance of passive funds have grown. Now, Passive funds contribute 15.58% of total MF AUM, which is the highest it has ever been. Passive funds are not only getting better share, but are also performing extremely well in the markets.

The good news from the above data flow is that the investors are starting to think beyond traditional active equity and active debt funds. Alternate asset classes like hybrid funds and passive funds now account for AUM share of 28.93%. It is emerging as the third dimension for Indian investors.