The inflows into equity mutual funds (MFs) remained strong in the financial year ended March 31 despite weak returns and volatile equity markets. Steadily growing inflows through systematic investment plan (SIP) remain the bright spot and key differentiator in the current cycle.
SIPs have contributed nearly one-third to equity flows and AUM in the last financial year, said Kotak Institutional Equities.
The industry has not seen a year of outflows since FY14, barring the Covid-impacted FY21. While historically, flows closely track returns with a lag, strong flows in the past few months despite weak returns could indicate a temporary disconnect or a more long-term view of returns, it added.
Robust equity flows
MFs have continued their run of strong net equity flows. Net flows in March were the highest since last May. Net inflows in equity and hybrid funds were down at ₹1.5-lakh crore against ₹2-lakh crore recorded in FY22. The industry had registered an average inflow of ₹1-lakh crore in the last 10 years, except for the Covid-impacted FY21.
Data over the past 10 years, show a reasonable correlation between one-year benchmark returns and MF net equity flows six months later, with this relationship being stronger in the past five years.
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However, there has been a contrast in the past few months with market returns stagnating at low-single digit, while net inflows have rebounded sharply from near zero in last November. “Flows (especially bulk flows) could fall unless returns improve in the next six months,” said the report.
Steadily-growing SIP flows have been a defining feature of the current cycle with SIP flows in FY23 growing 25 per cent year-on-year basis to ₹1.6-lakh crore against 20 per cent decline in overall active equity flows.
Interestingly, the SIP book has seen lower churn, evident from the SIP AUM growth of 20 per cent year-on-year as against 10 per cent growth in overall active equity AUM. The SIP book’s contribution to net inflows and AUM has improved over the years to nearly 35 per cent. While equity returns in the past year have been lacklustre, three-year return of 20 per cent compounded annual growth rate is likely to have sustained the SIP flows.