At a time when the benchmark indices have touched new highs, the broader market has seen steep correction which has led to over 70% year-on-year decline in net sales of equity mutual funds in August. The fall in net asset value (NAV) of many equity mutual fund schemes may see slowdown in inflows through systematic investment plans.
Debt mutual funds too continued to see outflows in August as yields hardened because of weakening rupee, rising oil prices and widening current account deficit. Debt mutual funds as a category saw net outflows of Rs 6,800 crore in August this year as against net inflows of Rs 9,810 crore in the same month last year. In fact, debt funds have seen net outflows in four out of five months in this fiscal so far.
Falling equity inflows
Net sales of equity-and equity-linked mutual funds (includes equity, arbitrage funds, and ELSS) have declined to Rs 5900 crore in August this year from the peak of Rs 20,400 crore a year ago. The average net sales during March to August 2018 stood at Rs 8900 crore, a decline of 50% from the average during the GST dislocation. The available data, according to a report by Emkay Research, says that the appetite for mutual funds and possibly also direct investment of retail investors has peaked out around early 2018.
The report underlines that the aftermath of GST dislocation and demonetisation created idle liquidity which found its way into the equity markets, creating a valuation distortion, especially in the mid- and small-cap space. “The mutual fund allocation towards equity increased significantly in this period and has started tapering in last few months. The three-month lag correlation between net sales of equity mutual funds with mid-cap and benchmark indices was found to be high at 0.80 in the past two years. The sustenance of negative NAVs of equity mutual funds is a risk for the broader market,” writes Dhananjay Sinha, head of research at Emkay Global in a note to clients.
Similarly, Rahul Parikh, chief executive officer, Bajaj Capital says SIP inflows seem to have contributed majorly to the dip as investors remained wary of expensive valuations amid rising concerns over high oil prices and rupee depreciation.
Only eight of the BSE-30 Index and 17 of the Nifty-50 Index stocks have outperformed their respective benchmark indices. While market volatility remains the most important risk in equity investment either directly or through mutual funds, one should look at equity investments for the long term. If the volatility continues for a long time, then investors should be concerned as it may wipe out a large part of past gains. Ideally, to beat market volatility investors should invest via systematic investment plans (SIPs) of mutual funds. Investors must take note of the fund manager, his long-term track record, asset management company, its philosophy, fund expenses and investment style.
Brijesh Damodaran, managing partner of BellWether Advisors LLP, says short volatile phases should be looked at as an opportunity to increase equity allocations from a medium- to long-term perspective. “Retail investors too need to understand that for any substantial wealth creation, especially in the context of equities; long-term investment is what they should be aiming for. Equities would always bear the risk of being volatile in the near term but as the investment horizon increases, the probability of consistent returns increase,” he says.
Retail investors should invest in equity markets through mutual funds, ideally through the SIP route. Since they invest in a basket of stocks and actively manage it, investors get access to a portfolio, which is less volatile compared to direct stocks and do not need regular tracking or expertise. Moreover, investing through SIP averages the investor’s cost of investment, which is an advantage in volatile markets.