The Indian mutual fund industry saw a significant change in the investment trends in the last month of the year as the inflows of equity mutual funds realised a sequential decrease. The latest figures published by the industry regulator, the Association of Mutual Funds in India (Amfi), show that the amount of money that entered equity-oriented schemes in the form of net inflow stood at ₹28,054 crore in December.

This is a decline of more than 6% as compared to the previous month of November, when inflows into the category were ₹29,911 crore. Although the momentum was slightly toned down, the December amount was still high compared to the ₹24,690 crore in October, indicating that the interest in equity investments is still inherently strong.

Performance dynamics across equity inflows

The liquidity of the inflows of equity was softened, and there was a marginal contraction in the total asset base of the mutual fund industry. The total Assets Under Management (AUM) of the industry dropped and stood at ₹80.23 lakh crore as of December, compared to the ₹80.80 lakh crore of November. This drop in overall asset base was largely attributed to major volatility and withdrawals in other market segments, which overruled the constant interest displayed in equity and gold-related instruments.

Although the total number of inflows of equity slowed down, however, most sub-categories of the equity segment still registered positive traction during the entire month of December. The preference of the investors towards particular styles of fund management was evident. 

Flexi-cap funds became the best performer of the month, as they took the first position with net inflows of ₹10,019 crore. This was a significant rise from the ₹8,135 crore that the category attracted in November, an indicator of the rising popularity of flexi-cap strategies that provide fund managers with the freedom to invest in different market capitalisations based on market conditions.

A healthy participation level was also observed in other categories. Second in terms of preference was the mid-cap fund, which attracted ₹4,176 crore net funds. This was followed closely by the large and mid-cap category, which experienced inflows of ₹4,094 crore. Small-cap funds, where retail investors have traditionally shown a lot of interest, saw inflows of ₹3,824 crore.

Inflow into large-cap funds, which is often viewed as a safer investment option in times of uncertainty, was ₹1,567 crore. The positive movement that is still taking place in these segments is a sign that there are still more growth opportunities at the ends of the market capitalisation spectrum that are being sought out by investors.

Challenges and profit booking

Most of the categories of equity performed well, but there were several smaller segments that experienced headwinds in the month. The most striking exceptions to the positive trend were the equity-linked saving scheme (ELSS) and dividend yield fund because both experienced net outflows. The ELSS funds registered an outflow of ₹718 crore, and the dividend yield funds recorded an outflow of ₹254 crore.

Analysts attribute such exits to profit-booking and seasonal tax-related adjustments as the driving factors. With investors frequently targeting the year-end of the calendar year, a large number of them tend to rebalance their portfolios or sell some of their holdings to meet certain financial needs, resulting in these localised contractions.

The wider mutual fund sector was not spared, as a huge capital flight was experienced in debt-related funds. In December, the staggering outflow recorded by debt mutual funds was ₹132 lakh crore. This marked a severe increase, as compared to the relatively modest net outflows of ₹25,692 crore experienced in November.

These massive redemptions in the debt segment contributed majorly to the industry reporting overall net outflows of ₹66,591 crore in the month. Such withdrawals at the end of the year of debt schemes are normal since institutional and corporate investors will tend to withdraw funds to fulfil tax and other financial commitments at the end of the year.

In the midst of the volatility of the equity and debt markets, there was again, and to a greater extent, an interest in safe-haven assets by the investors. The increase in popularity of gold exchange-traded funds (ETFs) was tremendous in December. The net inflows into gold ETFs increased to a huge record of ₹11,647 crore against ₹3,742 crore in November and ₹7,743 crore in October. This tendency indicates that investors are planning to diversify their portfolios against market fluctuations by becoming more exposed to precious metals.

Conclusion

December was a complicated month for the Indian mutual fund industry. Although the 6 per cent fall in equity inflows to ₹28,054 crore indicates a slight slowdown in the brisk buying witnessed over the past few months, the fact that the flexi-cap funds and mid-cap funds are still on a growth path indicates the underlying strong point.

The asset base of the industry was put under the strain of the heavy debt fund redemption, but the boom in the investments of gold ETFs tends to the conservative and careful approach of the investing masses. With the industry going through these changes, the data highlights a picture of selective equity participation and a tactical move towards the end-of-year safety and tax efficiency.