Lumpsum flows into equity mutual funds hit a new low; debt inflows await interest rate peak

The lumpsum gross inflows into the equity mutual funds, excluding NFOs, stood at Rs 179 billion in October 2022 – the lowest since November 2020, said the latest Mutual Fund Report by Motilal Oswal Financial Services. However, SIP inflows have been touching new highs, with flows at Rs 130b in October 2022. SIP closures have remained in the 1-1.1m range for the past nine months.

The report indicates that the slowdown in lumpsum investments has been on account of large HNIs waiting for a better entry point as the equity market is close to a new high, weakness in flows from lower-end customers in rural areas, and reduced NFO activity by large AMCs in the equity segment.

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Redemptions in the equity segment have been steady. The report suggests that the redemptions may gather momentum when there is a sharp rally in the equity market and the share of equity in the portfolio allocation models of wealth managers rises above certain thresholds.

HNIs have shown a rising propensity towards investing in the passive funds, driven by the formalization of their investment process. HNIs also prefer to invest in alternative assets (such AIFs and PMS) as they offered relatively better returns in the past couple of years. This, despite the high cost that HNIs have to bear, when compared with MFs.

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The report also said that with the RBI raising interest rates, fixed deposit rates have moved higher. Weighted average term deposit rates have risen by 35bp/30bp for Private/PSU Banks. With the expectations of further rate hikes, fixed deposits may find favor with HNI customers. On the other hand, large corporations are anticipating further rate hikes, at least until March 2023. Institutions are also considering investments in fixed deposits and NCDs v/s debt funds to avoid a notable MTM impact. With another 50bp hike, or if the yield on the 10-year G-Sec touches 8%, flows may shift to long duration Debt assets, translating into better yields.

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