In the beginning of August, the Association of Mutual Funds in India (AMFI) released its monthly report for the month of July, 2020 containing the net mutual fund outflow and inflow data. According to this research data, equity mutual funds saw a net monthly outflow of around Rs. 2,480 crores in the month of July, 2020. This monthly mutual fund outflow is actually the first ever, since the year 2016. Here’s an in-depth look at some of the reasons why this could have happened.
A drop in risk appetite
The nationwide lockdown imposed as a consequence of the coronavirus crisis led to many people losing their primary revenue stream. Lay-offs, job losses, and suspension of business operations were rife. Also, the recent brutal market sell-off in the month of March 2020 perhaps spooked the investors and caused widespread panic.
As a result, many investors, both retail and institutional, completely lost their risk appetite. This led to the investors pulling their money out from mutual funds. Some investors, upon redeeming their mutual fund investments, reinvested it in direct equity in the hopes of witnessing better overall gains.
Switch to fixed-income securities and safe-haven assets
The drop in the risk appetite of investors directly led to them investing in safe-haven assets and fixed-income securities such as debt funds and gold exchange-traded funds (ETFs). In fact, the monthly net inflow into debt-funds was around Rs. 91,391 crores as on the month of July, 2020. The high levels of net inflow into these funds clearly indicate the investors’ change in priorities.
Due to the increased volatility in the equity market, investors are now clamoring towards secure, better managed, and fixed interest earning investment options. In addition to debt funds, the net inflow into gold exchange-traded funds also witnessed a jump of around 53% month over month. As a matter of fact, the inflows spiked to around Rs. 921 crores in the month of July, up from around Rs. 494 crores in June. This is another clear-cut indication of investors adopting a safety-first approach to their investment capital.
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A major reason for investors redeeming their mutual fund investments has to do with profit booking. After the sudden and extreme market sell-off in March, 2020, the markets witnessed a faster than expected recovery. This led to investors exiting equity mutual funds to cash out the profits earned by them.
The entire profit booking exercise could have been a major contributor to the high levels of net mutual fund outflow for the month of July, 2020. And, when you compare and contrast the decline in equity mutual fund inflows with that of the debt-fund inflow, it becomes quite clear that the investors booked profits and deposited their investment capital in secure fixed-income assets.
Fear of market correction
Investors expecting another sharp market correction is another probable reason why the month of July 2020 witnessed a decline in equity mutual funds. The sudden market sell-off has shaken up the investors and has pushed them towards capital conservation. As a result of this, many investors are seemingly exiting the mutual fund market due to the fear of having to face another deep market correction.
To be fair, the anxiety of investors is not totally unfounded. The current stock market recovery has been no less than miraculous due to the widespread increase in the stock prices despite the economy fighting a crisis. And so, it’s only a matter of time before the bubble bursts. Therefore, investors exiting equity mutual funds early before the next sell-off seems justified.
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In addition to these, another compelling reason for the decline in equity mutual fund inflows could be chalked up to the decreasing cash reserves of investors. Since most of them have been rendered either jobless or with little to no income, they’ve relied on redeeming their mutual fund investments to meet their financial obligations. That said, with the recovery of the job market and the economy as a whole, the equity mutual fund inflows can also be expected to get back on track and return to how things were before the crisis came knocking.
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