Dissecting the mutual fund flows (The
Mains Paper 1 : Economy
Prelims level : Mutual Fund Flows
Mains level : Economic Growth and NBFCs
- The mutual fund industry has managed to close FY19 with strong asset
growth despite it being a hair-raising one for the financial markets.
- During the year, the stock market paused in its bull run on slowing
growth fears, even as the new capital gains tax on equity kicked in.
- The bond markets and consequently debt funds, were roiled by the IL and
FS default and the NBFC liquidity crisis.
- Data from the Association of Mutual Funds of India (AMFI) nevertheless
show that the industry witnessed a 11.4 per cent expansion in assets under
management to ₹23.79-lakh crore in FY19.
Highlighting the mutual fund flows
- Though retail investors kept faith with mutual funds, three trends show
that they weren’t unaffected by rising risks.
- In the equity category, net subscriptions at ₹1.11-lakh crore were 26
per cent lower than the previous year’s figure of ₹1.50-lakh crore.
- Fund purchases varied sharply from month to month depending on how stock
markets fared. After hovering at ₹8,000-12,000 crore between April-October,
they dwindled rapidly to ₹5,100 crore in February 2019 before doubling again
- This suggests that investors continued to take an opportunistic approach
to their equity allocations. Inflows into balanced funds fell precipitously
from ₹89,700 crore in FY18 to ₹6,800 crore in FY19.
- Clearly, fixed income investors who were widely mis-sold balanced funds
for their ‘regular’ monthly dividends were caught unawares by market risks.
- The debt category, shaken by both rate uncertainty and default events,
saw investors withdraw money from long-term products to park it in the
ostensibly ‘safer’ liquid funds.
- Overall, it was the healthy net flows of ₹1.11-lakh crore into equity
funds and the ₹43,350 crore influx into ETFs from the EPFO that powered much
of the asset expansion this year.
- Sustained monthly flows via SIPs armed domestic fund managers with
enough firepower to counter-balance foreign investor pull-outs.
Three problem areas
- While sustained flow into mutual funds in a difficult year is good news,
the above trends flag three problem areas that the industry needs to address
on a war footing.
- One, despite routine disclaimers about market risks, many first-time
investors into both equity and debt funds come in with little understanding
of the risks to their capital.
- Two, debt mutual funds have done a poor job of conveying their inherent
risks to retail investors, with supposedly ‘safe’ products such as Fixed
Maturity Plans and liquid funds suffering default events.
- There is thus a strong case for the industry’s investor education
efforts to veer away from campaigns promoting SIPs or debt funds, to an
honest discussion of how market risks work.
- Finally, with asset sizes scaling up manifold and the performance gap
between active and index products shrinking.
- The industry needs to get more proactive about lowering costs, without
Q.1) Consider the following about Global Atmosphere Watch (GAW).
1. It is non-governmental organization having a consultative status with the
2. It works to provide the scientific community with the means to predict future
3. It keeps a watch on ozone depletion and the increase of ultraviolet (UV)
radiation on earth.
Select the correct answer using the codes below.
a) 1 and 2 only
b) 2 and 3 only
c) 1 only
d) 1, 2 and 3
Q.1) Retail investors have kept faith with equity funds in turbulent times, but
volatility has taken a toll. Comment.