Liquidity concerns continue to weigh on the markets amid a meltdown led by the escalating West Asia conflict, a depreciating currency and a slowdown in the economy. Reflecting cautious investor sentiment, Inflows into equity mutual funds plunged 40 percent to Rs22,908 crore in May from Rs38,440 crore in the previous month, says data released by the Association of Mutual Funds in India (Amfi) on Wednesday.
This is the lowest monthly net inflow into equity-oriented categories in a year. In May last year, the same schemes had received a net inflow of Rs19,013 crore.
The slowdown in mutual funds deploying money into stocks can largely be attributed to a combination of factors. “Equity markets witnessed some recovery from the corrections seen earlier in the year, reducing the urgency among investors to deploy incremental capital during periods of weakness,” says Himanshu Srivastava, principal, manager research, Morningstar Investment Research India.
Secondly, elevated valuations in certain pockets of the market, particularly within the broader segments, may have also prompted some investors to adopt a more measured approach.
In addition, the global backdrop remained uncertain, with concerns around the trajectory of global growth, evolving geopolitical developments, and the future path of interest rates continuing to influence investor sentiment. “Against this backdrop, some degree of profit-booking and temporary caution from lump-sum investors appears to have weighed on overall flows,” Srivastava explains.
Markets have been on tenterhooks since the West Asia conflict started end-February as it saw a consistent exodus of foreign capital from Indian stocks. Since then, it was the domestic institutional investors (DIIs), including mutual funds, pension funds and banks that have been flushing the markets with liquidity. So far this year, DIIs were net buyers of Indian stocks worth Rs4.23 lakh crore, while buying Rs82,670 crore in May. Benchmark indices Sensex and Nifty had slumped 2-3 percent in the same month.
Meanwhile, the amount collected through systematic investment plans (SIP) in May also saw a marginal decline to Rs30,954 crore compared to inflows of Rs31,115 crore in April. An SIP is an investment plan offered by mutual funds that allows investors to invest a fixed amount in a mutual fund scheme periodically.
Gold ETFs outflow
There is a liquidity crunch even in gold exchange traded funds (ETFs). In May, Gold ETFs incurred their first-ever net outflow of Rs725 crore.
“The reversal appears to have been driven by a combination of profit-booking following the earlier rally in gold prices and a shift in investor risk appetite, with some rotation away from safe-haven assets,” says Nehal Meshram, senior analyst, Morningstar Investment Research India.
After strong inflows of Rs24,040 crore in January, momentum tapered in subsequent months, indicating a gradual cooling in incremental allocations.
“Additionally, the rising opportunity cost of holding gold, particularly in an environment of relatively attractive yields in fixed income, may have contributed to the pullback. The pattern of flows also suggests that a significant portion of earlier allocations was tactical in nature, making them more sensitive to price movements and short-term macro cues,” Meshram says.
Overall, the trend points to waning incremental demand after a strong start to the year, with flows becoming more tactical and price-sensitive, rather than indicative of sustained structural allocation shifts.
Recently, four asset management companies—HDFC Mutual Fund, ICICI Prudential Mutual Fund, Kotak Mutual Fund and Nippon India Mutual Fund—have restricted subscriptions in their respective gold ETFs for amounts exceeding Rs25 crore, starting from June 5.
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