[Editorial Analysis] Dissecting the mutual fund flows

Mains Paper 3 : Economy

Prelims level : Mutual Fund Flows

Mains level : Economic Growth and NBFCs

Context

• 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 in March.

• 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.

Conclusion

• 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 regulatory intervention.

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Prelims Questions:

Q.1) Consider the following about Global Atmosphere Watch (GAW).

1. It is non-governmental organization having a consultative status
with the United Nations.

2. It works to provide the scientific community with the means to
predict future atmospheric states.

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

Answer: B

Mains Questions:

Q.1) Retail investors have kept faith with equity funds in turbulent times, but volatility has taken a toll. Comment.

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