Equity mutual funds witnessed outflows for the first time since June 2016 in the month of July at Rs 2,480 crore, according to data released by the Association of mutual funds in India (AMFI). Notably, investments in equity mutual funds were on a downward trend between April and June 2020.
All categories of equity funds, excluding focused funds and ELSS, saw outflows during the month. Outflows were the highest in the multicap funds category at Rs 1,033 crore, followed by mid cap funds (Rs 579 crore), value/contra funds (Rs 549 crore), large & midcap funds (Rs 467 crore), and large cap funds (Rs 365 crore).
Inflows through SIP slipped below the Rs 8,000 crore mark for the second consecutive month in July. SIP inflows were lower at Rs 7,831 crore as compared to 7,927 crore in June and Rs 8,123 crore in May.
Among hybrid schemes, aggressive hybrid funds and arbitrage funds that invest predominantly in equities also witnessed strong outflows of Rs 2,196 crore and Rs 3,732 crore, respectively.
The outflow comes at a time when the equity market has recovered significantly from its lows of March when the indices crashed to its four-year low levels due to the potential impact of the pandemic on the economy.
Graph: Equity mutual funds see first monthly outflow in four years
What is the reason for outflows?
AMFI chief NS Venkatesh, while speaking to media said, “People are booking profits. Maybe they are waiting on the sidelines to re-enter the market.”
Though the markets recovered on the easing of lockdown restrictions, stimulus from the government and central bank, and in hopes of a vaccine; uncertainty continues to grip the market due to rising COVID-19 cases and grim economic outlook.
Businesses across various sectors are still grappling with low demand, which could in turn impact corporate earnings in the coming quarters. Consequently, equity mutual fund returns could continue to generate muted returns in the near term.
Therefore, till there are clear signs of the virus abating and economic revival, investors may be wary of equity investments and book profits.
What should investors do?
As an investor, you must not let the fear of uncertainty grip you. Volatility is the very nature of equity investment. Some bets of the fund manager may not payoff in the short term due to unforeseen events, but over the long term, it can reward you with handsome gains.
Therefore, it makes sense to avoid any kneejerk reaction and hold on to your investment. By redeeming your investment during a market downturn, you would turn a notional loss into an actual loss. It could also lead to a shortfall in achieving your desired corpus.
Given the current circumstances, it’s difficult to rightly predict where the markets are headed. However, the markets do have the potential to bounce back sharply once the conditions improve. In fact, market downturns give you the valuable opportunity to buy more units at lower rates and benefit from the recovery.
Ideally, one should exit the equity mutual fund scheme only under the following circumstances:
- Your investment has grown to the desired corpus
- To gradually shift to safer avenues when your financial goal is approaching
- The scheme underperforms consistently as compared to the benchmark and most peers
- The fund objective changes and is no longer in congruence with your own objective
- The fund risk profile changes and doesn’t match your current risk appetite
- In case of a financial emergency when you have no other option
So if you are holding worthy diversified equity schemes in your portfolio based on your personalized asset allocation, and if you have a long term investment horizon, you need to be patient about the short term underperformance.
It would potentially generate better rates over medium to long term through smart stock/sector selection strategy. If you are unsure if you have invested in the right scheme, get a portfolio review done.
To evaluate if you are holding potential winners, you need to assess the schemes on various quantitative and qualitative parameters, such as performance track record compared to the benchmark index and category peers, risk-return-parameters, portfolio quality, as well as the efficiency of the fund manager and the fund house.
This article first appeared on PersonalFN here