Net outflows in equity mutual funds due to profit booking, say analysts

Mutual fund investors are selling their investments in equity mutual funds and they are not in a hurry to invest in equities anymore, shows Amfi data.

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Mutual fund investors are selling their investments in equity mutual funds and they are not in a hurry to invest in equities anymore, shows Amfi data. Reflecting the trend, the equity mutual fund categories saw net outflows of around Rs 2480 crore in July.

“This could be largely attributed to investors booking profit, given the surge in the equity markets, across market segments, in the recent times,” says Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.

Equity-oriented mutual funds witnessed their first major monthly net outflow in a long time. In July, except for ELSS and Focused Fund categories, all the other equity categories witnessed net outflows. Multi cap mutual fund category was the worst hit, followed by mid cap and value fund categories.

Mutual fund advisors also believe that investors may be holding on the surplus cash because of the uncertainties faced by them due to the Covid-19 pandemic.

With equity markets doing well and stable scenario in the fixed income markets, hybrid schemes also witnessed significant net outflows. Balanced Hybrid Fund/Aggressive Hybrid Fund, whose mandate is to invest between 65-80% of assets in equities, witnessed a net outflow of Rs 2,196.3 crores in July.

Srivastava says investors may be viewing this scenario as a good exit opportunity. The hybrid fund category had been witnessing net outflow for some time due to the uncertain scenario prevailed in both equity and debt markets.

Bharat Bond ETF – April 2025 and Bharat Bond ETF – April 2031 got significant traction from investors as they found their investment proposition appealing, says Srivastava. These are passively managed exchange traded funds that invest and replicate the NIFTY Bharat Bond index of respective maturities.

Rushabh Desai, Amfi Registered Mutual Fund distributor, based in Mumbai: "The debt mutual fund categories have stabilised compared to the past months which is a very healthy sign. I believe that many investors are moving to debt for risk mitigation and for procuring higher yields,” he says.

However, credit risk funds have seen outflows – albeit in a smaller scale than the outflows in the last few months. Credit risk funds have been hit hard by the downgrades and defaults in the debt mutual fund space. The news of Franklin Templeton Mutual Funds shutting down six of its debt funds also dented investor sentiment.

However, investors have been moving towards safer debt mutual fund categories like corporate bond fund and banking & PSU funds due to the prevailing mood of risk aversion. Short duration and ultra-short duration funds also saw net inflows in July, according to Amfi data.

“There can be two reasons for this. One, investors want to park their money in shorter maturity funds for easy access of liquidity and secondly to capture higher yields that they provide over liquid funds and traditional fixed deposits. However, I suggest mutual fund investors to remain cautious of the credit risks involved in these schemes as not all of these schemes maintain a high credit profile,” says Desai.

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