Fund houses see increase in redemption pressure

At first glance, India’s mutual fund industry appears to be in fine shape. Net fund inflows — gross inflows minus outflows — are still positive, albeit only just. But a closer scrutiny of gross redemptions to sales ratio suggests that the scales are increasingly tilting in favour of the former.

In August, the month in which broader indices continued their northward climb, gross redemption to gross sales ratio reached 65.9%, compared with a median of 55% in the last 24 months, industry data showed. Gross redemptions in August stood at ₹14,948 crore, the highest in the past five months.

Net inflows into equity mutual funds have been consistently dropping over the past four months, declining to ₹7,734 crore in August. This is 26% lower than the average of the past two years during which funds invested a total of ₹231,031 crore in local equities. By contrast, overseas funds invested ₹26,010 crore in the same period.


There are a couple of reasons behind the gross redemption to gross sales ratio heading northward. First, about 80% of the top 200 equity funds have underperformed their benchmarks year to-date. In the past 10 years, on an average, 33% of the top 200 funds underperformed their benchmark indices, Bloomberg said, citing data compiled by Goldman Sach.

Redemption Pressure
Positive historical returns have been pivotal in drawing savers to mutual funds. The last one-year historical positive returns matter a lot to investors as nearly 51% of industry’s equity assets are held for a year on an average, industry data showed. The one year SIP returns of 107 schemes of a total of 137 have been negative in the last one year, according to Accord Fintech.

Second, the appeal of equity is waning as the spread between the index earning yields— the inverse of P/E—and bond yield has dropped to a 10-year low. Hence, fresh equity investments are relatively less attractive now.