Mutual funds: why equity funds are popular again
Investors in equity mutual funds quickly gain confidence in the market outlook and scale up their investments. Equity-focused mutual funds recorded the highest monthly net inflows of Rs 10,083 crore in May, almost three times that of last month and the highest since February of last year. Over the past three months, these funds have recorded net inflows after net outflows for eight consecutive months. Redemptions also fell significantly in May compared to the previous month, according to data from the Association of Mutual Funds in India.
Actions are gaining momentum
So why are investors putting money back into equity mutual funds?
Markets hitting new highs thanks to robust quarterly earnings, chances of a faster recovery in economic activity and a drop in Covid-19 cases after the second wave have led to renewed confidence. Moreover, with the performance of below-average debt funds – the category reported net outflows of Rs 44,512 crore in May, driven by liquid, overnight and corporate bond funds – the investors who stayed on the sidelines are slowly coming back.
With lower interest rates on small savings plans and bank deposits, many investors are turning to hybrid and equity-based mutual funds. Bank deposits rose 9.7% as of May 21 from around 11% a year ago.
Himanshu Srivastava, associate director, Manager Research, Morningstar India, says a significant improvement in the coronavirus situation in recent weeks would have reassured investors. “Strong quarterly results, a positive long-term earnings growth outlook, and diminishing concerns about any serious impact of the second wave of the pandemic on the economy, are also said to have heightened sentiments. This would have prompted investors to reallocate their assets to equities, ”he said.
ELSS loses some traction
During the month of May, the Equity Linked Savings Scheme (ELSS) reported net outflows of Rs 290 crore as many investors recorded profits. Analysts say that inflows to ELSS typically increase after September, when individuals begin their tax planning and peak in the three months through March. Many people invest in ELSS to save tax as one gets a deduction of Rs 1.5 lakh under section 80C of Income Tax Act. Investors should note that even in ELSS the systematic investment plan works best as it works on average cost in rupees.
Hybrid remains investor favorite
In line with the trend, the hybrid plans category reported net inflows of Rs 6,217 crore, led by arbitrage funds at Rs 4,521 crore in May. Fixed income investors invest in hybrid programs such as dynamic asset allocation / balanced benefit funds. For risk averse investors, hybrid funds are a better choice because they offer higher returns than debt funds and are not as risky as equity funds.
There are various combinations of equity and debt investments in hybrid programs and investors should select funds based on their risk appetite. Investors can create a balanced portfolio and earn regular income and long-term capital appreciation. Equity-focused hybrid funds will invest at least 65% of their total assets in equity-linked instruments and the remainder in debt-linked instruments. Likewise, a debt-focused hybrid fund will invest at least 60% of its total assets in fixed income securities such as bonds, debentures, government securities and the rest in stocks.