According to data released by the Association of Mutual Funds of India (AMFI), the total size of the funds managed by the mutual fund industry has dipped by Rs 66,000 crore in May 2018 from Rs 23.25 lakh crore to Rs 22.59 lakh crore.
The dip has been mainly caused by redemptions from income and liquid schemes. The fund flows into these schemes tend to be quite volatile since they are mainly the preserve of corporate treasuries and High Net-worth Individuals (HNIs). The investors often make large redemptions at specific times, such as when the advance tax is due. However, the fall in their returns due to rising interest rates is likely to be a contributing factor.
Equity schemes saw a marginal slowdown, not a dip. Net inflows were Rs 10,444 crore in May compared to Rs 10,724 crore in April. ELSS funds, although equity in nature, are counted separately by AMFI. Flows into ELSS funds rose from Rs 447 crore in April to Rs 906 crores in May 2018.
Flows into arbitrage funds (classed as equity for tax purposes) fell from Rs 1,238 crores to just Rs 720 crore. The returns on arbitrage funds tend to move in sync with interest rates. The most common type of arbitrage strategy makes money on the difference between a stock’s price and its futures price and generates returns that are close to the prevailing interest rate.
Income funds saw net outflows of Rs 20,407 crore and liquid funds saw outflows of Rs 46,724 crore. Gilt funds saw outflows of Rs 428 crore, continuing a trend in April (outflows of Rs 436 crore). Gilt funds are one of the worst affected fund categories in the rising rates environment. The Government’s 10-year bond yield crossed 8% after the recent RBI monetary policy decision to hike interest rates.
Flows into balanced funds slowed from Rs 3,500 crore in April to Rs 2,666 crore in May. Balanced funds have also been hit by rising rates due to their debt component, as we explain here.