Investors stick to mutual funds despite LTCG tax and volatility

Equity mutual funds continued to receive robust fund inflows in February 2018 despite reintroduction of the long-term capital gains (LTCG) tax in the Union Budget for FY18-19 and a volatile month, thus reflecting investors' commitment to long-term investments. Equity mutual funds and ELSS fundsreceived a net inflow of ~Rs14,680cr in February 2018, a growth of 10% mom and 169% yoy. During FY18 (till February), mutual funds and ELSS funds saw net inflows of ~Rs1.6 lakh crore against ~Rs62,000cr recorded in the corresponding period of FY17, as the equity market was making new highs every month.

Meanwhile, balanced funds have witnessed a decline in inflows in February 2018 against the previous month. However, balanced funds received net inflows of ~Rs83,000cr during FY18 (till February) as compared to ~Rs30,600cr recorded in the corresponding period of the previous fiscal.

Income funds and Gilt funds continued to witness net outflows as bond yields rose continuously in fear of a rise in inflation and fiscal slippage. As on March 9, 2018, 10-year government bond was trading at a yield of 7.7%, up ~119bps in last 6 months.

(in Rs crore)

	Net Inflow / (Outflow) Feb 2018	Net Inflow / (Outflow) Jan 2018	Net Inflow / (Outflow) Feb 2017	Outflow For the Year to Date - Current Year	Net Inflow / (Outflow) For the Year to Date - Previous Year
INCOME	-9,799	-9,871	10,864	7,868	1,76,880
INFRASTRUCTURE DEBT FUND	140	-	-	340	-
EQUITY	14,683	13,404	5,465	1,53,799	54,960
BALANCED	5,026	7,665	4,562	83,003	30,658
LIQUID/MONEY MARKET	1,223	96,552	8,227	52,043	1,10,973
GILT	-1,621	-1,192	-722	-2,802	-2,175
ELSS - EQUITY	1,585	1,986	997	10,613	7,191
GOLD ETFs	-94	-110	-46	-773	-695
OTHER ETFs	953	-2,234	930	18,876	20,455
FUND OF FUNDS INVESTING OVERSEAS	-4	-41	-4	-418	-315
	12,092	1,06,159	30,273	3,22,549	3,97,932

Source: AMFI

Liquid funds have seen a modest net inflow of ~Rs1,200cr in February 2018 compared to a significant net inflow of Rs96,500cr in January 2018. Further, there is a phenomenon in liquid funds that they witness huge net outflow in December and similar inflows in January each year, as shown in the chart below). This is because corporates withdraw their money from liquid funds in December, before the quarter ends, and reinvest in January every year. Corporates are the largest investors in liquid funds. However, this phenomenon was not seen in 2016-17, which could be due demonetization (November 2016).

Source: AMFI

In February 2018, the AUM of the Indian mutual fund industry stood at Rs22.2 lakh crore, down ~Rs20,900cr  due to outflows from debt funds. 

(Rs in Crore)

	AUM as on Feb 2018	% to Total AUM	AUM as on Jan 2018	% to Total AUM	AUM as on Feb 2017	% to Total AUM
INCOME	7,91,494	35.6	8,01,405	35.8	7,94,679	44.4
INFRASTRUCTURE DEBT FUND	2,445	0.1	2,295	0.1	1,891	0.1
EQUITY	6,95,870	31.3	7,03,930	31.4	4,63,296	25.9
BALANCED	1,74,468	7.9	1,76,087	7.9	77,126	4.3
LIQUID/MONEY MARKET	3,87,269	17.4	3,81,930	17.0	3,31,777	18.5
GILT	11,625	0.5	13,332	0.6	15,799	0.9
ELSS - EQUITY	80,972	3.6	82,974	3.7	56,724	3.2
GOLD ETF	4,830	0.2	4,906	0.2	5,766	0.3
OTHER ETFs	69,848	3.1	72,879	3.3	40,147	2.2
FUND OF FUNDS INVESTING OVERSEAS	1,505	0.1	1,537	0.1	1,842	0.1
	22,20,326	100.0	22,41,275	100.0	17,89,047	100.0

 Source: AMFI

Since the Indian equity market has entered a phase of consolidation fearing four rate hikes in the US in 2018, rising crude oil prices, increasing bond yields and uncovered frauds at state-owned banks, investors should focus on the longevity of investments. In debt mutual funds, investors should invest in low duration debt funds since the fear of a rise in inflation could drag the returns of Gilt funds and long-term debt funds in 2018.

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