Time To Buy Mutual Funds Aggressively

Historically, election years have been rewarding for the equity MF investors, so do not wait on the sidelines for the elections to get over, for you might miss the bus if you are not invested

The darkest hour is just before dawn. The inflows into the equity MFs have touched their lowest in the last two years. The net inflows into equity mutual fund schemes, including ELSS, came in at Rs 5122 crore for the month of February 2019, which is down by 17% on a monthly basis and is at a two-year low. Last time, we saw such low inflows in March 2017. After that, there was a spurt in inflows, which touched Rs 20362 crore in the month of August 2018.

This leads us to a question: Have we touched the low in terms of inflows and will we see a reversal in the trend and an increase in net inflows into equity mutual funds? Have we left the worst in terms of inflows behind us? To answer this question, we need to understand the factors that have led to such a decline in inflows and whether those factors are going to turn around now.

The reason for such low inflows is consistent underperformance of the MF schemes in terms of returns as compared to even bank fixed deposits in the last one year. Except for the large-cap category, almost all other categories in equity dedicated funds have given lower returns than bank fixed deposits (FDs), assuming an average FD rate of 7 percent.

Such underperformance was reported despite the large surge in the performance of MF schemes we saw in the last one month. The picture of returns was much grimmer one month back (see the graph). The table below shows that, on average, the domestic equity funds have generated returns in the range of 7-11 percent.

So what is the reason for such recent outperformance of the schemes and whether it will attract inflows from the retail investors into mutual fund schemes? Also, how sustainable is the outperformance? Are we witnessing a pre-poll rally and the gains will fizzle out after the elections? (Check the relation between inflows and change in Sensex returns)

Equity rally: Will it sustain or fizzle out?