Equity Mutual Funds Witness Outflows in July. Here’s Why…

Inflows through SIP slipped below the Rs 8,000 crore mark for the second consecutive month in July. SIP inflows were lower at Rs 7,831 crore as compared to 7,927 crore in June and Rs 8,123 crore in May.

Among hybrid schemes, aggressive hybrid funds and arbitrage funds that invest predominantly in equities also witnessed strong outflows of Rs 2,196 crore and Rs 3,732 crore, respectively.

The outflow comes at a time when the equity market has recovered significantly from its lows of March when the indices crashed to its four-year low levels due to the potential impact of the pandemic on the economy.

What is the reason for outflows?

AMFI chief NS Venkatesh, while speaking to media said, "People are booking profits. Maybe they are waiting on the sidelines to re-enter the market."

Though the markets recovered on the easing of lockdown restrictions, stimulus from the government and central bank, and in hopes of a vaccine; uncertainty continues to grip the market due to rising COVID-19 cases and grim economic outlook.

Businesses across various sectors are still grappling with low demand, which could in turn impact corporate earnings in the coming quarters. Consequently, equity mutual fund returns could continue to generate muted returns in the near term.

Therefore, till there are clear signs of the virus abating and economic revival, investors may be wary of equity investments and book profits.

[Read: Should You Stop Investing in Equity Mutual Funds Generating Returns Lower Than a Bank FD?]

What should investors do?

As an investor, you must not let the fear of uncertainty grip you. Volatility is the very nature of equity investment. Some bets of the fund manager may not payoff in the short term due to unforeseen events, but over the long term, it can reward you with handsome gains.

Therefore, it makes sense to avoid any kneejerk reaction and hold on to your investment. By redeeming your investment during a market downturn, you would turn a notional loss into an actual loss. It could also lead to a shortfall in achieving your desired corpus.

Given the current circumstances, it's difficult to rightly predict where the markets are headed. However, the markets do have the potential to bounce back sharply once the conditions improve. In fact, market downturns give you the valuable opportunity to buy more units at lower rates and benefit from the recovery.

[Read:  Do You Own Equity Mutual Funds That Have Underperformed Their Benchmark? Read This!]

Ideally, one should exit the equity mutual fund scheme only under the following circumstances:

• Your investment has grown to the desired corpus

• To gradually shift to safer avenues when your financial goal is approaching

• The scheme underperforms consistently as compared to the benchmark and most peers

• The fund objective changes and is no longer in congruence with your own objective

• The fund risk profile changes and doesn't match your current risk appetite

• In case of a financial emergency when you have no other option

So if you are holding worthy diversified equity schemes in your portfolio based on your personalized asset allocation, and if you have a long term investment horizon, you need to be patient about the short term underperformance.

It would potentially generate better rates over medium to long term through smart stock/sector selection strategy. If you are unsure if you have invested in the right scheme, get a portfolio review done.

To evaluate if you are holding potential winners, you need to assess the schemes on various quantitative and qualitative parameters, such as performance track record compared to the benchmark index and category peers, risk-return-parameters, portfolio quality, as well as the efficiency of the fund manager and the fund house.

At PersonalFN, we select mutual funds on the basis of 5 variable tests, viz. Systems and Process, Market cycle performance, Asset management style, Risk-reward ratios, and Performance Track Record.

So, each fund recommended by PersonalFN has to go through our stringent process and tested on these five essential parameters.

Here are some stringent qualification parameters that our expert research team looks at before recommending any fund:

1. The fund manager possesses decent experience and is not overloaded with multiple schemes. Moreover, the fund house should have well-defined investment systems and processes in place.

2. The fund has successfully generated positive returns across market cycles, viz. bullish and bearish. It is important the fund has the ability to limit your losses during a crisis.

3. The portfolio should not be too concentrated, highly churned or low quality. It should be managed efficiently.

4. The fund must offer adequate return for the risk incurred. It should not be putting your money to unnecessary risk.

5. The track record of the fund in terms of generating return on investment over various time periods, i.e. 1 year, 3 years, 5 years, and so on.

This matrix was specially developed by the in-house research team at PersonalFN. We believe it's probably one of the best and most reliable fund selection methodologies in the industry today.

If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Each fund recommended by PersonalFN goes through our stringent process involving both quantitative and qualitative parameters (as mentioned above before), providing you with Buy, Hold and Sell recommendations on equity and debt mutual fund schemes.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Warm Regards,
Divya Grover
Research Analyst

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