When the mutual fund data for March came out, it appeared that the SIP flows and the mutual fund collections were coming down. What is the update after that? Was March an aberration?
March was a normal month but people who interpreted data were in aberration. They failed to understand that in equity mutual fund, there is pure equity mutual fund where we go and invest into direct equity and there are also arbitrage funds where we invest in equity and short the futures.
Impact of flows in a pure equity fund and arbitrage fund is completely different. When there are flows in pure equity fund and we buy, the stock prices can go up but when there are flows in arbitrage fund and we invest that money, it is unlikely to have any impact on prices because we are hedging ourselves by shorting in future. This is like apple and oranges. People who looked it from the top realised that there is a massive drop in the mutual fund flows. They did not realise that the flows had dropped in arbitrage fund.
March is the month where corporate investors, treasury investors book their profit, take their cash out and so there was redemptions in arbitrage fund and not in pure equity fund. Now this simple fact was missed by all the analysts who were crying or maybe they were the bears who wanted markets to come down and they just needed a reason whichever way.
The flows in mutual funds have continued very nicely. More importantly, these flows are coming with systematic investment plan (SIPs). We now have almost Rs 7500 crore plus worth of monthly flows in systematic investment plan. The NPAs also have increased their limit for investment in equity. The provident fund also may increase their limit to invest in equity.
Put NPAs, provident fund and SIP flows together and my guess is that this year we will get anywhere between Rs 1,10,000 crore and Rs 1,25,000 crore from those flows. Plus, there is normal flows through systematic transfer plan odd, lump sum applications in equity funds.
So, I want to assure you that everything is good in mutual fund industry. Flows are coming reasonably well and more importantly, it is coming from matured investors who knows that markets can be volatile and they need to be a long-term investors to make money in equity market.
Now let us roll over to the second part. Indians are saving more. The Economic Times today is reporting that while the deposit growth is at a multi-year low, it just means that Indians are not saving or parking the money into plain vanilla fixed deposits. Nobody is buying those grandmother variety fixed deposits where they found safety. What is the nature of the flow? Is it still towards equity diversified schemes, is it tilted towards midcaps and small caps?,
The flows have shifted from retail invested towards pure equity funds through SIP in balanced funds and short-term bond funds and credit opportunity funds. There has been virtually no flows or negative flows in fixed income funds.
In fixed income funds, the performance has been fairly erratic in last one year plus. At one point of time, we were saying investors to look towards our fixed income funds. Duration funds like gilt or a bond fund will outperform Kotak Bank savings bank account of 6%. We brought it down, saying that will outperform PSU bank savings bank interest of 3.5%.
Then we brought it down, saying that will outperform current account of banks at zero per cent and we actually for a brief period ended up becoming negative return. This has happened primarily because 10-year yield moved from somewhere around 6.10-6.20 all the way up to 7.80 and this despite RBI cutting interest rates in between.
Today we have a unique scenario after many years where five-year government securities are yielding more than the 10-year benchmark government security. This kind of waywardness in bond market impacted performance of duration funds, gilt and bond and hence we have seen negative flows or very marginal flows.
But bulk of the flows in FY18 have come towards equity funds, balanced funds, credit opportunity funds.