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The Rise of ETFs Amidst Outflows in Mutual Funds

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The Rise of ETFs and Index Funds Amidst Outflows in Mutual Funds

By: Tavaga Research

The Indian mutual fund industry witnessed yet another month of net inflows from almost all the categories, barring growth/equity-oriented schemes, hybrid schemes and solution-oriented schemes.

Data released by AMFI (Association of Mutual Funds in India), points out that equity-oriented schemes witnessed a heavy net outflow in December 2020.

Net outflows from equity-oriented schemes stood at Rs 10,147.12 crore. Month-on-month the net outflows reduced by 21.45% as November 2020 witnessed net outflows of Rs 12,917.36 crore.  The number is even greater if we compare the performance of December 2020 with December 2019 which saw net inflows of Rs 4,499.39 crore. Redemptions, too, were considerably higher as investors pulled out Rs 36,220.28 crores in December. Within equity funds, large-cap funds were worst hit, across all categories despite a rising market in the month of December. Except for thematic funds and dividend-yield funds, all categories all registered outflows.

Equity Oriented Schemes
Source: AMFI, Tavaga Research

The income/debt oriented categories saw inflows. Data from AMFI suggests that November 2020 saw a net inflow of Rs 44,984 crore and December 2020 saw a net inflow of Rs. 13,862.77. Within the debt category, Money Market funds and Ultra Short Duration funds saw majority outflows, while investors put in money in Corporate Bond Fund, Overnight Fund and Liquid Fund categories.

Debt Oriented Schemes

The net hybrid outflows increased to Rs 5,932.6 crore in December 2020 from Rs 5,249.18 crore in November 2020 as redemptions were considerably higher month-on-month, with Rs. 16,709.52 crore in December 2020 vs Rs. 11,978.87 Crore in November 2020.

Hybrid MF
Source: AMFI, Tavaga Research

ETFs and Index Funds Emerge as the Clear Winners

Investors continue to pour money into passive instruments such as ETFs, including gold ETFs and index funds on the backdrop of low and negative returns in actively managed mutual funds. The assets under management of ETFs and index funds rose to Rs 285,670.19 crore in December from Rs 261,209 crore in November 2020 as the category witnessed a net inflow of Rs 7,169.47 crore.

ETF MF

The change of attitude by retail investors as they continue to invest heavily in passive instruments despite challenging economic scenarios is worth appreciating. Passive instruments are rapidly gaining traction not only amongst High Net-Worth Individuals (HNIs) but also amongst retail investors. This is evident with the fact that AUM of ETFs and index funds rose to 9.21% of the total AUM in December 2020 from 7.21% in December 2019.

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Are ETFs and Index Mutual Funds the same?

While both the categories invest the money mobilized from investors in a pre-decided benchmark, the primary difference between these two instruments is, index funds are not traded on any stock exchange, however, Exchange-Traded Funds (ETFs) trade on a stock exchange, like any other security.

Below are the differences between ETFs and Index Funds:

Differences between ETFs and Index Funds
Source: Tavaga Research

Why are active mutual funds witnessing outflows and why this trend might continue?

  • Since the beginning of the pandemic caused due to Covid-19, many people have lost their jobs, incomes have fallen, and many small businesses have shut down. As a result, the affected category of retail investors have temporarily stopped their SIPs
  • Retail investors have taken the stock market route and they now prefer buying ETFs and invest money in stocks, directly, rather than purchasing active mutual fund units
  • Many investors have fallen prey to the Franklin Templeton Mutual Fund fiasco and have either stopped or reduced investing in debt schemes as the fixed income category hasn’t lived true to its label!
Equity SIP Inflows
Source: AMFI, Tavaga Research

What future lies in for Passive Investments?

Investing in index funds and ETFs has been the most convenient way to own top stocks. Benefits such as transparency, diversification, low-costs make this category more attractive amongst investors.  While in India, the AUM of passive instruments is less than 10%, developed markets like the US have it over 50%. Moreover, the investor does not have any control over an active fund manager’s investment strategy and is bound to fall prey to the behavioral biases. Also, the outperformance of most indices over active funds has made this category more attractive to investors.

From the data presented above, history will remember 2020 as the beginning of a turnaround in investor behaviour as passive investments will only grow from here.

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2 comments

Dimple September 19, 2020 - 12:44 am

Insightful

Reply
Dimple Chaudhary September 19, 2020 - 12:46 am

Insightful

Reply

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