Mutual funds: Why equity MFs are a hot favourite again

With interest rates of small savings schemes and bank deposits falling, many investors are switching to hybrid and equity-oriented mutual funds. Bank deposits grew at 9.7% as on May 21 as compared to around 11% a year ago.

Equity mutual fund investors are fast gaining confidence on the market outlook and are stepping up their investments. Equity-oriented mutual funds reported the highest monthly net inflows of Rs 10,083 crore in May, almost thrice than that of last month and the highest since February last year. For the past three months, these funds have reported net inflows after net outflows for eight consecutive months. Redemption, too, fell significantly in May as compared with the previous month, according to data from Association of Mutual Funds in India.

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Equities gain momentum
So, why are investors once again pumping money into equity mutual funds?

The markets touching new highs on the back of robust quarterly earnings, chances of faster pick-up in economic activities and declining Covid-19 cases after the second wave have led to renewed confidence. Moreover, with the performance of debt funds below par— the category reported net outflows of Rs 44,512 crore in May led by liquid, overnight and corporate bond funds—investors who were staying on the sidelines are slowly getting back.

With interest rates of small savings schemes and bank deposits falling, many investors are switching to hybrid and equity-oriented mutual funds. Bank deposits grew at 9.7% as on May 21 as compared to around 11% a year ago.

Himanshu Srivastava, associate director, Manager Research, Morningstar India, says significant improvement on the coronavirus situation over the last few weeks, would have provided comfort to investors. “Good quarterly results, positive earnings growth outlook over the long-term and waning concerns of any severe impact of the second wave of the pandemic on the economy, would have also boosted sentiments. This would have prompted investors to again allocate assets towards equities,” he says.

ELSS loses some traction
During the month of May, equity-linked savings scheme (ELSS) reported net outflows of Rs 290 crore as many investors booked profits. Analysts say typically inflows into ELSS pick up after September when individuals start their tax planning and peak during the three months to March. Many individuals invest in ELSS to save tax as one gets deduction of Rs 1.5 lakh under section 80C of the Income Tax Act. Investors must note that even in ELSS, systematic investment plan works better as it works in rupee cost averaging.

Hybrid remains investors’ favourite
Keeping with the trend, the hybrid schemes category reported net inflows of Rs 6,217 crore, led by arbitrage funds at Rs 4,521 crore in May. Fixed income investors are investing in hybrid schemes such as dynamic asset allocation/balanced advantage funds. For risk-averse investors, hybrid funds are a better choice as they give higher returns than debt funds and are not as risky as equity funds.

There are various combinations of equity and debt investments in hybrid schemes and investors have to select the funds based on their risk appetite. Investors can create a balanced portfolio and earn regular income along with capital appreciation in the long-term. Equity-oriented hybrid funds will invest minimum 65% of its total assets in equity-related instruments and the rest in debt-related instruments. Similarly, a debt-oriented hybrid fund will invest a minimum of 60% of its total assets in fixed-income securities like bonds, debentures, government securities and the rest in equity.