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Channel checks: Equity flows muted; debt outlook positive

* We interacted with a few large Mutual Fund distributors (having AUM in excess of INR10b) and institutional sales representatives to sense the pulse of customer behavior in the current environment.

* Correction in equity markets and a sharp increase in the 10-year G-Sec yield play a meaningful role in gauging customer interest for investing in Mutual Funds.

* Over the past couple of months, a few major trends have emerged: a) absence of NFOs because of the regulation, b) decline in AUM, c) sustained high outflows from the debt segment and d) decline in new SIP account openings.

* Our interactions with the channel partners indicate the following key points: 1) slowdown in flows is emerging from the business community where there are working capital-related pressures, 2) commission payouts have not been increased, 3) slowdown in SIP accounts owing to Fintech players, 4) HNI’s inclination towards longterm debt funds is improving and 5) large institutions are expecting further rate hikes and will commit to substantial investments in due course.

MF Equity lump sum flows have slowed down in the recent past

* There has been a slowdown in business for large distributors in the recent past, wherein the flows into the mutual fund equity products have weakened. The key factors behind this slowdown include: a) a steep correction in the equity markets and 2) increased working capital needs for small businesses given the rise in commodity prices.

* With respect to redemptions, no major trends have emerged yet. However, as observed in the past cycles, the redemptions gather momentum when there is a sharp bounce back in equity markets.

SIP flows remain healthy from IFAs, Fintechs are seeing closures

* The strategy of distributors and IFAs (Independent Financial Advisor has been to focus more on SIPs rather than lump sum investments in the current volatile environment.

* The number of SIP closures increased in the recent past as the customers sourced by the Fintech companies had enrolled for SIPs of much shorter duration (six months to one year). Further, most of the customers were young students and hence to sustain investments every month is a challenge for them.

HNIs preferring debt, passives and alternate assets

* Among HNIs, there has been a definite slowdown in terms of inflows into equity funds. However, HNIs have been preferring longer duration debt funds increasingly, given that the interest rates have been raised by the RBI.

* With respect to passives, while retail segment continues to avoid the space, HNIs are increasingly investing in index funds.

* Their preference for index funds is based on: 1) ETFs that are primarily Do-itYourself as no distributors pitch the same, 2) liquidity for ETFs, which is high only for select funds while index funds can be redeemed at fund houses with ease, 3) transaction costs for ETFs, including STT and other charges, reduce the cost gap between the two.

* HNIs also prefer to invest in alternate assets, such AIFs and PMS products, due to their relatively better returns delivered in the past couple of years. This is despite the high cost the HNIs have to bear when compared with MFs.

Direct equity to equity mutual fund transition likely in the medium term

* From a medium-term perspective, distributors see an opportunity to shift funds from direct equity investments to equity MF schemes especially in these volatile times. The

* On the other hand, if the banks raise interest rates on Fixed Deposits to 7.5- 8.0%, there could be a flight to these products from mutual funds.

AMCs have not increased commissions, competition intensifying

* AMCs have not increased commission payouts in the current slowdown phase. Distributors earned large commissions during the past couple of years on the back of NFOs, which saw high payout ratios. The commission payouts currently are at normalized levels.

* Competition from new/small AMCs can increase especially if they hire Fund Managers with a superior track record. Distributors bet more on the Fund Managers’ performance as compared with the overall brand of the AMC.

Institutions awaiting more rate hikes before committing to long-term debt funds

* Some part of the outflows from debt schemes are moving to liquid funds.

* Institutions are also considering investments in Fixed Deposits and NCDs v/s debt funds to avoid notable MTM impact.

* Rather than guessing on the duration, investors are focusing on the accrual strategy currently.

* With another 50bp hike or if the 10-year G-Sec yield reaches 8%, the flows on the debt side could move to longer duration assets, translating into better yields on the debt side.

* Credit risk fund was more in favor with HNIs, family offices and retail than large institutions. Institutions have been wary of the quality of paper the schemes invest in. Currently, no major interest is observed in these funds.

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