Mutual Fund Update: Rise in gross redemptions to sales ratio

The domestic mutual funds have remained one of the strongest suppliers of liquidity to the Indian equity market. When foreign investors were wary of investing in Indian equity, domestic mutual funds flush with retail inflows pumped in liquidity to the Indian equity market.

Nevertheless, volatility in the market along with deteriorating performance of the mutual fund scheme against their benchmark has resulted into the fall of equity inflows. It has been observed that almost 80 per cent of the domestic equity funds has underperformed their respective benchmarks year till date. The last 10-year average has been only 33 per cent according to data compiled by Goldman Sach.

The current trend in the inflows in the equity mutual funds shows a continuous fall in the net inflows into the equity-dedicated mutual funds. The net inflows into the equity MFs in the month of August were Rs. 7,734 crore, down from Rs. 10,444 crore we had witnessed in May 2018. This fall is directly reflected in the sharp drop in the equity purchase by mutual fund managers in India. For the month of August, they had purchased Rs. 4,094 crore, which was almost the same as in the previous month's (July 2018) purchase of Rs. 3,995 crore, the lowest since February 2017.

Moreover, the ratio of gross redemptions to sales has picked up recently suggesting early signs of rising redemption pressure. The redemption to sales ratio currently stands at 66 per cent compared to 37 per cent last year same month. Although it touched in the month of March 2018 to 92 per cent, it dropped drastically in the following month.

According to the same report by Goldman Sach, this could partly be due to the impact of tax changes (long-term capital gains tax and dividend distribution tax) announced earlier this year in the budget. We also note that the yield gap between Indian equities and bonds has fallen to a 10-year low, which makes fresh equity investments relatively less attractive.