Equity boom losing steam: MF inflows in Feb hit the lowest level in 10 months

Even with the mutual fund industry riding a 48-month streak of positive equity inflows, net inflows cooled to ₹29,303.34 crore in February—the lowest since ₹18,888.36 crore posted in April 2024, according to the data released by the Association of Mutual Funds in India (Amfi). February’s figure also saw a 26% slide from ₹39,687.78 crore worth of inflows in January.

Industry participants noted that most inflows into mutual funds now come from slightly mature investors who have been investing for quite some time, are aware of market cycles, and have experienced them in the past.

“We observed a paradox of risk, as equity flows dropped by about 25% compared to January,” said Anand Vardarajan, chief business officer, Tata Asset Management. He added that it is important to remember that risk increases as markets rise and decreases when markets fall.

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Aniruddha Sarkar, CIO and portfolio manager at Quest Investment Advisors, said, “The 26% decline in net mutual fund inflow in February is quite normal considering the panic seen on the ground among investors in the month.”

Sarkar pointed out that many new investors who entered the market over the last four years had only seen steady gains since their entry and have never faced a serious drawdown in their portfolio values. “But when one-year returns turned flat to negative in early February, that’s when many first-time investors started to panic, and comparison started with safer returns from fixed deposits,” he explained.

Cautious sentiment prevails

In February, the sell-off was driven mainly by relentless FII outflows, brewing geopolitical tensions, and a slowdown in corporate earnings in FY25. The Nifty 50 fell nearly 6%, while the Nifty Smallcap 250 dropped around 13%, and the Nifty Midcap 100 slipped about 11%.

“We sense that investors are forming a cautious view and will wait and watch till markets settle down,” said Akhil Chaturvedi, executive director & chief business officer, Motilal Oswal AMC.

If the correction persists or the recovery takes time, Chaturvedi believes this trend could last a while.

On the other hand, mid- and small-cap funds took a big hit in February, with inflows slipping to ₹3,406 crore and ₹3,722 crore, down from ₹5,147 crore and ₹5,720 crore in January. Large-cap funds weren’t spared either, with inflows easing to ₹2,866 crore from ₹3,063 crore the month before.

“A large portion of retail allocation is in small-cap funds or thematic funds where the pain is more pronounced compared to large-cap or hybrid funds,” pointed out Gaurav Dua, head-Capital Market Strategy, Mirae Asset Sharekhan.

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Despite the uncertainties, signs point to the correction nearing its end.

Easing valuations, supportive fiscal and monetary policies, and better growth prospects in FY26 make the Indian equity market ripe for selective investments, said several fund managers.

“The correction has created a buying opportunity in selective stocks that have been beaten down disproportionately,” said a March strategy report from Motilal Oswal Financial Services.