Mutual Fund Inflows Not Enough to Lift Markets, Says Choice AMC

Mutual Fund Inflows: A Double-Edged Sword for Market Stability

Despite record inflows, mutual funds are struggling to lift market sentiment amid external pressures and rising interest rates.

Sustainable Inflows, Limited Impact

Jain noted that while mutual funds have attracted significant inflows—₹32,490 crore in Systematic Investment Plans (SIPs) and ₹38,307 crore in equity inflows in September—the overall market performance has been lackluster. The Nifty index fell approximately 6% during the same period, highlighting that domestic inflows, although strong, are not sufficient to counteract the selling pressure from FIIs, who have offloaded around ₹3 trillion this year alone.

The near-perfect offset of ₹30,313 crore in domestic institutional purchases against ₹30,294 crore in FII sales last week illustrates the precarious balance in the market. Jain emphasized that while domestic investments can provide a floor for the market, they do not set the ceiling, indicating a cautious outlook for sustained market recovery.

Mid and Small-Cap Funds: A Silver Lining?

Despite the overall market struggles, Jain pointed to the performance of mid and small-cap funds, which have outperformed large caps over the past year. The Nifty Midcap 150 and Smallcap 250 indices returned +4.6% and +7.2%, respectively, compared to a -7.1% return for the Nifty 50. This trend is attributed to stronger earnings growth in these segments, with mid-cap profits growing at 23% compared to 21% for large caps.

Jain believes that the Nifty LargeMidcap 250 index, trading at a more attractive valuation of 22.9x, presents a better investment opportunity than the Nifty Midcap 150, which trades at a premium. He advises investors to focus on stock selection rather than chasing indices, as the volatility and valuation discrepancies between these segments can offer unique opportunities.

Impact of Rising Interest Rates

The Reserve Bank of India’s recent shift towards a tighter monetary policy, marked by a 25 basis points hike in the repo rate, raises questions about its impact on corporate earnings. Jain asserts that while the immediate effect of this rate hike may be minimal, the broader implications of rising bond yields and a weakening rupee could pose significant risks, particularly for leveraged mid-sized borrowers.

With consensus earnings growth projected at 9.2% for FY27 and 17.2% for FY28 among the top 200 companies, Jain believes that corporate earnings can withstand the pressure from higher interest rates. However, the real challenge lies in managing the external economic factors that could undermine these projections.

Future Growth and Expansion Strategies

Looking ahead, Jain outlined Choice AMC’s growth targets, aiming for an AUM of ₹10,000 crore by FY27. He emphasized the importance of building a credible product shelf, including index funds and ETFs, to attract investors. Jain also highlighted the significance of B30 cities, which are emerging as key growth areas, accounting for 19.1% of industry AUM, up from 18.8% earlier this year.

The strategy focuses on leveraging existing networks rather than opening new branches, making it an asset-light approach. This is particularly relevant as retail investors in these cities tend to be more equity-hungry and SIP-driven, presenting a lucrative opportunity for asset managers.

Challenges and Regulatory Recommendations

Despite the optimistic outlook, Jain acknowledged several challenges in scaling up the business, including high compliance costs and the need for strong distributor relationships. He called for regulatory changes that would ease the burden on new AMCs, such as time-bound compliance relief and digital onboarding processes to reduce acquisition costs.

Jain emphasized the need for clear communication of risks associated with high-volatility investment categories to build investor trust. As the mutual fund industry continues to evolve, these changes could play a crucial role in fostering a more resilient investment environment.

Key Highlights

• Mutual fund inflows reached ₹38,307 crore in September, but markets fell 6% during the same period.
• Domestic institutional investors offset FII selling nearly perfectly last week.
• Mid and small-cap funds outperformed large caps, with significant returns over the past year.
• RBI’s rate hike may not directly impact corporate earnings, but external factors pose risks.
• Choice AMC targets an AUM of ₹10,000 crore by FY27, focusing on B30 cities for growth.

Investor Note: The mutual fund landscape remains dynamic, with inflows providing a buffer against market volatility. However, investors should be cautious of external economic pressures and focus on sectors with strong growth potential, particularly in mid and small-cap segments.