Domestic mutual funds sold shares worth ₹1.29 trillion in FY21—the most in a decade—even as stock markets rallied to record highs during the year amid a gush in foreign liquidity inflows.
The year saw high redemption from equity mutual funds as new retail investors took to investing in equities directly, showed data from the Securities and Exchange Board of India (Sebi).
“Equity as an asset class did extremely well in the last financial year with the Sensex clocking almost 68% return. Low expectations, cheap valuations and global liquidity led to a market rally,” said Anand Vardarajan, business head, banking, alternate products and product strategy, Tata Asset Management Ltd.
“However, investor sentiment was not very upbeat and they took an approach of sell on rally. In equities, there is a tendency to sit over one’s losses but trim gains. Usually, it is big returns or quick returns. FY21 was a rare year when it was big and quick, and investors perhaps chose to pocket that and, hence, the net outflows,” he added.
Mutual funds were net buyers of shares for six consecutive years, after offloading shares worth ₹22,013 crore back in FY14.
In the last six fiscal years, on average, mutual funds bought equities worth more than ₹79,431 crore. During the period, domestic institutional investors, or DIIs, comprising mostly mutual funds, were net buyers, driving the stock market rally, despite foreign institutional investors (FIIs) being on a selling spree.
However, DIIs, which include mutual funds, insurance firms and financial institutions, turned sellers in FY21, offloading shares worth more than ₹1.42 trillion. In the year-ago period, DIIs were net buyers of equities worth ₹1.3 trillion.
Equity MFs registered eight consecutive months of outflows in February. According to data released by the Association of Mutual Funds in India (Amfi), total outflows in equity-oriented schemes stood at ₹13,121 crore, ₹12,078.54 crore and ₹6,764.45 crore in December, January and February, respectively, with MFs trimming their positions in blue-chip companies such as Bharti Airtel, HDFC Bank, Reliance Industries and HDFC Ltd.
“Mutual fund outflows in equities remained high in recent months due to profit booking by investors after a sharp market rally and also due to the increase in market volatility. Fresh inflow into MFs also remained low due to an active primary market, while many investors are waiting for market corrections to enter back, restricting equity investment by funds,” said Satish Kumar, research analyst, Choice Broking.
Despite the lack of support from DIIs, the domestic markets had a stellar performance. Foreign portfolio investors (FPIs) were on a buying spree in FY21, purchasing a record $37.09 billion ( ₹2.75 trillion) worth equities, while selling $6.71 billion ( ₹44,593.06 crore) in debt, according to NSDL data.