Mutual Fund Trends: Strategic Discipline Amid Uncertainty
By Rishabh Goel, Managing Director, Tailwind Financial Services
March 2025 marked a period of significant flux in India’s mutual fund industry, shaped by shifting investor sentiment, global economic uncertainty, and market volatility. Amid falling inflows and rising stoppage rates, the underlying story remains one of resilience, long-term opportunity, and the importance of smart investing.
A Dip in Equity Inflows, But Retail Interest Holds Strong
Net inflows into equity mutual funds dropped to an 11-month low of Rs 25,082 crore in March, continuing a three-month downward trend. This 40% decline compared to October 2024 may be attributed to global trade tensions, rising interest rates, and fears of a broader economic slowdown. However, a notable counter-trend emerged: the number of equity folios grew by 14.5 lakh, suggesting strong retail investor interest. Equity-oriented funds now account for nearly 70% of all mutual fund folios.
Risk-On Behavior: Small and Mid-Cap Preference
Despite increased volatility, investors continue to favor mid and small-cap funds, with March inflows of Rs 3,439 crore and Rs 4,092 crore, respectively. While these categories offer the potential for higher returns, they come with higher risk—a tradeoff not all investors are equipped to manage.
Sectoral Funds See Sharp Pullback
Contrasting the enthusiasm for mid and small caps, sectoral and thematic fund inflows collapsed from Rs 5,712 crore in February to just Rs 170 crore in March. This suggests a pullback from high-risk, concentrated investment themes.
Large Cap Funds: An Underappreciated Safe Haven
In a surprising twist, large cap funds received relatively muted inflows of Rs 2,479 crore. Given their historical stability and ability to weather downturns, investors may be missing an opportunity to balance their risk exposure.
SIP Stoppage Ratio Rises Sharply
A critical indicator of investor sentiment, the SIP stoppage ratio jumped to 128.27% in March, up from 122.76% in February. Over 51 lakh SIPs were closed or matured, compared to just 40 lakh new registrations. This suggests investors are becoming more cautious or reevaluating their investment choices. For FY 2024-25, the stoppage ratio stood at 75.63%, up from 52.41% the year before.
Marginal Dip in SIP Inflows, but AUM Continues to Grow
SIP inflows dipped slightly to Rs 25,926 crore in March from Rs 25,999 crore in February, reflecting marginal caution. Yet, overall Assets Under Management (AUM) for equity mutual funds grew 7.5% to Rs 29.5 lakh crore, supported by a market rally that saw the BSE Sensex gain 5.8%.
Total AUM for the mutual fund industry reached Rs 65.74 lakh crore in March, a 23% year-over-year increase, reflecting overall industry resilience.
What Should Investors Do?
Given the current environment, here are some thoughtful strategies for investors:
- Don’t Chase Past Returns: Avoid investing in funds solely based on recent performance, especially small cap, mid cap, and thematic funds. Past returns do not predict future outcomes.
- Understand Risk-Return Tradeoffs: Recognize the risk profile of each fund category. Higher returns typically come with higher risk. Align your choices with your personal risk appetite.
- Evaluate Fund Fundamentals: Look beyond returns. Assess risk ratios, fund manager credentials, the consistency of performance, expense ratios, and the fund house’s investment process.
- Be Selective with NFOs: Not every New Fund Offer is worth your money. Only consider NFOs with a strong investment rationale and robust management pedigree.
- Personalize Your Portfolio: There is no one-size-fits-all approach. Choose schemes based on your age, financial goals, investment horizon, and risk tolerance. Avoid herd behavior.
- Use Volatility to Your Advantage: Use market corrections to make staggered lump-sum investments. Volatility can be an opportunity when approached with discipline.
- Stay Committed to SIPs: Avoid stopping SIPs mid-way. Doing so can interrupt compounding and derail your financial goals. SIPs are designed to thrive through market cycles.
Final Thoughts
While the mutual fund industry is navigating a phase of increased caution and realignment, the long-term outlook remains strong. Investors who stay focused on fundamentals, follow a disciplined approach, and align their investments with personal goals will be better positioned to benefit from market recovery.
The road ahead requires clarity, patience, and prudence. But with the right strategy, mutual funds continue to offer a powerful pathway to long-term wealth creation.
