Equity fund inflows dip marginally in Jan, sectoral funds rule the roost

Domestic investors continued to invest into the equity-oriented mutual funds in the month of January, taking correction in the market as an opportunity to build their exposure further. This logged the 47th consecutive month of net inflows into the segment.

“In January, investors pumped in Rs 39,688.78 crore into equity-oriented mutual funds. Though this was marginally lower than the net inflow of Rs 41,155.91 crore in December, it was meaningful in absolute terms, nonetheless,” said Himanshu Srivastava, Associate Director-Manager Research, Morningstar Investment Research India, commenting on the AMFI data for January 2025.

However, given the correction in the markets, the assets under management for equity-oriented mutual funds declined by 4% in January to Rs 29,46,764.20 crore as against Rs 30,57,548.59 crore in December.

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Jatinder Pal Singh, CEO, ITI Mutual Fund, said, “In January 2025, volatility in the Indian equity markets, combined with geopolitical uncertainties and anticipation of the Union Budget, led to a decline in equity mutual fund AUM. This resulted in a reduction of Rs. 1.1 lakh crore in the AUM of open-ended equity mutual funds but the flows were consistent with December 2024. Investors showed a preference for Large Cap and Flexi Cap funds.”

Additionally, investors turned to ELSS funds to take advantage of the tax-saving benefits, reflected in a ~14% rise in gross flows into these funds. Investors preferred debt and hybrid funds in Jan’25, visible by the net positive flows in these categories to the tune of 1.3 lakh crore and 0.17 lakh crore, respectively.

The investors’ focus towards making the most of the market fall in January can also be gauged from the fact that around 30.7 lakh new folios were added during the month.

“The performance of the equity markets and the returns that equity-oriented mutual funds have generated in the last few years have anyways motivated several investors to enter into the equity markets, and its pleasing to see more and more investors using the mutual fund route to do so because of the obvious benefit that mutual fund offers,” said Srivastava.

The flows have been consistent across the segment signifying a broader appeal of the equity markets. All the equity-oriented categories received net inflows during the month.

Sector or thematic funds continued to rule the roost as it garnered net assets worth Rs 9016.6 crore during the month. However, this also includes Rs 2,838 crore garnered by 3 new sector or thematic funds launched in January. Sector/thematic funds are typically cyclical in nature and are largely meant for investors who either are in a position to track a sector or understand the dynamics of a given theme, or they have resources at their disposal to do that form them.

“Its important to time their entry and exit from these funds as they can tend to be very volatile. They offer a very high-risk high return investment proposition and investors should be vary of that while investing in them. Given in the recent times some of the sector funds have delivered good returns, thus attracting investors. Its important to understand that every sector has different dynamics and drivers and that one sector doling well doesn’t guarantee that all sectors would perform well. Hence, investors should not look at all the sector funds from the same lens. They should be prudent and observe caution while investing in these funds,” advises Srivastava.

Mid and small cap fund categories, and categories which have significant exposure in these two segments, continue to receive strong inflows, highlighting investors preference for this segment, largely driven by the high returns that they have generated over the last few years. Since both the segments witnessed sharp correction, investors would have chosen to make use of this opportunity and enhance their exposure to these segments. However, investors should be wary of inherent risk in these segments and be judicious while investing. The investment in mid and small cap funds should be in line with their risk appetite.