An increase in passive funds investment is being shown by high net-worth individuals (HNIs). This is caused by the formalisation of their investment process. Also, HNIs prefer to make investments in alternative assets like Portfolio Management Services (PMS) and Alternate Investment Funds (AIFs) because they have provided relatively better returns in the past two years. As per the latest Mutual Fund Report by Motilal Oswal Financial Services, the lumpsum gross inflows into the equity mutual funds, excluding New Fund Offers (NFOs), amounted to Rs 179 billion in October 2022, which is the lowest since November, 2020. But the Systematic Investment Plan (SIP) inflows have been showing growth, with flows of Rs 130 billion in the same period. SIP closures have continued to be in the range of 1-1.1m for the last 9 months.
The report implies that the slowdown in lumpsum investments has been on account of large HNIs seeking a better entry point as the equity market is close to a new high. The share of exchange traded funds (ETFs) in the total HNI assets under management (AUM) rose to 1.8 per cent in October this year, against 0.3 per cent in March 2018. The share of ETFs in the total retail AUM has continued to be flat at nearly 0.4 per cent since March 2018.
In the equity segment, redemptions have been seen to be steady. As per the report, the momentum may be gained by the redemptions at the time of sharp rally in the equity market and when the equity share in the wealth managers’ portfolio allocation models increases above certain thresholds.
The report has also stated that fixed deposit rates have moved higher with the hike in interest rates by the Reserve Bank of India (RBI). For private and PSU banks, the weighted average term deposit rates have seen an increase by 35bp/30bp. Fixed deposits may find favour with HNI customers with the likelihood of further increase in rates.
Large companies are expecting more rate hikes at least until March 2023. Institutions are considering the investment in fixed deposits and NCDs v/s debt funds for avoiding a notable market to market (MTM) impact.