May 17, 2022

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Inflows In Equity Mutual Funds Increase Every Year. Here’s Why

Equity MFs attract Rs 40,000 cr in Sep qtr on strong inflow in NFOs |  Business Standard News

The ending of 2021 and the first few months of 2022 was a turbulent period for stock markets. A lot of stocks’ prices have gone down and the effect has reflected in mutual funds too, especially the equity focused ones. Even then, the inflow towards equity mutual funds have doubled in December 2021 compared to the previous month, according to January 2022 report from the mint. At the same time, inflows in debt mutual funds have decreased too. This trend is noticeable throughout the years in the historical data and inflows in equity mutual funds tend to increase every year. Let’s examine why.

What are equity mutual funds and what are their inflows?

Equity mutual funds are those funds that invest primarily in stocks of different companies. Stocks investments are considered to have the highest return potential and a higher level of risk associated with it. Equity mutual funds tend to share similar characteristics. 

Inflows are basically the amount of money that is invested in the mutual fund in a specific period of time. Here, inflows in equity mutual funds mean the amount of money that was invested in all equity mutual funds combined. 

What is the reason for higher inflows in equity funds?

Equity oriented mutual funds are feature-rich, allowing investors to greatly benefit from investing in them. But it tends to stay a favorite for many even during a turbulent time. Below are a few reasons that could explain this trend.

Historical data – History shows that, in the recent past, equities and the stock market have grown to offset the setbacks in the longer term. This gives investors confidence that the current downward trend could also be offset in long term. Since equity-oriented mutual funds share similar characteristics and are mostly invested in equities, investors tend to share the same confidence in equity mutual funds too. 

Buying the low – A lot of investors believe in the buy low, sell high mantra of stock trading and it could be benefiting equity mutual funds too. Whenever the stock markets and thereby equity mutual funds hit a low, investors see it as an opportunity to buy them at a lower price. These units could then rise in price when the stock markets undergo a correction. After which, you can either immediately sell the units or stocks for profit or keep them for a longer time for further growth. This helps with inflows related to equity mutual funds in a long term.

Higher returns – Another factor that could be helping equity mutual funds with their inflows is one of the most obvious benefits of the fund itself- higher return potential. Compared to their counterparts like debt mutual funds, equity funds tend to have a higher potential for return, thanks to their market linkage. This, added with the above said historical advantage, helps in making equity funds a favorite choice for many, especially for longer-term investments. But it is important to keep in mind that the risk associated with these funds is higher as well. 

Are equity funds the right choice always?

The right choice of investment differs for different people. Even when the trends swing towards equity investments, your choice should be in match with your interest. For instance, if you are someone who is risk-averse, there is no need for you to be forced to invest in an equity fund. Instead, you can figure out your risk appetite and investment horizon by consulting an investment expert and finding out exactly what works for you. Talk to an expert and invest in the right fund for you today!