H1FY25 WAS ALL ABOUT THEMATIC FUNDS
As the first half of FY25 has come to an end, it is time to look back at how the mutual fund new fund offerings (NFOs) have performed. The good news is that H1FY25 has seen a sharp revival in the fortunes of the NFOs in India. The NFO flows had been tepid over the last two fiscal years. In FY23, the mutual fund NFOs collected just ₹62,342 Crore while in FY24, the NFO collections were just about ₹66,364 Crore. In comparison, the first half of FY25 itself has already seen NFO collections to the tune of ₹71,584 Crore. The last time, Indian MF NFOs crossed the ₹1 Trillion mark was in FY22. So, it now looks entirely plausible that FY25 will not only be better than FY 22 in terms of NFO flows, but it will also be one of the best months for the volume of NFO flows into mutual funds in India. What stood out about the NFO flows into Indian mutual funds in the H1FY25 period was that the deluge of NFO flows were dominated by an overdose of sectoral and thematic funds, account for 71.1% of flows.
In the midst of these heavy NFO flows, there was another big story that quietly played out in H1FY25, and that was the preponderance of sectoral / thematic funds in terms of NFO collections. There is a small background to it. Today, as per SEBI regulations, an AMC can only have one equity / debt fund of one category. However, the exceptions are thematic / sectoral funds and passive index funds. For instance, the same AMC can have only one large cap fund and one mid-cap fund and one small cap fund. However, they can have one banking fund, one technology fund, one pharma fund etc. The AMC can have any number of sectoral / thematic funds as long as they are intrinsically different. Not surprisingly, the NFOs have gravitated towards this category. This deluge of sector / thematic funds in the NFO narrative has raised concerns of sectoral concentration at market highs, but we will stay out of that debate for now. Let us quickly recap the NFO story of FY23 and FY24.
RECAP – NFO STORY OF FISCAL YEAR FY23
FY23 was specifically disappointing as it came just after the bumper NFO collections in FY22. At ₹62,342 Crore, the NFO collections in FY23 were sharply lower and this could be attributed to the tepidness in the markets following the huge digital sell-off and rising inflation in the market. However, there was one more reason. For 2 out of 12 months i.e. May 2022 and June 2022, there were zero NFOs. That is because SEBI had insisted that no NFOs would be permitted till the AMCs put in place the new system which will allow the funds to flow directly from the customer to the AMC, without residing at the broker / distributor end. This ban was necessitated as mutual funds were not putting the system in place, despite repeated reminders from SEBI. This 2-month ban was largely responsible for the tepid flows in mutual fund NFOs in FY23. Here is the NFO story of FY23.
| Fiscal Year FY23 | No. of NFOs | Generic Equity MF | Thematic Funds | Flexi Caps | Index Funds | Index ETFs | Close End FTPs | Hybrid Funds | Income Funds | Monthly NFO Flow |
| Apr-22 | 3 | 0 | 3,130 | 0 | 91 | 19 | 0 | 0 | 0 | 3,240 |
| May-22 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Jun-22 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Jul-22 | 9 | 0 | 0 | 0 | 5 | 11 | 1,430 | 0 | 0 | 1,446 |
| Aug-22 | 37 | 733 | 367 | 1,962 | 203 | 79 | 2,293 | 756 | 1,592 | 7,985 |
| Sep-22 | 21 | 333 | 3,823 | 1,680 | 487 | 130 | 1,117 | 804 | 0 | 8,374 |
| Oct-22 | 31 | 15 | 2,609 | 426 | 1,750 | 11 | 598 | 0 | 30 | 5,439 |
| Nov-22 | 26 | 90 | 2,336 | 0 | 980 | 90 | 3,703 | 0 | 0 | 7,199 |
| Dec-22 | 36 | 1,586 | 0 | 410 | 571 | 2,798 | 1,532 | 1,235 | 354 | 8,486 |
| Jan-23 | 18 | 0 | 0 | 1,204 | 420 | 27 | 851 | 1,572 | 348 | 4,422 |
| Feb-23 | 27 | 0 | 2,540 | 2,508 | 863 | 30 | 954 | 292 | 0 | 7,187 |
| Mar-23 | 45 | 6 | 3,835 | 0 | 634 | 181 | 3,878 | 0 | 30 | 8,564 |
| FY23 Total | 253 | 2,763 | 18,640 | 8,190 | 6,004 | 3,376 | 16,356 | 4,659 | 2,354 | 62,342 |
Data Source: AMFI (₹ in crore, except number of NFOs)
What did we read from the month-wise and the product wise break-up of NFO flows into mutual funds during the fiscal year FY23.
- The total NFO collections of ₹62,342 Crore across 253 NFOs were actually spread over 10 months, since there was a ban on fresh mutual fund NFOs in May and June 2022. That effectively works out to a monthly average of ₹6,234 Crore in NFO flows in FY23.
- During FY23, the NFO flows had crossed the ₹8,000 Crore a month only on 3 occasions in the months of September 2022, December 2022, and March 2023; which were largely the quarter-end periods during the fiscal year.
- The flow spread was very lop-sided. In fact, 92.5% of the NFO flows in FY23 came in the last 8 months of the fiscal with just 7.5% of the NFO flows coming between April 2022 and July 2022. Of course, in this phase, two months were also lose to the NFO ban.
- Let us get into specifics of categories. Out of the 253 mutual fund NFOs which collected ₹62,342 Crore between them in FY23; thematic funds dominated collections in FY23 raising ₹18,640 Crore; followed closely behind by fixed term plans (FMPs) raising ₹16,356 Crore during FY23.
- Among other key contributors in terms NFO flows were multi-cap / Flexi-cap funds, which raised ₹8,190 Crore via NFOs in FY23. However, the net inflows into index funds and index ETFs were subdued in FY23 at ₹9,380 Crore, struggling to recreate the magic of FY22 in passive fund NFO collections.
- Compared to FY22, even the hybrid fund NFO flows were relatively subdued in FY23 at ₹4,659 Crore. In FY22, the dynamic allocation funds (BAFs) were the flavour of the season with big ticket NFOs from SBI, ICICI Prudential and others. Other categories like generic equity funds and income fund NFOs were relatively subdued in FY23.
FY23 may not exactly be comparable since there were 2 lost months and 1 month of lost momentum. Effectively, the collections of FY23 were for 9 months only. Let us now shift to a recap of the FY24 NFO story.
RECENT RECAP – NFO STORY FOR FY24 REMAINS TEPID
FY23 was disappointing for a reason that nearly 3 months of the year hardly saw any activity due to the SEBI imposed ban on mutual fund NFOs. FY24 was a different ball game and was supposed to be better considering the expected buoyancy in the markets. Th equity markets were buoyant through most of FY24, but it failed to recreate the magic of FY22. At the end of the fiscal year FY24, the NFO collections were just a tad better than FY23. The big change in FY24 was the change in the tax methodology for pure debt funds. Effective April 2023, debt funds with less than 35% exposure to equity, did not get any indexation benefits on long term gains. Such gains would be treated as income and taxed at the peak rate of tax applicable. That dampened the enthusiasm for income funds and fixed term plans (FTPs). Here is a quick dekko at the NFO flow picture of FY24.
| Fiscal Year FY24 | No. of NFOs | Generic Equity MF | Thematic Funds | Flexi Caps | Index Funds | Index ETFs | Close End FTPs | Hybrid Funds | Income Funds | Monthly NFO Flow |
| Apr-23 | 9 | 0 | 1,612 | 0 | 34 | 10 | 0 | 101 | 71 | 1,828 |
| May-23 | 5 | 0 | 174 | 0 | 142 | 0 | 103 | 64 | 0 | 483 |
| Jun-23 | 11 | 101 | 2,717 | 220 | 63 | 15 | 0 | 112 | 0 | 3,228 |
| Jul-23 | 17 | 0 | 1,540 | 1,471 | 176 | 122 | 0 | 0 | 3,414 | 6,723 |
| Aug-23 | 15 | 0 | 2,556 | 2,446 | 31 | 63 | 188 | 2,247 | 0 | 7,531 |
| Sep-23 | 16 | 0 | 1,629 | 874 | 6 | 53 | 0 | 5,233 | 0 | 7,795 |
| Oct-23 | 14 | 1,103 | 918 | 975 | 71 | 346 | 0 | 199 | 26 | 3,638 |
| Nov-23 | 14 | 41 | 1,342 | 551 | 96 | 10 | 447 | 96 | 0 | 2,583 |
| Dec-23 | 21 | 2,062 | 4,259 | 0 | 167 | 64 | 2,060 | 1,260 | 0 | 9,872 |
| Jan-24 | 20 | 0 | 284 | 683 | 976 | 243 | 384 | 4,247 | 0 | 6,817 |
| Feb-24 | 22 | 1,514 | 7,178 | 0 | 696 | 582 | 251 | 1,499 | 0 | 11,720 |
| Mar-24 | 21 | 0 | 3,074 | 0 | 178 | 70 | 319 | 396 | 109 | 4,146 |
| FY24 Total | 185 | 4,821 | 27,283 | 7,220 | 2,636 | 1,578 | 3,752 | 15,454 | 3,620 | 66,364 |
Data Source: AMFI (₹ in crore, except number of NFOs)
Here is what we gleaned from the month-wise and the product wise break-up of NFO flows into mutual funds during fiscal year FY24.
- The total NFO collections of ₹66,364 Crore across 185 NFOs in FY24 were only marginally better than the NFO collections in FY23. That effectively works out to a monthly average of ₹5,530 Crore in NFO flows in FY24.
- During FY24, the NFO flows were more evenly spread through the year with the first half of FY24 accounting for 41.6% of the NFO collections and the second half of FY24 accounting for the balance 58.4% of the total NFO collections for FY24.
- Let us get into specifics of categories. Out of the 185 mutual fund NFOs which collected ₹66,364 Crore between them in FY24; thematic funds again dominated collections raising ₹27,283 Crore. The only other category of funds that came even remotely close was the Hybrid Funds at ₹15,454 Crore, largely through asset allocation funds.
- Among other key contributors in terms NFO flows were multi-cap / Flexi-cap funds, which raised ₹7,220 Crore via NFOs in FY23. However, the net inflows into index funds and index ETFs were subdued in FY23 at ₹4,214 Crore, with investors still seeing a lot of low hanging fruits in active funds, especially in the risky sectoral / thematic categories.
- On the debt front, there was some sense of urgency to raise NFO money ahead of the new rules pertaining to pure debt funds becoming effective in India. For FY24, FTPs saw ₹3,652 crore of NFO flows and income funds saw NFO flows of ₹3,620 Crore.
FY24 was not much better than FY23 overall, and was actually lower in average monthly NFO flows. That is why; there were great expectations from NFOs in FY25.
H1FY25 HINTS AT FULL YEAR RECORD FOR MUTUAL FUND NFO FLOWS
In terms of NFOs, the fiscal year FY25 is off to a promising start with ₹71,854 Crore collected in just 6 months. That is more than the full year collections of the previous two years and the full year number could set an all-time record. Here is a quick dekko.
| Fiscal Year FY25 | No. of NFOs | Generic Equity MF | Thematic Funds | Flexi Caps | Index Funds | Index ETFs | Close End FTPs | Hybrid Funds | Income Funds | Monthly NFO Flow |
| Apr-24 | 9 | 0 | 707 | 512 | 269 | 0 | 0 | 44 | 0 | 1,532 |
| May-24 | 9 | 0 | 9,563 | 0 | 242 | 72 | 0 | 263 | 0 | 10,140 |
| Jun-24 | 17 | 345 | 12,974 | 1,051 | 39 | 48 | 0 | 770 | 0 | 15,227 |
| Jul-24 | 15 | 0 | 9,790 | 3,945 | 2,651 | 179 | 0 | 0 | 0 | 16,565 |
| Aug-24 | 18 | 865 | 10,202 | 0 | 771 | 113 | 0 | 1,297 | 567 | 13,815 |
| Sep-24 | 27 | 1,734 | 7,842 | 297 | 3,656 | 102 | 0 | 872 | 72 | 14,575 |
| H1-FY25 Total | 95 | 2,944 | 51,078 | 5,805 | 7,628 | 514 | 0 | 3,246 | 639 | 71,854 |
Data Source: AMFI (₹ in crore, except number of NFOs)
Here is what we read into the month-wise and the product wise break-up of NFO flows into mutual funds for the first half of fiscal year 2024-25 (H1FY25)
- The total NFO collections of ₹71,854 Crore across 95 NFOs in the first half of FY25 is already higher than the full year NFO collections in FY23 and also in FY24. That translates into average monthly NFO flows of ₹11,976 Crore; sharply higher than previous 2 years.
- While April may have been a tepid month for NFO flows due to political election uncertainty, the flows were May onwards have been extremely robust. IN fact, the NFO flows have been above ₹10,000 Crore each month since May 2024.
- Let us get into specifics of categories. Out of the 95 mutual fund NFOs which collected ₹71,854 Crore between them in H1FY25; thematic funds again dominated collections by a huge margins; raising ₹51,078 Crore. Thematic funds accounted for 71.1% of all NFO flows in H1FY25. None of the other fund categories managed to cross ₹10,000 Crore.
- Among other key contributors in terms NFO flows were index funds / index ETFs managed to collect ₹8,142 Crore, hinting at a gradual return to the passive story. The category of multi-cap / Flexi cap funds also managed to find takers for their story, collecting ₹5,805 Crore in H1FY25. Overall, it was an H1 dominated by equity funds.
- On the debt front there was a drying up of NFOs. Closed ended FTPs did not see a single NFO while income fund raised just about ₹639 Crore. The government did throw a lifeline to debt funds in the form of lower long term capital gains tax at just 20% for debt funds holding between 35% and 65% in equities. However, the loss of indexation benefit almost made the FTPs unattractive, as their attraction was largely on dual indexation.
H1FY25 has been sharply better than the previous two years, but the bias is excessively in favour of equities.
KEY TRENDS IN NFOS TO WATCH OUT IN H2FY25
The second half could see the sectoral and thematic story continuing to play out, because these themes typically play out very effectively when markets are at new highs. The gains on sectoral and thematic funds can appear to be very high in short bursts, but that is more due to the risk concentration in such funds. Investors have to watch out for the risks. Debt funds and FTPs are likely to remain under pressure, since the combination of removal of capital gains treatment for pure debt funds and removal of indexation benefits, takes away the charm of debt funds; especially the closed ended FTPs.
However, the big trend in the second half of FY25 could be the sharp revival in hybrid fund NFOs. With the debt funds becoming unattractive in post-tax terms, there is an expectation that much of this demand could shift to hybrid fund categories like multi asset allocation funds (MAAFs), balanced allocation funds (BAFs), and equity savings funds. At the short end, funds could shift from liquid and money market funds will shift to arbitrage funds. The NFO narrative of H2FY25 could be illustrative of the coming paradigm of NFO flows!