Net outflows from equity funds reach a whopping Rs11,560 crore since entry load ban since August 2009, 30% of it in just July itself!

Equity funds are witnessing continuous redemptions since the entry load ban in August 2009 but in July it has turned into a massive haemorrhage. A humungous Rs3400 crores flew out of mutual funds in July alone. Including the outflow of last month, net outflows since August 2009 stand at a whopping Rs11,560 crore.

The sales of new equity schemes stood at Rs705 crore In (Mirae Asset Emerging Bluechip Fund and SBI PSU Fund were launched) while sales of existing equity schemes was Rs4308 crores in July. But last month, redemptions from existing equity schemes stood at Rs8,413 crore meaning that equity mutual funds suffered a Rs3,400 crore of net outflow in July 2010. In June investors pulled out Rs1,446 crore from equity schemes.

Liquid funds have seen a healthy inflow of Rs34,303 due to improved liquidity situation while balanced funds recorded Rs43 crore outflows in July.  As on July 2010, the assets under management (AUM) of the industry stood at Rs6.68 lakh crore.

Commenting on the severe outflow, Jimmy Patel, CEO, Quantum Mutual Fund said, “distributors seem to be pushing ULIPs as they are more lucrative and their new norms will be implemented shortly. Equity funds are also witnessing new sales but nothing really major as it is still very much a “push product.”

Ever since the Securities and Exchange Board of India (SEBI) banned the entry load for mutual fund schemes, fund companies have been suffering from a steady haemorrhage of cash from their equity schemes. Over the last 12 months, funds have recorded positive inflows only in just two months. This is all the more galling for the fund industry, because mutual funds normally benefit from inflow of funds when the market is rising. Between March 2009 and July 2009 when the Sensex was up 88%, the fund industry saw an inflow of Rs7,429 crore. Indeed, even when the Sensex came down crashing by 39% between April 2008-December 2008, the mutual fund industry still saw an inflow of Rs1,254 crore.

Therefore, the continuous outflow of cash can only be attributed to SEBI’s order of banning entry loads and forcing fund distributors to make money by ‘advising’ investors. Distributors have simply stopped selling funds.

The truth is that, the ban on entry loads has dried up the distributors’ revenues and they are now asking investors to consider Unit-linked Insurance Plans (ULIPs) and company fixed deposits as the next best investment opportunity.

This is unfortunate because ULIPs are no better than equity funds unless they are held for a longer period while fixed deposits are unsecured investments. But the commissions on ULIPs and FDs are extremely attractive which is why distributors are pushing them.