Why large-cap funds are facing redemption pressure amid a bull run

The redemption pressure in large-cap funds has increased over the past two months even as the benchmark equity indices are scaling new heights. This is visible from the ratio of gross purchases and gross sales for the category, which has remained between 0.45 and 0.47 for the past two months. It is one of the lowest among major fund categories according to the data from the Association of Mutual Funds in India. The ratio for the category has remained below one for the seventh month in a row. It was 1.64 between April 2019 and May 2020.

A ratio above one reflects a favourable outlook of investors towards a mutual fund category. If the reading drops below 0.5, it indicates rising pessimism. For equity MFs as a whole, it was 0.72 in December, up 20 basis points from the previous month.

Double-digit returns in the past year have prompted investors to book profits in large caps, and underperformance of large-cap funds to their benchmark indices coupled with rising popularity of exchange traded funds have also added to the redemption pressure. A sample of large cap funds having more than ₹1,000 crore assets under management (AUM) delivered a return of 19.3% in the past year, underperforming the respective benchmarks by 1.2%.

A surge in the gross inflow of sectoral funds in December has pushed large-cap gross inflows to the second spot for the first time in 20 months. In December 2020, the sectoral funds had the highest gross inflow of ₹7,439 crore, which is over two times the large-cap inflow.

On the other hand, the large-cap funds reported the highest outflow of ₹13,254 crore among all the fund categories in the past two months. The share of large-cap funds in the AUM of the equity mutual funds dropped by 109 basis points to 19% in the last calendar year. Also, large-cap fund folios dropped by 94,036 in the past two months.


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