They say liquidity is the mother's milk for any bull market. When inflows are strong markets gain, when inflows slow down markets falter.

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And it's always the new or incremental rupee which makes all the difference. So the flow is what matters.

Let us take a look at flows into domestic equity mutual fund schemes.

Since 2015, the size and influence of the domestic mutual fund industry has grown exponentially driven by huge inflows into equity schemes. This in turn has driven stock markets higher to new records.

Things have been changing for the last few months and unfortunately, it's a change for the worse. Data from Association of Mutual Funds of India (AMFI) for the month of July shows,

a) While aggregate net inflows into equity and equity linked savings schemes (ELSS) increased 28 percent in July over June, the Rs 10,585 crore July number is 10 percent down from the 2018 monthly average and a whopping 48 percent lower as compared to monthly record high. In fact in absolute terms, the inflows in July 2018 is back at what we saw in April 2015.

b) Balanced funds as a category continue to see severe contraction. July's Rs 287 crore is a drop of 81 percent from June and it is down 97 percent as compared to the monthly high we saw in this category. Introduction of 10 percent tax on dividends from equity mutual funds has made balanced funds less attractive.

c) Equity exchange traded funds (ETFs) as a category saw outflows of Rs 3,982 crore. In the previous month, this category had seen an inflow of Rs 8,313 crore as the Bharat 22 ETF was launched in June. Bharat 22 ETF was clearly a one-off and we had warned in July that it would have been a mistake to extrapolate it.

Markets had gotten accustomed to large monthly inflows into equity mutual funds over the last three years.

Experts have tom-tommed how local mutual fund money would act as a buffer if foreign institutional investors (FII) got fidgety and wanted out of India. All this could come into question if inflows into mutual funds continues to slow.

First Published:Aug 8, 2018 6:51 PM IST