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

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


The redemption pressure on 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 mutual funds as a whole, the ratio was 0.72 in December, up 20 basis pointsfrom the previous month.

The profit booking by investors due to double digit returns in the past year, underperformance of large-cap funds to their benchmark indices and rising popularity of exchange traded funds has accentuated the redemption pressure. A sample of large cap funds having more than Rs 1,000 crore assets under management (AUM) delivered a return of 19.3% in the past year, underperformed 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 Rs 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 Rs 13,254 crore among all the fund categories in the past two months. The share of large-cap funds in the assets under management (AUM) of the equity mutual funds dropped by 109 basis points to 19% in the last calendar year. Also, the large-cap fund folios dropped by 94,036 in the past two months, the second biggest fall after the value fund category.





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