Mutual funds to see lower inflows in the near term amid market highs and lows: Report

The inflow of funds through mutual funds (MFs) is projected to experience volatility in the near term, as reported by InCred Equities, a financial advisory firm based in New Delhi. The brokerage highlighted that this volatility is mainly driven by global events impacting the markets. 

Nevertheless, there is optimism for the medium to long-term horizon due to increasing market penetration and the growing popularity of mutual fund investments, particularly among young and middle-income investors.

In its recent note, InCred Equities pointed out that the Asset Under Management (AUM) in mutual funds declined by one per cent month-on-month to Rs 68 lakh crore in February 2025. This decline is attributed to softer equity fund inflows and subdued gross equity fund inflow, including a reduction in new systematic investment plan (SIP) registrations. Despite these challenges, gross SIP inflow remained robust at Rs 260 billion. 

The firm noted that the "recent correction in select AMC stocks have placed them in attractive buckets," suggesting potential investment opportunities.

Equity MFs

The volatility observed in mutual fund inflows can also be traced to sharp declines in small-cap and mid-cap indices, which have fallen by 14-18 per cent so far in 2025. In February, there was a decrease in mutual fund inflows, as reported by the Association of Mutual Funds in India (AMFI). Net equity inflows amounted to Rs 29,241.78 crore, compared to Rs 39,669.6 crore in January, indicating a 26.29% month-on-month drop (MoM).

Inflows into large-cap funds decreased to Rs 2,866 crore from Rs 3,063.3 crore, while small-cap funds received inflows of Rs 3,722.5 crore, down from Rs 5,721 crore. Midcap funds saw inflows of Rs 3,407 crore, lower than the ₹5,148 crore recorded in the previous month.

InCred Equities emphasised that investor sentiment has been affected, with gross inflows into equity schemes hitting an 11-month low in February 2025. However, the relatively low gross outflow indicates that many investors are maintaining a patient stance, despite market fluctuations. "We expect the volatility to stay in the near term, mainly led by global events. However, we remain optimistic in the long run amid rising market penetration," the firm stated. 

What lies ahead

Looking ahead, the financial advisory firm anticipates improvements in mutual fund inflows as market conditions stabilise. The report suggests that higher retail participation and increased investment discipline will play significant roles in boosting inflows. Additionally, there is an expectation of rising contributions from regions beyond the Top 30 cities, reflecting a broader acceptance and understanding of mutual fund investments across different demographics. "We expect the volatility to continue in the near term, but we remain optimistic over the mid-to long-term horizon amid improving geographic penetration as well as the rising popularity of mutual fund schemes, mainly among the young and mid-income investors," InCred Equities added.

Overall, while mutual fund inflows are currently facing challenges due to market volatility, the medium-term outlook remains positive. As the retail segment grows and investment knowledge spreads, mutual funds are expected to recover and potentially thrive. For now, the focus is on navigating the near-term uncertainties while preparing for a more stable investment landscape as market dynamics evolve.