How Much Of Recent Equity Fund Inflows Were In Arbitrage Funds?

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There’s more to the arb fund story. We spoke of how much of the inflow into equity funds was just in Arbitrage funds, which are just funds that try to make fixed income from market arbitrage, and are not really equity funds. While we spoke of that for August 2016, how much have arb funds changed the game in the last few months?

The answer: for July and August, they are more than 50% of the total net flows into equity funds. For all earlier months, people actually bought equity funds in large quantities:

 

arb-funds

The point is – if retail investors in India were buying equity mutual funds, there was genuine participation in the markets. The last two months, however, they have slowed down. The markets have continued to go up – on the back of FII flows.

There are two interpretations:

  1. Retail participation isn’t high enough so we are not in a bubble.
  2. Retail has lost interest in markets and equity funds, and they are the suckers who buy high and sell low. Without retail, will the markets keep going up?

There’s no easy answer, but I think that our retail investors have seen a dream run in the last six months, so they are booking some profit or reducing their investments.

If you planned for a 12% return and you got nearly 20% in six months, you would do well to book some profit and slow down further investments until some time – perhaps as much as 12 months more. It’s just unnecessary to take more risk than you need to, especially in a market that appears as mad as ours.

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