Sharp outflows in March: Vallum Capital explains shift from liquid mutual funds to equities

India saw March fund outflows led by money market and debt withdrawals, while equity inflows rose, favouring large caps, as investors turned cautious and selective amid volatility.

By Anshul

India’s fund flow landscape turned sharply divergent in March, with a steep pullback in short-term liquidity instruments contrasting with steady inflows into equities, according to Vallum Capital’s latest monthly macro report.

Total net asset-level flows swung decisively into negative territory, reversing from an inflow of ₹73,589 crore in February to an outflow of ₹2.2 lakh crore in March.

The shift was led by a sharp reversal in money market funds, which saw outflows of ₹1.95 lakh crore compared with inflows of ₹42,800 crore a month earlier, indicating a significant withdrawal of short-term parked capital.

Fixed income funds also faced sustained pressure, with outflows widening to ₹76,354 crore in March from ₹16,919 crore in February. The report attributes this trend to heightened sensitivity to interest rates and continued redemption pressure in debt-oriented products.

In contrast, equities remained relatively resilient.

Net inflows into equity funds rose 11% month-on-month to ₹46,501 crore, suggesting that investors continued to deploy capital selectively despite broader market volatility. Commodities, while still attracting inflows, saw a moderation, with net investments declining to ₹3,831 crore.

The report highlights a shift in investor preference within equities. Large-cap funds absorbed the bulk of inflows at ₹28,558 crore, reflecting a move towards relatively stable and higher-quality stocks.

Flexi-cap and mid-cap categories also recorded steady additions, while arbitrage funds witnessed significant outflows of over ₹22,000 crore, signalling a retreat from more complex or tactical strategies.

Market performance supported the inflow trend in equities. Indian stocks posted a strong one-month rebound, with small-caps rising 8.1%, mid-caps 6.9%, and large-caps 4.8%. However, the year-to-date picture remains negative across segments, underscoring that the recovery is still partial following a sharp correction earlier in the year.

Sectoral and thematic flows indicate a rotation in investor focus. Funds linked to manufacturing, infrastructure, defence and pharmaceuticals attracted fresh capital, aligning with a broader tilt towards domestic capital expenditure and healthcare themes. In contrast, PSU and consumption-oriented funds continued to see outflows.

Factor-based performance also reflected mixed sentiment. While higher-risk strategies such as alpha, momentum and growth led the recent market rebound, more defensive approaches like quality and low-volatility strategies have shown greater resilience over longer periods, suggesting that investor confidence in the rally remains measured.

Commodities continued to outperform on a year-to-date basis, with gold and silver each delivering returns of over 16%, outpacing all equity segments. However, flows into commodity funds have cooled, indicating some moderation in incremental investor interest.

Globally, the report points to a broader shift in capital allocation trends.

A weakening US dollar and rotation away from US-centric assets have supported emerging markets and commodity-linked investments. Several international markets, including Brazil, Poland, South Korea and Taiwan, have outperformed in recent months, while India has participated in the broader emerging market recovery but has not led it.

Currency movements also reflect these dynamics, with the Indian rupee depreciating against major global currencies over both short- and long-term periods.

According to Vallum Capital, the current environment is characterised by a combination of cautious risk-taking and selective allocation. While equities continue to attract inflows, the sharp withdrawal from money market and fixed income segments suggests that investors are recalibrating portfolios amid evolving global and domestic conditions.

Note To Readers

Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers should consult certified experts before making any investment decisions.