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The mutual fund data for the month of April 2021 released by the Association of Mutual Funds in India (AMFI) is reflective of the uncertainties surrounding the country. The investing community has had to make decisions amid one of the most distressing periods that the country is going through. The Covid-19 pandemic is ferociously ripping through the length and breadth of the territory and has cast a shadow on the economic growth trajectory in the coming months. While state governments are imposing lockdowns of varying severity, there are demands for a countrywide lockdown from various quarters.

Amid the gloom, it must be heartening for the mutual fund industry that equity mutual funds saw net inflows (investments exceeding redemption) of Rs 3,437 crore in April. However, inflows have substantially reduced from net inflows Rs 9,115 crore in March 2021.

When looked in conjunction with the high inflows into bond funds (Rs 1 lakh crore compared to outflows of Rs 52,528 crore in March 2021) and liquid funds (Rs 41,507 crore), money market schemes (Rs 20,286 crore) and overnight schemes (Rs 18,492 crore), it is perhaps evident that the investing community at this point prefers to be cautious.

It is also indicative of the fact that should negative news flow continue for a while, which appears to be likely given the struggle that the healthcare system is going through to tackle the pandemic, the flow into equity mutual funds might be muted for a while.

The trend in the capital market must have added to the investors’ dilemma. Amid the surround sound of distress, the equity indices have refused to correct by any significant amount. The Sensex and the Nifty have been holding on in a range close to their all-time highs.

On the face of it the capital market may appear to be not in sync with reality. However, by nature stock markets are forward looking and the overall sense may be that once the pandemic is brought under control, the economy will bounce back like it did after the first wave of Covid-19 in 2020 and the economy will become buoyant, while corporate results would once again look healthy.

In such a scenario, investors would be well advised to allot a part of their portfolio into equities and equity-linked instruments such as mutual funds. Uncertain times are often some of the best times to invest in risk assets which have the potential to generate superior returns compared to other safer avenues, such as debt. Those who missed the late 2020 rally in the capital market by logging out of equities and being on the sidelines waiting for the ‘right time’ would know the pain of being over-cautious.

In this context, the rising systematic investment plan (SIP) folios from 3.72 crore in March 2021 to 3.79 crore in April would give a positive indication to the industry. Though the SIP inflows dipped marginally to Rs 8,590 crore in April, compared to Rs 9,182 in March, the increase in SIP accounts shows that retail investors could be preparing to put in more money once things appear to be brighter. SIP investors with a long term horizon are surely to make good gains even if there is a slide in the markets in the coming days.

However, those betting big on thematic funds should be cautious. As the AMFI figures suggest, sectoral or thematic funds received around Rs 1,705 crore or 50% of inflow in open-ended equity-oriented schemes. AMFI Chief Executive N S Venkatesh has pointed out that this may be due to the investors putting money in pharma-related funds hoping that the companies in the sector would benefit from the pandemic.

Thematic funds, be it the likes of pharma, banking or infrastructure, are high-risk investments even within the equity category. They bring in concentration risk where companies in one sector may sink or swim together. Investors might be caught on the wrong foot if the tide turns suddenly. In fact, the pharma sector has already seen a major run up and stocks are richly valued. It would be advisable to only put a portion of one’s portfolio into such investments depending on one’s risk taking ability.