Mutual fund investors continued to pump money into equity schemes, lifting stock markets to record highs, despite the challenges triggered by the second wave of the pandemic.

Net inflows into equity mutual fund schemes raced to a 14-month high of ₹9,235.48 crore in May, showed data issued by the Association of Mutual Funds in India (Amfi) on Wednesday. Equity schemes saw a net inflow of ₹1,783.13 crore in April, while it was ₹5,045.53 crore in May last year.

“For the third consecutive month, equity mutual fund inflows have been positive. Investors who have accumulated higher savings in the past year due to lower spending and were staying on the sidelines are slowly getting back. The strong returns in equities and the stability of the markets despite the second wave provide the much-needed positive nudge,” said Arun Kumar, head of research, FundsIndia, an online retail investment platform

The multi-cap category was the biggest beneficiary in May, with an inflow of ₹1,954.19 crore. Mid and small-cap categories received ₹1,368.06 crore and ₹1,080.70 crore, respectively, in May. All equity-oriented categories saw net inflows last month except for the equity-linked savings scheme (ELSS) category.

Domestic institutional investors (DIIs), which include mutual funds, insurance firms, pension funds and banks, were net buyers of shares worth ₹2,067.23 crore in May, helping lift the benchmark index Sensex more than 6% during the month.

“Significant improvement with daily Covid cases falling consistently, along with improving recovery rate, over the past few weeks, have provided comfort to investors. Good quarterly results, positive earnings growth outlook over the long-term and waning concerns of any severe impact of the second wave of the pandemic on the economy, would have also boosted sentiments. This would have prompted investors to again allocate assets towards equities,” said Himanshu Srivastava, associate director-manager research, Morningstar India.

Overall, redemptions from equity schemes also narrowed to ₹14,169.63 crore in May from ₹17,282.95 crore in April. Redemptions were, however, much lower in May last year at ₹7,283.23 crore.

The contribution of monthly systematic investment plans (SIP) rose a tad to ₹8,818.90 crore in May from ₹8,590.89 crore in April.

Debt funds however, saw an outflow in May, largely led by liquid and overnight funds. Liquid and overnight funds saw huge outflows as short-term rates continued to stay low. Liquid funds and overnight funds saw outflows of ₹46,447 crore and ₹11,563 crore, respectively. All other sub-categories of debt mutual funds saw inflow except for smaller outflows in corporate bond funds ( ₹1,468 crore) and banking and PSU debt funds ( ₹1,340 crore).

The average return of liquid funds and overnight funds in the past year has been 3.15% and 2.99%, respectively, on the back of easy monetary policy by RBI, which has projected inflation for FY22 at 5.1%.

Amfi chief executive N.S. Venkatesh attributed the outflows in May to the funding requirements of corporates. Ordinarily, March, June, September and December see outflows on account of advance tax payments. But, historically, May has not seen such outflows.

Regulatory changes aimed at cutting risk in liquid funds are also likely to have taken a toll on returns. In 2019, Sebi made it compulsory for liquid funds to hold 20% of their assets in cash, higher than the 10% the regulator subsequently brought in for all debt mutual funds. The regulator also stopped them from investing in paper with credit enhancements.