Investor caution appears to be easing, after the level of net outflows into funds almost halved in September.
Concerns about potential wealth taxes and other tax rises in the impending Autumn Budget have understandably rattled the nerves of investors.
This has caused many investors to take money out of funds in recent months but the latest data from the Investment Association (IA) shows net retail sales outflows actually slowed in September to £505 million.
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The figures marked an improvement from August’s £1.8 billion outflows.
The slowdown brought total third quarter outflows to £2.7 billion, following a net £307 million of withdrawals in July and £1.8 billion in August respectively.
Where are investors putting their money?
While investment outflows may have eased, the actual assets where money is going into suggests that caution remains.
Fixed income funds had their highest inflows since May 2025 at £818 million and mixed asset funds continued their 10-month positive trend to reach £264 million in September.
This was partly offset rising equity outflows.
Equity fund uncertainty
Investor caution towards equities persisted in September, with outflows rising to £2.6 billion from £2 billion in August. Europe was the only region to record positive equity flows, with £124 million in inflows.
Globally diversified funds saw their largest redemptions since October 2024 at £1.3 billion, where US companies are a significant component. The concentration of high valuations in the largest seven US stocks has been fuelling speculation that there will be a price correction – particularly among artificial intelligence stocks.
Indian equities also experienced record outflows of £249 million, while healthcare equity funds saw outflows of £221 million, attributed to renewed uncertainty following President Trump’s push to lower US drug prices and ensure that countries outside the US pay more for pharmaceuticals.
Closer to home, UK equity outflows remained steady at £795 million, a slight improvement from August’s £849 million. The region saw outflows of £2.3 billion during the third quarter, in line with the second quarter but an improvement on the heavy outflows of £4.1 billion in the first three months of the year.
The IA said the shift in flows from equity funds into money market funds suggests that investors are anticipating market volatility, with rising speculation about a US market correction and an AI bubble.
While equity fund redemptions remained substantial, this year’s movements appear to reflect broader investor caution over equity markets, the IA said. Last year, investors with capital invested outside ISAs and SIPPs responded to speculation over a rise in capital gains tax by realising some of those gains to avoid a higher tax rate.
Meanwhile, index tracker funds rebounded with inflows of £1.2 billion, recovering from their largest-ever monthly outflow in August of £399 million.
Miranda Seath, director of market insight and fund sectors at the IA, said: “September’s data show caution over equity funds prevailing among investors, with outflows of £505 million.
"While still negative, this is a marked improvement on September 2024 in the run up to last year’s Autumn Budget, when outflows reached £3.8 billion amid speculation around potential capital gain tax hikes. We will look to see how investor sentiment develops in October.
"With a later Budget this year and rising speculation over pension tax changes, we hope that investors wait to see rather than making irreversible moves to take out tax-free lump sums from pensions.”
Investor behaviour in September suggests patience rather than pessimism, added Seath, as the markets await greater clarity before making their next move.
She added: “More broadly, our latest poll of UK adults shows that a perception that investing is risky remains the biggest barrier to investing for UK adults, underlining the need to transform how risk is communicated.
"Our work to support a re-framing of risk warnings as part of the Leeds Reforms will help potential investors better understand the risks and rewards of investing. Longer term, supporting an investment culture and consumer confidence will help to boost participation and strengthen long-term financial resilience for households and the economy.”
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