Illustration: Binay Sinha
After seeing two months of consecutive inflows, debt-oriented mutual funds saw huge outflows in September, losing Rs 1,13,833.95 crore, compared to inflows of Rs 45,169.36 crore in August, data from AMFI.
Capital outflows in September were driven by higher corporate refunds to meet anticipated second-quarter tax obligations, analysis by Nehal Meshram, senior analyst and research manager at Morningstar Investment Research India, shows.
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Liquid funds saw a sharp turnaround, with outflows of Rs 72,665.97 crore in September, which accounted for 63.8% of the total outflow. This was followed by money market funds which recorded outflows of Rs 23,420.84 crore and overnight funds which witnessed a net outflow of Rs 19,362.65 crore. Companies typically withdraw their surplus investment funds from liquid and money market funds before settling their quarterly tax obligations. Other debt categories that also saw outflows were Ultra Short Duration, Banking and PSU, Floater.
Corporate bond funds saw maximum inflows of Rs 5,039.07, followed by Gilt funds, long duration funds and short duration funds in September 2024.
“Investors have been favoring long duration funds for some time, driven by rising expectations of interest rate cuts. These funds are positioned to benefit from potential rate cuts, and capital inflows may increase even more so as the
The outlook for rate cuts is becoming clearer,” Meshram said.
Quarterly Summary: Debt Fund Flows in September 2024 Quarter
For the second consecutive quarter, debt funds recorded net inflows, despite Treasury bond redemptions at the end of the quarter.
“Net flows into debt funds in the September 2024 quarter of Rs 0.51 trillion were much lower than the net inflow of Rs 1.25 trillion into debt funds in the June 2024 quarter. However, what is important is that the trend of positive quarterly flows is Incidentally, in the 6 quarters leading up to the June 2024 quarter, debt funds had seen consistent net outflows in the last two quarters ending in June and. September 2024, there has been a visible trend where debt fund investors are willing to lock into long-term instruments rather than simply moving in and out of Treasury-related funds at the short end of the yield curve. “said the IIFL broker in a note.
Key flow drivers:
IIFL analysis shows that flows were again driven in the September 2024 quarter by debt funds at the short end of the yield curve. Money market funds recorded net inflows of Rs 15,411 crore in the quarter, while liquid funds recorded net inflows of Rs 10,990 crore, short duration funds recorded net inflows of Rs 8,398 crore and corporate bond funds They recorded net inflows of Rs 7,968 crore. The other categories that also recorded net inflows in the September 2024 quarter include Gilt funds of Rs 5,481 crore, long duration funds of Rs 3,258 crore, ultra-short duration funds of Rs 2,621 crore and low duration funds of 2,191. crores. Other positive entries in the quarter were relatively minor.
“In a quarter where net inflows stood at Rs 0.51 trillion, outflow categories were bound to be relatively limited; but 3 categories of debt funds stood out with negative flows in the September 2024 quarter. The funds banks and PSUs recorded net outflows of (Rs 3,836 crore), float funds (Rs 1,579 crore) and credit risk funds (Rs 1,416 crore). “Repayments were much lower in the June and September quarters of 2024. Compared to the previous quarters, the overall backdrop of debt fund flows was more encouraging this quarter,” IIFL noted.
Total managed assets of all active debt funds at the end of the September 2024 quarter bounced to Rs 14.97 trillion; compared to Rp 14.13 trillion, Rp 12.62 trillion and Rp 12.91 trillion, respectively, in the previous three consecutive quarters. The proportion of assets under management of debt funds in the total assets under management of variable rate investment funds amounts to 22.32% in September 2024; compared to 23.11%, 23.64%, 25.42% and 28.19%, respectively, in the previous 4 consecutive quarters. Debt funds’ AUM ratio declined in the September quarter despite net inflows.
“This decline in the share of AUM in debt funds has been progressive and can be attributed to the more than proportional increase in the share of AUM in equities and other equity-related funds,” IIFL noted.
What should your debt strategy be?
Government bond yields remain elevated, with the 10-year Indian Government Bond (IGB) yield hovering around 7.2%, reflecting the higher global interest rate environment and concerns over domestic inflation, Mirae Asset Mutual Fund noted in a note. However, a more stable inflation outlook and stable economic growth have supported demand for government securities, especially from domestic institutional investors such as banks and insurance companies. Corporate bond spreads remain relatively tight, with investment grade debt showing resilience amid a stable macroeconomic backdrop. However, higher yields have increased borrowing costs for lower-rated companies, leading to selective issuance in the corporate bond market, he added.
“Overall, the Indian fixed income market remains attractive for investors seeking higher returns with manageable risks, particularly in quality government securities and corporate bonds,” the Mirae Asset MF note said.
ICICI Prudential MF said Indian bond yields could see tug-of-war effects through 2024. This could increase market volatility. Therefore, uncertainty about the direction of yields would prevail in 2024.
“We recommend Accruals + Active Duration Management in the current scenario,” he said.
Motilal Oswal believes investors should have a duration bias in the fixed income portfolio to capitalize on the likely reduction in yields in the next one to two years.
You can invest 30% of the portfolio in
• Duration funds actively managed to capitalize on the evolution of the fixed income scenario
• For passive duration allocation, one can invest in G-sec securities with long-term maturity to benefit from accumulated income and potential medium-term gains.
First published: October 16, 2024 | 09:52 IS
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