By Siddhant Mishra
The Reserve Bank of India’s consistent hike in benchmark rates, followed by banks, might be bad news for borrowers, but debt fund managers are beginning to see inflows into their schemes.
The Association of Mutual Funds in India (Amfi)’s November data showed net inflows into equity mutual funds (MFs) were down 75% on a monthly basis – from Rs 9, 390 crore to ₹2,258 crore.
However, debt funds are beginning to find favour. These schemes, which had witnessed net outflows of ₹2,818 crore in October, recorded net inflows of ₹3,669 crore in November.
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“Debt funds bounced back with net inflows to the tune of ₹3,668.59 crore in November after witnessing two consecutive months of net outflows in September and October. In fact, of the 11 months so far in 2022, the fixed income category has witnessed net outflows in six months. Further, the quantum of net outflows in those months was so high that cumulatively, over these 11 months, total flows were negative (₹1.98 trillion),” according to Morningstar India.
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Over the last three months, large outflows have primarily been seen in categories such as overnight funds, liquid funds, ultra-short duration funds, and money market funds, where significant amount of money has been invested by institutional investors.
According to Amfi data (see chart 1), while funds with shorter tenures have seen heavy outflows, those of longer duration and gilt funds have seen gradual rise in inflows.
Interestingly, categories such as index funds (fixed income) and fixed income ETFs have consistently been receiving flows during the last three months (see chart 2), according to Morningstar.
Vikas Garg, head of fixed income at Invesco MF, in an interview with FE, had said funds of 2-4-year duration were the ones to bet on, and there was no need for investors to be paranoid due to the volatility, and thus park their money in overnight or ultra-short duration funds.
Many asset management companies have launched target maturity funds during the course of the year. These have managed to garner significant investor interest, as yields have gradually been rising, says Morningstar India.
Sanjay Pawar, fund manager at LIC MF, said: “Our house view is that with equity markets remaining volatile and yields getting attractive, retail investors are shifting to debt. The same is expected to continue in the near term.”
According to him, yields may have peaked and majority of the negatives have already been priced in. On the contrary, crude prices have fallen, inflation (both global and domestic) is declining, huge borrowings from states and the Centre have sailed through smoothly, and the rupee is stabilising. “This is why a carry of over 7% may be very attractive. This makes long-duration funds attractive to investors for 3-5-year periods,” he said.