Mutual funds: In November, inflows into debt funds saw a significant drop to Rs 12,916 crore, marking a 92% decrease from the Rs 1.57 lakh crore recorded in October. This steep decline can be attributed to a combination of factors including liquidity constraints, tax obligations, and market fluctuations. Liquid funds experienced the largest outflows, with net redemptions totaling Rs 1,778.98 crore. The decrease in investor activity was mainly a result of constrained liquidity conditions and tax payments, prompting a notable change in investor sentiment.
The inflow of funds into debt mutual funds refers to the total amount of money invested within a specific timeframe. Here are recent insights on trends in debt fund inflows in India, based on available data:
November 2024: There was a substantial decline in debt fund inflows, dropping by 92% to Rs 12,915 crore compared to the previous month. This sharp decrease suggests a notable shift in investor behavior, potentially influenced by prevailing market conditions or expectations regarding interest rate movements.
In November, low-duration funds attracted the highest inflow of Rs 4,374 crore, followed by ultra-short-duration funds which received Rs 2,961 crore. Gilt funds with a 10-year constant duration and long-duration funds had the lowest inflows at Rs 274 crore and Rs 79 crore, respectively, during the same period.
Meanwhile, liquid funds experienced the highest outflow of Rs 1,778 crore in November, a significant decrease from the inflow of Rs 83,863 crore in October. Short-duration funds also saw an outflow of Rs 454 crore, while floater funds experienced an outflow of Rs 342 crore during the same period.
October 2024: Debt mutual funds experienced a notable increase in inflows, totaling Rs 1.57 lakh crore. This surge pointed towards a vigorous recovery fueled by investments in liquid schemes, marking a significant turnaround from the outflows recorded in September.
September 2024: In September, debt-oriented mutual funds saw significant outflows of Rs 1,13,833.95 crore, a stark contrast to the inflows of Rs 45,169.36 crore recorded in August. The outflows in September were primarily driven by heightened corporate redemptions to fulfill second-quarter advance tax obligations. Liquid funds experienced a notable shift, with outflows totaling Rs 72,665.97 crore, accounting for 63.8% of the overall outflow.
Money market funds followed suit with outflows of Rs 23,420.84 crore, while overnight funds witnessed a net outflow of Rs 19,362.65 crore. Corporates typically withdraw surplus investible funds from liquid and money market funds before settling their quarterly tax liabilities. Other debt categories experiencing outflows included Ultra Short Duration, Banking and PSU, and Floater funds. Conversely, corporate bond funds received the highest inflows amounting to Rs 5,039.07 crore in September 2024, followed by Gilt funds, Long duration funds, and Short Duration funds.
August 2024: Debt mutual fund inflows witnessed a 62% decrease to Rs 45,169 crore from July’s levels, indicating a more cautious approach among investors. This trend was linked to investors showing a preference for shorter-term and safer investment alternatives.
Why the slip?
“Debt-oriented funds continued to attract inflows in November, though the quantum was relatively modest. The funds registered inflows of INR 12,915.90 crore, a noticeable decline compared to the substantial inflows of INR 1,57,402.30 crore recorded in October. Overall, 9 out of 16 debt mutual fund categories recorded net inflows in November,” said Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India.
“Liquid funds experienced the highest outflows, amounting to INR 1,778.98 crore. Meanwhile, investors showed a strong preference for categories like low-duration funds, ultra-short-duration funds, money market funds, corporate bond funds, and overnight funds. Together, these categories accounted for approximately 85% of the inflows across nine categories that recorded positive figures, highlighting a strong preference for low-risk, highly liquid investment options,” Meshram added.
“The debt category saw significant increase in redemptions from long dated debt fund categories like medium duration, long duration and gilt funds. This could be as a reaction to market reaction to pressure on Indian long bond yields and some profit booking. Overall, debt saw a net inflow of only Rs 12,915 crores in November which is less than 10% of the net inflows of Rs 1.57 lakh crores in October,” said Mayukh Datta, Chief Business Officer, ITI Mutual Fund.
What lies ahead?
The decrease in debt fund investments is indicative of a more prudent approach taken by investors. Due to market pressures and liquidity issues, low-risk investments and selective duration tactics are now favoured.