(PTI) Investors continued to withdraw from mutual funds focused on investing in fixed-income securities for third consecutive quarter and pulled out over ₹70,000 crore in April-June due to high inflation and an increasing rate cycle.
"In the next (September) quarter, it is safe to assume that monetary conditions will be tighter in terms of lower amount system liquidity and higher regulatory rates, both of which should see further reduction in mutual fund debt corpuses," Sandeep Bagla, CEO Trust Mutual Fund, said.
Interest rate will be the major factor to dictate flow in debt mutual funds in coming quarters. Once rates start stabilizing, inflows can be expected, Ankit Yadav, Wealth Manager (USA) & Director of Market Maestroo, said.
The latest outflow has pulled down the asset managed by fund managers for debt fixed-income funds by 5 per cent to ₹12.35 lakh crore at June-end from close to ₹13 lakh crore at the end of March, data available with the Association of Mutual Funds in India (Amfi) showed.
After hitting a peak of ₹14.16 lakh crore in the first quarter of fiscal 2022, assets under management for the fixed-income category has been on a steady decline and since then the asset base has fallen by 13 per cent.
According to the data, net outflow from open ended fixed- income mutual funds or debt mutual funds was at ₹70,213 crore in the quarter under review.
Month-wise, the quarter started on an optimistic note in April with the segment attracting ₹54,756 crore, however, this changed in May and June, as the category saw net outflows of ₹32,722 crore and ₹92,247 crore, respectively.
This came following a net outflow of ₹1.18 lakh crore in March quarter and ₹21,277 crore in quarter ended December 2021. Prior to that, the category had seen a capital infusion to the tune of ₹10,858 crore in July-September 2021.
Trust MF's Bagla said investors have been withdrawing from fixed-income funds over the last three quarters primarily because of high inflation and its impact on interest rates. Higher interest rates result in lower bond prices which in turn eat into the returns of fixed-income investors.
According to him, investors have pulled out from fixed- income funds both due to liquidity requirements and in order to protect their capital.
The rising rates scenario, particularly from the US Federal Reserve, creates uncertainty in the mind of the investors, Yadav of Market Maestroo said.
"As new debt fund becomes more attractive due to rates hikes, investors are redeeming their existing debt funds," he added.
Out of the 16 fixed-income or debt fund categories, 12 witnessed net outflows during the quarter under review.
Heavy withdrawal was seen from segments, such as low duration funds, short duration funds, corporate bond funds and banking and PSU funds.
The only categories that witnessed inflows were the liquid funds, 10-year gilt funds and the long duration funds.
The pull-out in June quarter was largely contributed by short duration, corporate bond, low duration, banking & PSU funds with the outflow figures for these categories standing at ₹19,704 crore, ₹13,785 crore, ₹13,757 crore and ₹8,099 crore respectively.
Within the debt sector, short end rates have risen quite sharply. The bonds and funds up to 1-2 year maturity offer reasonable returns for investors as they have already factored in further rise in repo rates, Trust MF's Bagla said.
However, credit bonds are unlikely to face buyers as the Reserve Bank India (RBI) policies are likely to make credit conditions tougher. Also, floating rate funds suffer from the risk of spread widening and are likely to continue to underperform, he added.
Generally, debt funds are considered to be less risky, with investors taking comfort in being able to hedge their risks by parking hard-earned money in instruments that provide better returns than bank fixed deposits.
On the other hand, equity mutual funds attracted a net sum of ₹49,918 crore in the quarter under review due to volatility in stock market environment and exodus by Foreign Portfolio Investors (FPIs).
Investors are preferring equity as it is known to be a value creator asset class and its increasing awareness amongst the investors is driving the growth in investments in equity-oriented schemes with an aim to achieve long-term financial goals.
During June quarter, equity funds comprised around 36 per cent of the total industry's AUM of ₹35 lakh crore, while fixed income funds were at 35 per cent.