Debt funds lose Rs 1.13 lakh cr in Sept 2024: What should investors do?

After seeing two months of consecutive inflows, debt-oriented mutual funds experienced large outflows in September losing Rs 1,13,833.95 crore, compared to inflows of Rs 45,169.36 crore in August, showed AMFI data. 

The outflows in September were driven by increased corporate redemptions to meet second-quarter advance tax obligations, shows an analysis by Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India.

Liquid funds experienced a sharp turnaround, with outflows of Rs 72,665.97 crore in September representing 63.8% of the overall outflow. This was followed by  money market funds that saw outflows of Rs 23,420.84 crore and overnight funds that witnessed a net outflow of Rs 19,362.65 crore. Corporates typically withdraw their surplus investible funds from liquid and money market funds ahead of settling their quarterly tax liabilities. Other debt categories that also witnessed outflows were Ultra Short Duration, Banking and PSU, Floater.

Corporate bond funds experienced maximum inflows to the tune 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 increasing expectations of interest rate cuts. These funds are positioned to benefit from potential rate reductions, and inflows may rise further as the

outlook on rate cuts becomes clearer," said Meshram.

Quarterly overview: Debt fund flows in September 2024 quarter 

For the second quarter in a row, debt funds saw net inflows, despite the quarter-end treasury redemptions. 

"The net flows into debt funds in the September 2024 quarter at Rs 0.51 Trillion was sharply 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 are being maintained. Incidentally, in the 6 quarters prior to the June 2024 quarter, debt funds had seen consistent net outflows. In the last two quarters ended June and September 2024; there has been a visible trend wherein debt fund investors are willing to lock themselves into long-dated instruments rather than just churning in and out of treasury related funds at the short end of the yield curve," said brokerage IIFL in a note. 

Key flow drivers: 

The analysis by IIFL shows that flows were once again driven in the September 2024 quarter by debt funds at the short end of the yield curve. Money Market Funds saw net inflows in the quarter of Rs 15,411 crore, while Liquid Funds saw net inflows of Rs 10,990 Crore, short duration funds saw net inflows of Rs 8,398 Crore, and corporate bond funds saw net inflows of Rs 7,968 Crore. The other categories that also saw net inflows in the September 2024 quarter include Gilt Funds ₹5,481 Crore, long duration funds Rs 3,258 Crore, ultra short duration funds Rs 2,621 Crore, and low duration funds Rs 2,191 Crore. Other positive inflows in the quarter were relatively smaller.

"In a quarter when net inflows were to the tune of ₹0.51 Trillion, the outflow categories were bound to be relatively limited; but 3 categories of debt funds stood out with negative flows in the September 2024 quarter. Banking & PSU Funds saw net outflows of (Rs 3,836 Crore), Floater Funds (Rs 1,579 Crore), and Credit Risk Funds (Rs 1,416 Crore). Clearly, the number of funds seeing redemptions and even the intensity of redemptions were much lower in the June and September 2024 quarters as compared to the prior quarters. The broad undertone of debt fund flows was more encouraging this quarter," noted IIFL. 

Total AUM of all active debt funds at the close of the September 2024 quarter bounced to Rs 14.97 Trillion; compared to Rs 14.13 Trillion, Rs 12.62 Trillion, and Rs 12.91 Trillion  respectively in the previous three sequential quarters. The share of debt fund AUM in overall open-ended MF AUM stands at 22.32% as of September 2024; compared to 23.11%, 23.64%, 25.42%, and 28.19%, respectively in the previous 4 sequential quarters. The AUM share of debt funds has come down in the September quarter despite the net inflows. 

"This fall in AUM share of Debt funds has been progressive and can be attributed to the more than proportionate rise in the AUM share of equity and other equity related funds," noted IIFL. 

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 domestic inflation concerns, noted Mirae Asset Mutual Fund in a note.  However, a more stable inflation outlook and steady economic growth have supported demand for government securities, especially from domestic institutional investors like banks and insurance companies. Corporate bond spreads remain relatively tight, with investment-grade debt showing resilience amid the steady macroeconomic backdrop. However, higher yields have increased borrowing costs for lower-rated companies, leading to selective issuance in the corporate bond market, it added. 

"Overall, India’s fixed income market remains attractive for investors seeking higher yields with manageable risks, particularly in government securities and quality corporate bonds," said the note by Mirae Asset MF. 

ICICI Prudential MF said Indian bond yields could see push-and-pull effects playing out through 2024. This could increase market volatility. Hence, the uncertainty in direction of yields would prevail in 2024.

"We recommend Accruals + Active Duration Management in the current scenario," it said. 

Motilal Oswal believes investors should have a duration bias in the fixed income portfolio so as to capitalize on the likely softening of yields in the next 1-2 years.
 

30% of the portfolio can be invested in

• Actively managed duration funds to capitalize on evolving fixed income scenario

• For passive duration allocation, one may invest in long term maturity G-sec papers to benefit from accrual income and potential MTM gains