August has been a brutal month for debt funds, with outflows worth Rs 25,872.5 crores. About 9 out of the 16 fund offerings saw net outflows. This comes after 6 months of sustained inflows in debt funds. The 16 debt fund categories cumulatively garnered Rs 1,38,500.87 crores between April and June 2023, and a further Rs 61,440.08 crores in July.
On the other hand, equities have been witnessing a steady, but stellar growth in fund inflows. From raking in Rs 18,358.08 crores between April-June and Rs 7,625.96 crores in July, the inflows spiked to Rs 20,245.6 crores last month.
So, is it time to switch from debt funds? Don’t jump to conclusions just yet. Most of the funds which have witnessed major outflows are those which have a tenure of less than one year, like liquid, ultra short, low duration and the like. In keeping with this, liquid funds saw outflows worth Rs 26,823 crores, while ultra-short duration funds saw exits worth Rs 4,123 crores.
Don’t abandon debt
Notably, most of these funds serve as temporary parking for institutions, hence swift inflow and redemption of money is the norm here. This is also because of how these debt funds are structured. According to Melvyn Santarita, Analyst – Manager Research, Morningstar India, investors are currently adopting a cautious approach, given that September is set to bring about major macroeconomic shifts.
Fed’s much anticipated meeting is on September 19-20, where decisions around changing interest rates will be taken. Notes mutual fund expert Shifali Satsangee, “There are many reasons for the outflow from shorter duration funds, namely uncertainty around direction of interest rates so investors taking a cautious stance, institutions pulling out amounts from liquid funds for working capital requirements and funds moving from conservative to aggressive asset classes after witnessing the rally in equity markets.”
Infact, as Santarita highlights, funds which stand to benefit if the interest rate cycle reverses have gained some traction. And once there is greater clarity on the route they take, it is possible that they might see higher inflows.
Funds in this category include gilt funds, dynamic bond funds and long-duration funds. In the same stead, gilt funds saw inflows worth Rs 255.03 crores, dynamic bond funds saw inflows worth Rs 134 crores, and long duration funds saw outflows worth Rs 180 crores.
As financial planner Sanjeev Dawar also highlights, one possible reason for outflow can also be people migrating to fixed income options like FDs from market-linked debt funds, owing to an upcoming hike in FDs deposit rates.
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