Debt funds focused on investing in fixed-income securities witnessed an outflow of ₹65,372 crore in September amid increasing interest rate cycle and redemptions by corporates to pay advance tax.
This comes following a net inflow of ₹49,164 crore in August and ₹4,930 crore in July, data available with Association of Mutual Funds in India (Amfi) showed.
Prior to that, investors pulled out over ₹70,000 crore from debt mutual funds in April-June due to high inflation and increasing rate cycle.
Out of the 16 fixed-income or debt fund categories, 12 witnessed net outflows during the month under review. The heavy withdrawal was seen from segments such as liquid, money market and ultrashort-term duration funds.
The only categories that witnessed inflows were overnight funds, long duration, gilt funds and gilt fund with 10-year constant duration.
Overnight funds category witnessed inflows to the tune of Rs 33,128 crore, long duration saw an inflow of Rs 111 crore, gilt funds and gilt fund with 10-year constant duration also witnessed inflows at a lower level of Rs 6.64 crore and Rs 1.20 crore respectively.
"A rising interest rate environment that's been in place since May 2022 has likely resulted in investors preferring to move out of the debt markets in favour of investing in equity," Kavitha Krishnan, Senior Analyst – Manager Research, Morningstar India, said.
She further said the overall macro environment has been indicative of a local and global slowdown. While the U.S. Federal Reserve has been on a rate hike cycle, RBI too has been hiking interest rates in an effort to bring inflation under control. Also, a rising dollar has been placing additional pressure on earnings, despite the positive impact that it could have on exporters.
Another factor that could have impacted the flows into debt funds is the withdrawal by institutions to meet their obligations towards advance tax payments, she added. The overall sentiment toward debt funds has been to invest in lower-duration funds. This is also evidenced by the positive flows into overnight funds during September.
Liquid funds saw a significant outflow of ₹59,970 crore in this category, followed by money market funds (₹11,232 crore) and ultra short duration funds (₹8,454 crore).
"In the high inflationary scenario, RBI has been increasing the repo rate to tame inflation down, due to which the debt market is likely to be volatile. As the festive season is coming, people need liquidity, which might have affected the increase in outflows," Priya Agrawal, Money Coach, LXME, said.
The outflow has pulled down the asset base of debt mutual funds to ₹12.41 lakh crore by September-end from ₹13.03 lakh crore at the end of August.
On the other hand, equity mutual funds saw net infusion of ₹14,100 crore during the month under review.
The liquid, ultrashort-term, money market and overnight fund categories constitute a substantial portion of the total assets (about 50 per cent) within the debt fund category.
Given their significant contribution, even a slight change in the quantum of flows in percentage terms can make a huge difference in the overall flows within the category. The liquid and the overnight categories also stand out because of the magnitude of institutional money that flows into them.
