Debt mutual funds see Rs 32,722 crore outflow in May on rising interest rates
Mutual funds focused on investing in fixed-income securities saw a net outflow of Rs 32,722 crore in May in view of the Reserve Bank of India’s (RBI) stance on monetary policy to tackle inflation driven by global factors.
This comes after an inflow of ₹54,656 crore in April, showed data from the Association of Mutual Funds in India (Amfi).
Moreover, the number of folios has come down from 73.43 lakh to 72.87 lakh between April and May 2022.
Debt funds have always been considered a safe investment option, especially during volatile markets. However, rising interest rates, a volatile macro environment and high returns have affected the investment preferences of investors within the debt markets.
Kavita Krishnan, Senior Analyst – Manager Research, Morningstar India, said rising food, commodity and fuel prices, among other macro factors such as the war in Ukraine, could increase by 40 basis points (bps) in May 2022. Moreover, the RBI’s focus on curbing inflation gave rise to expectations of further rate hikes.
“Given the current scenario and broader market expectations, most categories of debt funds have witnessed outflows except overnight and liquid funds. Single-digit returns and a notable preference towards other asset classes like equities have also driven inflows into debt funds. affected,” he added.
Making a similar statement, Alok Agarwal, EVP and Chief Research Officer, Bajaj Capital, said that the outflow can be mainly attributed to the change in RBI’s stance in the off cycle policy meeting of last months, in which RBI Not only was the policy rate increased by 40 bps to 4.40. % but increased the CRR (cash reserve ratio) rate by 50 bps to 4.5%.
“In the same policy meeting on May 4, the RBI emphasized on ‘clearance of housing’ to ensure that inflation remains within the target going forward. This has shocked fixed income investors as it signals that now Indian central bank will also not like it. Behind the curve can be seen and let inflation runaway. This leads to upward movement in yield across the curve resulting in investors in most debt categories (except overnight and liquid funds) Mark-to-market loss in the portfolio of .
Of the 16 fixed-income or debt fund categories, 12 saw net outflows in May. Net inflows were seen only in four categories – overnight funds, liquid funds, gilt funds and gilt funds – with a continuous tenor of 10 years.
Money market funds saw a significant outflow of ₹14,598 crore in this category, followed by short-duration funds (₹8,603 crore), ultra-short-duration funds (₹7,105 crore) and low-duration funds (₹6,716 crore).
Preeti Rathi Gupta, Founder, LXME said, “This move may indicate short-term funding requirements of investors due to the current market scenario of rising repo rates and inflation rate.”