Mutual Fund Returns: Debt Mutual Funds See Strong Outflows on Lower Yields, Uncertain Rate Outlook

Mutual funds experienced a sharp drop in assets under management in February. A net outflow of Rs 8,274.29 was seen for all categories of debt funds combined. The number of releases stood at Rs 5,087 crore in January. With the exception of cash and overnight funds, all other debt categories recorded large outflows. Market analysts and fund managers attribute the decline to uncertainty in the rate cycle and the future path of yields.

Short-term funds recorded the maximum outflow of Rs 12,091.88 crores, closely followed by corporate bond funds (Rs 10,218.74 crores) and floating funds (Rs 10,322.89 crores) . However, cash and overnight funds saw inflows of Rs 40,273.31 crore and Rs 1,296.06 crore respectively.

Analysts believe debt-focused programs continue to see large outflows as investors avoid falling yields.

“The central bank’s decision to keep rates on hold and their relatively weaker forecast for domestic growth appear to have dampened sentiment. In addition, single-digit returns from debt funds proved detrimental, especially when looking at long- and mid-term bond yields. A possible reason for the sharp outflows from most categories could also be attributed to investors preferring to redeem their bond investments in favor of investments in equity markets, which after a strong rally, have seen some correction since November 2021, thus providing a good entry point,” says Kavitha Krishnan, Principal Analyst – Head of Research, Morningstar India.

Mutual funds have been under pressure for several months. Rising bond yields, rate uncertainty and rising inflation all contributed to lower debt fund yields.

“The sell-off in the bond market can be attributed to – the US Fed’s hawkish policy of a series of rate hikes and reduced liquidity, rising crude oil and other commodity prices, and a budget deficit and market borrowing higher than expected by the central government,” says Pankaj Pathak. , debt fund manager, Quantum Mutual Fund.

The ongoing war between Russia and Ukraine has added another layer of uncertainty to the debt market. Its direct impact can be seen in soaring crude oil prices. India imports more than 85% of its total crude oil consumption. This makes the Indian economy and Indian bond markets vulnerable to an oil shock.

“From a bond market perspective, this is a bad macro setup. If the price of crude oil continues to rise, we should expect bond yields to rise despite continued accommodative monetary policy. Thus, the price of crude oil remains the biggest risk for Indian bond markets,” says Pankaj Pathak.

“Going forward, the bond market will also react to the domestic supply and demand situation which has deteriorated significantly due to high market borrowing by the government. From an investor perspective, we believe that “a combination of liquid to money-market funds and short-term bond funds and/or aggressive low credit risk bond funds should remain the primary fixed-income allocation. We advise bond fund investors to have a longer holding period to weather any intermittent turbulence in the market,” adds Pankaj Pathak.

Dolores W. Simon