Debt Mutual Funds Face Rs 1.13 Lakh Crore Outflow in September 2024: Key Insights for Investors

Debt Mutual Funds Face Rs 1.13 Lakh Crore Outflow in September 2024: Key Insights for Investors

Debt-oriented mutual funds experienced significant outflows in September 2024, losing Rs 1,13,833.95 crore after two months of consecutive inflows, according to data from the Association of Mutual Funds in India (AMFI). This sharp reversal, compared to the Rs 45,169.36 crore inflow in August, was largely driven by corporate redemptions to meet second-quarter advance tax obligations, as noted by Nehal Meshram, Senior Analyst at Morningstar Investment Research India.

Key Categories Affected

Liquid funds saw the highest outflows, with Rs 72,665.97 crore leaving the category, representing 63.8% of the total outflows in September. Money market funds followed, losing Rs 23,420.84 crore, while overnight funds witnessed net outflows of Rs 19,362.65 crore. Corporate redemptions of surplus investible funds ahead of quarterly tax payments were the primary reason for these withdrawals from liquid and money market funds.

Despite this, corporate bond funds saw inflows of Rs 5,039.07 crore, making it the top-performing category in terms of positive flows. Gilt funds, long-duration funds, and short-duration funds also experienced net inflows during the month, driven by investor optimism around potential interest rate cuts.

Investor Strategy: Focus on Long-Duration Funds

Meshram indicated that investors have been gravitating towards long-duration funds, expecting interest rate cuts. These funds stand to benefit from potential rate reductions, and inflows are likely to increase as the outlook on rate cuts becomes clearer.

IIFL also noted that the net inflows into debt funds for the September quarter amounted to Rs 0.51 trillion, a decrease compared to the Rs 1.25 trillion inflows in the June quarter. However, the trend of positive quarterly flows persisted, marking the second consecutive quarter of net inflows, following six quarters of consistent net outflows.

Categories such as money market funds, liquid funds, and short-duration funds continued to see positive inflows. Corporate bond funds, Gilt funds, and long-duration funds also recorded significant inflows, reflecting investor confidence in long-term debt instruments.

Challenges and Market Trends

Certain debt fund categories still faced outflows, notably Banking & PSU Funds (Rs 3,836 crore), Floater Funds (Rs 1,579 crore), and Credit Risk Funds (Rs 1,416 crore). Despite these, the overall tone of debt fund flows was positive.

Total assets under management (AUM) for debt funds at the close of the September 2024 quarter rose to Rs 14.97 trillion, marking a recovery from previous quarters. However, the share of debt fund AUM in the overall mutual fund market fell to 22.32%, compared to higher shares in previous quarters, mainly due to the rising dominance of equity funds.

The market also remains influenced by elevated government bond yields, with the 10-year Indian Government Bond yield hovering around 7.2%. Mirae Asset Mutual Fund highlighted that steady demand for government securities and quality corporate bonds continues, despite higher global interest rates and inflation concerns.

Investment Outlook: Managing Duration and Yield

ICICI Prudential Mutual Fund advised investors to focus on "Accruals + Active Duration Management" to navigate market volatility expected through 2024. With bond yields likely to experience push-and-pull effects, active management of duration will be crucial for capitalizing on rate movements.

Motilal Oswal also recommended maintaining a duration bias in fixed-income portfolios, suggesting that investors should allocate 30% of their portfolio to actively managed duration funds and long-term G-secs to benefit from potential yield softening in the next 1-2 years.