AMFI April data: Credit risk funds bleed; fund managers blame it on redemption pressure

Credit risk funds category continued to suffer in the month of April as well as it felt the impact of Franklin Templeton India closing its six debt schemes.

This led to the panic in the market and has costed the industry with a total net outflow of Rs 19,239 from the credit risk fund category, according to the data from the Association of Mutual Funds in India (AMFI).

In comparison, the outflows from these funds stood at Rs 5,568.8 crore in March, Rs 637 crore in February, Rs 1,215 crore in January and  Rs 1,191 crore in December 2019.

So, in the last five months the industry has witnessed a total outflows of Rs 27,851 crore from just credit risk funds category.

“Credit risk funds outflows are largely because Franklin Templeton shut its schemes creating panic. However, Franklin Templeton has managed the redemptions well and now even across the industry the redemptions are manageable,” said N S Venkatesh, Chief Executive, AMFI.

On April 23, Franklin Templeton Mutual Fund was forced to wind up six of its schemes- including Credit Risk Fund. 

Credit risk funds are debt funds that invest roughly 65 percent of the investment corpus in less than AA-rated paper. As the risk related to investing in a lower-rated paper is higher, the returns on these papers are also high.

Fund managers said the credit risk fund has been reeling under the stress of redemptions as most of the fund houses had their underlying assets deployed in highly illiquid corporate bonds.

Given the liquidity squeeze in the lower credit space of the Indian bond markets and ensuing risk averse environment, there was a flight to safety from investors. Consequently, investors rushed to redeem their investments from avenues which they perceived as taking higher risk.

The outflows in credit risk funds were compensated by inflows in liquid funds category.

Liquid funds which are used by companies to park surplus cash registered net inflows of Rs 68,848 crore in April as again outflows of Rs 110,037 crore in March.

“Money which was redeemed from liquid funds to pay the advance tax or meet the cash requirement returned back in April,” Venkatesh said.

Within the debt category, medium duration and low duration too saw outflows of over Rs 6000 crore in April.

Just like credit risk funds, these categories too had investments in high yielding papers impacting returns and thus most investors exited.

Heightened downgrades and defaults in many of the high yielding instruments, led to NAV hits.

A higher yield-to-maturity indicates higher returns, but at the same time there is higher risk.

Equity Funds

All Equity fund categories barring dividend yield funds registered net inflows in the month of April.

Overall, the equity category witnessed net inflows of Rs 6,213 crores, comparatively lower than the net Inflow of Rs 11,723 crores it recorded in the previous month.

The highest net inflows were posted by large cap funds of Rs 1,691 crore, followed by multi cap funds that witnessed net inflows of Rs 1,240 crore in April.

“The month of April witnessed a relief rally in the markets on the back of measures taken by the government and RBI to boost the domestic economy. Selective relaxation in lock down to kick start the business and economic activity also helped in improving the sentiments,” said Himanshu Srivastava, Senior Analyst Manager Research, Morningstar Investment Adviser India.

S&P BSE Sensex surged by around 14 percent in April.

Safe haven investments helped gold ETFs to register net inflows of Rs 730 crore during the review period.

In April, the total assets under management of the mutual fund industry stood at 23.52 lakh crore down from Rs 24.70 lakh crore in March 2020.