Fixed income funds witness heavy outflows in January

Open ended income or debt-oriented categories of mutual funds witnessed a net outflow of Rs 33,408.76 crore in January 2021, compared with the net inflow of Rs 13,862.76 crore in December 2020. This could be largely attributed to the huge net outflow from liquid fund category during the month, which amounted to Rs 45,315.69 crore.

“Liquid funds are typically used by many businesses to park their money for a short period of time. The outflow from the category could be a result of these businesses pulling their money out for meeting liquidity requirement at the start of the year,” said Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, commenting on fixed income funds based on AMFI’s monthly data for January ’21.

The other categories that witnessed net outflows during the month are Low Duration Fund, Money Market Fund, Medium to Long Duration Fund, Long Duration Fund and Gilt Fund.

In line with the interest rate scenario in the country, investors continue to focus on fixed income categories having short to medium duration profile. Hence categories such as Short Duration, Medium Duration, Corporate Bonds and Banking and PSU Fund continue to receive robust investments. Categories like Dynamic Bond Fund, where taking active duration calls is part of the strategy to benefit from changing interest rate environment, also received good net inflows. These categories combined received a net inflow of Rs 16,688.15 crore through the month.

“With net inflow of Rs 6,892.63 crore, Short Duration Fund category was the biggest beneficiary during the month, followed by the Corporate Bond category which garnered net inflow of Rs 5,428.51 crore. While the funds from the corporate bond category are relatively safer investment options given limited scope to take credit bets, many funds from the short duration category too ply a relatively cautious investment approach. Also, their positioning on the duration front is largely in line with the current environment. These aspects have caught investor interest towards these categories in the recent times, especially when safety has been a big draw,” said Srivastava.

After witnessing consistent net outflows since April 2019 and losing net assets worth Rs 56,317.27 crore till December 2020, Credit Risk category finally received a net inflow of Rs 366.44 crore in January 2021. The net outflows from the category have been showing signs of moderation over the last few months, which eventually resulted in net inflow this month. This is an important development as it shows that investors are gradually gaining their risk appetite back, which was severely impacted after the debt crises during the March-May period last year.

Compared to December, the number of folios decreased suggesting that there is a section of investor who chose to move away from this category. However, the fund mobilised shot up during the month, whereas the redemption amount fell, signifying that it’s the existing investors, who probably understand the risk return trade-off of the category better, are the ones who are investing in the category. Although it will take a while for the category to make up for the assets it has lost over the years, it’s a good start, nonetheless.

Another category which was severely hit during the peak of liquidity crises last year was Medium Duration. However, post that, the net inflows into the category stabilized and continued to increase month after month. In January, the category received a net inflow of Rs 1,841.75 crore, which was marginally higher than the net inflow of Rs 1,817.96 crore recorded in the previous month.

“What has been pulling investors towards the funds from this category is their improved credit profile since the debt crises last year. Now most of the funds from the category have higher investments in AAA or equivalent rated securities. Moreover, the category is also positioned well in the current environment on the duration front, thus attractive investor interest,” informed Srivastava.