Debt Fund Investors Moving Towards Safety

The broad pattern of movement of AUM in the mutual fund industry shows the preferences of investors. Tracking the debt fund AUM movement over the last one year throws up certain interesting observations. The data on debt funds mostly reflect inflows and outflows, though the AUM valuation is at market-based prices. The reason is, in debt, market fluctuation is only so much. In contrast, in equity, the market has surged over the last one year and the AUM movement reflects more of market movement than investor action. Preference for passive funds and ETFs is a palpable change. Our data points start from April 2019, which is when AMFI started publishing fund-category-wise data in more detail, compared to just the broad categories published earlier. We will look at the data as of April 2019, March 2020 and March 2021, which will give us a sense of the direction.

Liquid funds used to be the dominant category in the debt space, and remains so. However, the extent of dominance is less than earlier. As on March 2021, liquid fund AUM stood at Rs 3.67 lakh crore (INR 3.67 trillion) as average of the month, out of total open-ended debt fund AUM of Rs 13.88 lakh crore (INR 13.88 trillion) as average of the month, represents 26.5%. In March 2020, it was Rs 3.82 lakh crore out of Rs 11.48 lakh crore i.e. 33.3%. In April 2019, it was even higher, 45.5%, which was Rs 5.1 lakh crore out of Rs 11.2 lakh crore. Liquid fund investors are mostly corporates as they require avenues for short term deployments. The seven-day exit load has been a dampener. Lower returns from liquid funds may have prompted corporate investors, investment time horizon permitting, to shift to other categories.

The other palpable shift has been a preference for quality i.e. lower credit risk. In April 2019, credit risk funds had a AUM of Rs 80.7 thousand crore, representing 7.2% of the total open-ended debt AUM of Rs 11.2 lakh crore. Though this is not on the higher side as a proportion, gradually it has lost investors’ interest. In March 2020, the AUM of credit risk funds dipped to Rs 58.3 thousand crore, which was 5.1% of the total AUM of Rs 11.48 lakh crore. The spate of defaults in various corporates and the incidence of lockdown and growth slowdown led to concerns. Subsequently, the Franklin Templeton incident happened in April 2020. Though there was no redemption from the six shut-down funds, it impacted sentiments about other credit risk funds. In March 2021, the category had assets of Rs 28 thousand crore, which is just 2% of the total AUM of Rs 13.88 lakh crore.

When liquid and credit risk funds lost corpus, which ones gained? Corporate bond funds and banking and PSU funds have gained popularity. These categories represent better credit quality i.e. safety than credit risk funds. Corporate bond funds, from an AUM of Rs 60.4 thousand crore in April 2019 representing 5.4% of total, went up to Rs 83 thousand crore in March 2020, which was 7.3% of total AUM. In March 2021, it was Rs 1.55 lakh crore, which was 11.2% of debt AUM. Similarly banking and PSU funds moved up from 34.6 thousand crore in April 2019 (3.1% of total) to Rs 75 thousand crore in March 2020 (6.5% of total) and is now at Rs 1.2 lakh crore, which is 8.8% of total open-ended debt AUM. The other category to gain corpus is short duration funds, which also represents decent credit quality. From Rs 80.7 thousand crore (7.2% of total) in April 2019, it has moved up to Rs 99 thousand crore (8.6% of total) in March 2020 and further to Rs 1.48 lakh crore (10.7% of total) in March 2021.

Apart from the major category shifts mentioned above, there were the minor ups and downs. Let’s look at ultra short term, low duration and money market funds together as these represent portfolio maturity of less than one year, except the very short maturity band of overnight and liquid Funds. Taken together, these three categories command 23.4% of total open-ended debt AUM in March 2021. In March 2020, it was 22.1% of total and in April 2019 it was 21%. Some money may have shifted from Liquid Funds to these categories, for relatively better returns, provided the investor has the requisite time horizon. These categories require a longer time frame than Liquid as the portfolio maturity is longer. Overnight Funds gained between 2019 to 2020, from 1% of AUM to 7.9%, but has been flat thereafter. In March 2021, Overnight Funds were at 6.4% of open-ended AUM. Returns are on the lower side. Dynamic Funds are not as popular, as the view is that RBI rate cuts are over for the time being, but certain AMCs have a particular positioning of their Dynamic Funds. The corpus has moved from 1.6% of AUM in March 2020 to 1.9% in March 2021.

The focus of the market is on short to moderate maturity funds (lower volatility) with relatively better credit quality (lower credit risk). Safety is a priority now; view-based gains (e.g. interest rates coming down) can happen later.


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