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Business News/ Money / Calculators/  Debt fund net inflows hit 6-year high in July
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Debt fund net inflows hit 6-year high in July

Despite fears of rising inflation and valuations, debt and equity find favour over gold and real estate

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Expectations of at least one more rate cut by the Reserve Bank of India (RBI) in the current financial year have continued to boost investor interest in fixed income mutual funds (MFs).

Net inflows in debt MFs in July hit a 6 year-high at 43,913 crore, according to the Association of Mutual Funds in India (Amfi). This led to debt funds’ assets under management (AUM) rising by 8.5% month-on-month to 6.7 trillion.

While this data is for July (the central bank’s monetary policy review was on 9 August), fund managers maintain that there is still a “pro low-interest rate expectation" among investors.

“There are expectations of a rate cut and also of inflation coming down in the next one or two readings. This kind of indication is leading to flows in fixed income. It is a virtuous cycle to our mind," said Lakshmi Iyer, chief investment officer, debt, Kotak Mahindra Asset Management Co. Ltd.

In the August policy review, RBI left the benchmark repo rate unchanged at 6.5%, citing upside risks to inflation. While, the July consumer price index-based inflation hit a 23-month high, analysts say that good rainfall would soften food inflation.

Though the rising interest in debt funds is evident, net inflows in equity MFs also saw a sharp growth to 2,506 crore in July, from 320 crore in June. Industry insiders say this volatility in inflows could be due to large redemptions in arbitrage funds in June, some of which may have come back in July.

Net inflows for equity funds have been positive since May 2014, except in March 2016. The AUM hit a new high of 4.51 trillion in July.

One of the reasons for the constant inflow in equities is poor returns from real estate. “A lot of money is coming in equities from real estate as that segment is seeing negative returns. Essentially equity is a long term gain. It is not something where you invest and expect good returns in 1 or 2 years," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

While valuation concerns are rising, there is no significant concern for long-term investors.

“Although flows have slowed a bit and people are concerned, what’s important to remember is that the earnings cycle is improving. Earnings should grow over the next two years and that is likely to support market valuations," said S. Naren, ED and chief investment officer, ICICI Prudential Asset Management Co. Ltd.

Investors also have concerns about gold. Gold exchange-traded funds’ (ETFs) assets fell 2.2% to 6,499 crore in July with outflows of 183 crore. They have seen negative net inflows every month since June 2013. “India is an exception where the net continues to be negative but that is because there are other ways of holding gold. World over ETFs are turning to be month-on-month positive," said Iyer.

While choosing long-term investments, keep the overall asset allocation in mind. Income funds are not for everyone. Long-term income funds are opportunistic investments and knowing when to exit is important. Also, volatility in long-term income funds is high.

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Published: 17 Aug 2016, 06:20 PM IST
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