Mumbai: Mutual funds pulled out ₹ 14,085.55 crore from debt securities in May, regulatory data showed, shifting to equities amid rising bond yields and higher fixed deposit rates. According Securities and Exchange Board of India (Sebi), this is the lowest mutual fund investment in debt markets since July 2013. In comparison, debt securities saw mutual fund inflows of ₹ 20,164.82 crore in April and ₹ 9,514.37 crore in May 2017.
According to Karthik Srinivasan, group head, financial sector ratings at Icra Ltd, debt investments by mutual funds are at a lower level on concerns of a continuous rise in systemic rates over the last few quarters.
“With the rise in rates, valuations are adversely hit and consequently, the NAV (net asset value) of schemes are also hit," he said. “Consequently, we are witnessing moderation in inflows into debt AUMs (assets under management), which leads to lower investments by mutual funds in debt instruments. Also, with banks increasing interest rates on deposits and various NBFCs (non-banking financial companies) offering higher rates on fixed deposits and retail bonds, some flows would have got diverted to those segments as well."
The 10-year US bond yield is now at 2.92% after touching 3% on 25 April, the first time since January 2014. In the beginning of this month, India’s 10-year bond yield climbed above 8% for the first time since May 2015.
R. Sivakumar, head, fixed income, at Axis Mutual Fund, agreed that the trend is a reflection of investors’ allocation choices. “Over the last few years, we have seen substantial increase in investors’ interest in equity and hence, there was a sustained inflow into equities," he said. “Also, over the course of 6-12 months, we have seen a lot of pressure on bond markets, which led to significant outflows. So, it’s basically a combination of these factors."
In May, mutual fund investment in equities touched a three-month high of ₹ 13,618.88 crore, up from ₹ 9,357.68 crore in the same month of 2017.
Avnish Jain, head, fixed income, at Canara Robeco Mutual Fund, said equity markets have been performing well in the past few years, while post demonetization, there has been an increase in retail participation in equity mutual funds. “The systematic investment plan (SIP) concept has caught up well with investors and monthly SIP in equity funds has increased considerably," he said. “Tax advantage, even after changes in equity taxation in the last budget, is favourable compared to debt funds, which adds to the attractiveness of equity-related products."
According to the Association of Mutual Funds of India (AMFI), the total amount collected through SIP during May 2018 was ₹ 7,304 crore, which is the highest ever.
Analysts say equity funds will likely see continued flows, while debt instruments may see volatility. “mutual fund investments in debt and equity will be driven by the flows into various schemes and the outlook of the fund managers at various points," Srinivasan said. “Investors prefer lower volatility and hence, in case the yields were to stabilize, flows into the debt schemes may pick up."
Jain agrees that with the current high rates, investors are locking in to these rates via fixed maturity plans (FMPs) and other close-ended products, and this may add to debt inflows. “The Reserve Bank of India hiked policy rates by 25 basis points (bps) in the June policy on the back of high crude oil prices, tightening global rates and high consumer price index-based inflation. “Volatile geopolitical scenario and uncertainty before general elections in 2019 is likely to keep markets volatile," Jain said. “As long as expectations remain that rates may go higher, inflows to debt funds may remain muted."
D.P. Singh, executive director and chief marketing officer at SBI Mutual Fund, said, “Going forward, I think a lot of money will flow into fixed maturity plans. Investors will not take a call on long-term debt funds in the immediate future, but may shift to ultra short-term funds/money market funds."