Sell in May and go away." A number of investors seemed to have adopted this mantra with credit risk funds and medium-term funds last month. Not since the Infrastructure Leasing and Financial Services Ltd (IL&FS) crisis has the bond fund market faced such high redemptions, fund analysts have pointed out.

Both credit risk and medium-term bond funds have witnessed a combined withdrawal of more than 6,200 crore in May 2019, shows data from the Association of Mutual Funds in India (AMFI). Outflows stood at about 1,800 crore in April.

These funds have a larger proportion of “AA" rated paper. This shows that investors are clearly shying away from taking higher risk. AA is a grade assigned to a debt obligation by a rating agency to indicate a lower quality than the top rating of AAA, and hence a relatively lower capacity to pay interest and repay the principal.

“Post the IL&FS crisis, the withdrawals from credit funds were not as high as a proportion of assets under management (AUM). Now on a smaller base, we have seen higher redemptions. There is no slowdown in the pace of redemptions in this category. In fact, this has worsened, which may have been due to the severity of the news flow in certain credit instruments," said a debt fund manager at a prominent fund house who did not want to be named.

This could also be the highest possible withdrawal in the history of this category, according to fund managers. Keep in mind credit funds are a three-year-old category, which sprang to prominence post-demonetization. This category witnessed huge inflows in 2017 and the first half of 2018, ballooning to a combined 1.4 trillion in assets by September 2018, said the fund manager quoted above.

Now, the outflows from these categories are increasing on the back of the already dwindling AUM. This has already brought down the AUM size of these categories, i.e. credit risk and medium-term bond funds, down to 1.13 trillion in May 2019, shows the latest AMFI data.

Turn to corporate bond funds and the picture is more sanguine. Corporate bond funds, due to their larger proportion of AAA-rated paper, are less risky. AUMs of corporate bond funds and banking and PSU (public sector unit) funds increased 1% from April to May.

The rise of corporate bonds underscores the fact that investors are increasingly shifting to higher-rated funds, and clearly shying away from the credit risk funds.

“Many investors are stung by the defaults in the bond market. And it does not seem like investors are going to overlook credit risk now going forward," said the fund manager quoted above. From the looks of it, the shift towards higher-rated funds is going to continue for a long time.