Debt fund investors move past Franklin episode; low yields limit returns
With fixed deposit rates falling to extremely low levels, investors are parking short-term funds with mutual funds. They are of course being lured by past returns
When Franklin Templeton closed debt fund schemes in six different categories in April, it seemed like investor sentiment for some of these categories was scarred for life. But the industry has bounced back in a matter of a few months. Compared to outflows from these fund categories in April and May, there have been fairly large inflows in June and July. Indeed, the inflows in the past two months are much higher than the outflows earlier in the fiscal.
As such, the assets under management in these categories have risen by 8% compared to end-March levels.
“Some investors are building emergency reserves as the slowdown in the economy has raised concerns that incomes could be lost. Typically, investors buy debt funds to build up emergency reserves,” said Vishal Dhawan, founder and CEO, Plan Ahead Wealth Advisors.
With fixed deposit rates falling to extremely low levels, investors are parking short-term funds with mutual funds. They are, of course, being lured by past returns, although they are likely to be disappointed by future returns.
Experts say that with debt yields shrinking, new investors may be a bit late in cashing in on the growth in debt funds.
“Those who are coming in right now are coming in at relatively low yields, which are among the lowest we have seen in a long time. We believe that investors coming in right now should not be coming for the yields. The performance of debt funds in the recent past has been because interest rates have come down substantially; it is very unlikely that we will see the same performance going forward,” said R. Sivakumar, head of fixed income, Axis Mutual Fund.
Dynamic bond funds and short-duration bond funds have seen returns of more than 8% in the past year, according to data from Value Research.
Another factor driving flows into short-duration funds is the increase in corporate cash balances, thanks to the large fund-raising currently underway. News reports suggest that a fair chunk of funds raised by the Reliance group found its way into short-duration funds in July.
Further, investors are also cashing out of equity mutual funds, say market watchers, and moving their chips to debt funds. In fact, equity funds witnessed outflows of about ₹2,480 crore in July.
In June, equity funds saw a meagre ₹240 crore as inflows.
Within the six categories where Franklin Templeton shut funds, the credit risk funds category continues to see outflows. Assets under management (AUM) of this segment have nearly halved this fiscal.
AUM of medium-duration funds, which also take on relatively higher credit risk, have fallen 26%. AUM of the ultra-short duration, short duration, low duration and dynamic bond funds have risen 23%.
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