MUMBAI : Problems of debt-fund investors seem never ending, for all may not be well with the mutual fund industry.

For the last few months, debt-fund investors have been having a rough time. If credit issues spooked debt investors earlier, now it is alterations in the exit load structure that has had the lot worried.

The Securities and Exchange Board of India’s (Sebi) introduction of a seven-day exit load last month saw massive a exodus, of 1.52 trillion, from liquid funds in June. At 1.52 trillion, it accounted for about 27% of the assets under management in the liquid category by May 2019. Debt funds as a category shrunk 14.5% month-on-month as redemption soared.

Corporate entities, particularly overnight corporate investors, use liquid funds to park surplus money. Mutual funds had estimated that about 30% of liquid-fund money is overnight-fund money. Much of that is expected to move to other overnight markets now.

Considering that liquid funds offer wafer-thin returns, a seven-day exit load could have led to losses for investors.

Of course, some of this is cyclical as corporates typically withdraw from liquid funds at the end of every quarter to meet obligations such as advance tax payments.

But huge withdrawals from other debt categories, too, have been a feature. Credit-risk funds continue to see outflows, while low-duration, money-market and medium-duration funds, also, have been hurt by outflows. The net withdrawals, excluding the liquid category and similar categories, were to the tune of 4,844 crore.

From the looks of it, credit risk aversion is deepening. “After the exit loads, increased outflows were expected in liquid funds. Besides, the increase in corporate defaults has been a nagging worry for investors in the last few months, which explains some of the outflows. Some stability is expected ahead," said a senior debt fund manager of a domestic fund house.

Note that exits have been happening despite the downtrend in bond yields. When yields fall, it leads to a rise in debt prices and, therefore, the net asset values of debt funds. However, as most investors seek to withdraw from the debt market when they should be holding, it suggests that the confidence is weak.

The picture is only slightly better on the equity front. Although net inflows to equity funds were 7,663 crore in June, the month-end assets under management of equity funds still fell. The decline in equity markets pulled down the outstanding equity AUMs of the mutual fund industry, with large investors making lumpsum withdrawals.

SIPs (systemic investment plans) are still going strong. Though inflows are marginally lower, they account for more than net inflows to equity funds, at 8,122 crore. That’s a saving grace for equity funds. As always, smaller equity investors have been making regular contributions through SIPs, and continue to cheer the spirits of the MF industry.

However, until large investors begin to park their spare money back in equity and debt funds, and some stabilisation in the debt fund market returns, the mutual fund industry may not recover any time soon.