Debt funds are 'back in favor' with a massive ₹1.13 lakh crore surge—are investors finally finding their footing?

Debt mutual funds see Rs 1.13 lakh crore inflows in October after two months of outflows. What drove the turnaround?

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Inflows after two months

Debt mutual funds received inflows of Rs 1.13 lakh crore in October after witnessing outflows for two consecutive months. The total outflow in August and September were Rs 1.91 lakh crore, according to the monthly data by AMFI. Here is a detailed breakdown.

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Why this turnaround?

Fixed income saw inflows of Rs 1.13 lakh crore, following the Rs 1.83 lakh crore outflow in September. This is largely the usual quarter-end phenomenon, with institutional liquidity returning in October. Overnight and liquid funds accounted for much of this reversal, said Hemant Kumar, Chief Business Officer, Tata Asset Management.

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Category breakdown

Among the 17 sub-categories, only four categories received inflows in October whereas the other categories saw outflows.

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Huge inflows

Liquid funds received the highest inflow of Rs 70,533 crore in October. Overnight funds received an inflow of Rs 54,893 crore in the same time period. The other two categories to receive inflows were money market funds and debt-oriented sectoral funds.

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Strong rebound in cash management categories

The strong rebound in cash-management segments is consistent with the return of institutional liquidity after September quarter-end redemptions, when corporates and treasury investors typically withdraw assets to meet reporting, tax, and operational requirements before subsequently redeploying cash, said Nehal Meshram, Senior Analyst, Morningstar Investment Research India.

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Outflows

Ultra-short to short-term funds saw the highest outflow of Rs 3,581 crore in October, followed by corporate bond funds that saw an outflow of Rs 3,142 crore. Credit risk funds saw the lowest outflow of Rs 70.31 crore in the mentioned period.

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Why these outflows?

Ultra-short and low-duration funds still saw outflows. Duration categories also continued to see outflows, led by corporate bond, short duration and banking & PSU debt funds, as higher crude oil prices, RBI rate hike and tightness in liquidity after the FCNR(B) inflows pushed domestic yields higher across the curve, said Neeraj Jain, Fund Manager - Fixed Income, The Wealth Company Mutual Fund.

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What should investors do?

Debt funds witnessed a sharp return to positive inflows following seasonal corporate treasury withdrawals around the September half-year-end. For retail investors, fixed income should remain an important component of asset allocation, providing stability and balance during periods of volatility, said Saugata Chatterjee, President and Deputy CEO, Nippon India Mutual Fund.

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Growth opportunities

The opportunity for the industry now lies in converting the growing participation into deeper and longer-term investor relationships, while helping investors remain focused on their financial goals and investment horizons, said Gaurav Goyal, Chief Business Officer, Canara Robeco Asset Management Company