The Association of Mutual Funds of India (AMFI) reported in its most recent data set for the month of March that the debt-oriented mutual fund category had significant outflows of more than Rs 1.98 lakh crore in contrast to inflows of Rs 63,808.82 crore in February.
All debt fund categories had withdrawals, according to AMFI statistics, with the exception of long-duration funds, banks, PSU, and gilt funds with a constant 10-year tenure. Liquid funds had the most withdrawals of all the loan categories, with around Rs 1.57 lakh crore being taken out.
Debt funds are mutual fund schemes that make investments in capital appreciation-producing fixed income instruments, such corporate and government bonds, corporate debt securities, money market instruments, etc. Bond funds and income funds are other names for debt funds.
Various debt funds exist based on investment horizons, risk-return profiles, and financial objectives. Among the well-known ones are:
Funds that invest in debt instruments with a maturity date of less than 91 days are known as liquid funds. They offer stable returns with low NAV volatility, making them appropriate for investors looking to temporarily lodge excess capital for a few days.
Ultra-short Duration Products: Investors with a minimum three-month investment horizon should consider these products. These funds are regarded as low-risk investments and provide somewhat greater yields than liquid funds.
Low-Duration Funds: These offer respectable returns at a somewhat hazardous level. For individuals wishing to invest for a period of six months to a year, they are helpful. To increase yields, a portfolio might contain bonds with a lower credit rating.
Money Market Funds: These funds make investments in debt securities with a maximum one-year maturity. Their somewhat longer term provides some opportunity for capital gains, but their primary goal is to create returns via interest income.
Short-Duration Funds: These funds make investments across credit ratings and in a prudent mix of long- and short-term debt. It is advised to invest in these funds for a period of one to three years.
Medium, Medium to Long, and Long Duration Funds: Generally speaking, a medium-duration fund's portfolio should have a duration of three to four years, a medium-to-long fund's length of four to seven years, and a long-duration fund's duration of seven years or more. These funds make investments in government, public, and private company debt instruments, both short- and long-term. In general, they perform better when interest rates are down and worse when they are rising.
Fixed Maturity Plans (FMPs): These closed-end funds make investments in debt instruments whose maturities coincide with the program's parameters. Typically, FMPs make investments in highly rated, low-risk debt, which they then keep in a passive manner until the securities mature and are redeemed, at which point investors receive their money. The primary benefit of the FMP structure is that it allows investors to lock in interest rates and removes interest rate risk. The primary disadvantage is that, although being listed, FMPs typically have little liquidity.
Corporate Bond Funds: These funds allocate a minimum of 80% of their portfolio to corporate bonds with ratings of AA+ or above. These funds are suitable for investors who are risk averse and seek consistent returns together with principle protection.
Gilt funds: These funds only make investments in federal and state government-issued securities. These securities have medium- to long-term maturity periods and are low-risk investments.
Should you make debt fund investments?
One can profit from debt by investing in debt funds and earning interest and capital gains. While not immediately available to them, retail investors can access wholesale debt markets and money markets.
Compared to equities, debt funds provide stability and a predictable income source. Every day, debt funds get income on their assets, which affects the net asset value of the fund depending on changes in credit ratings and interest rates.
All debt categories saw a decline in March, with the exception of long-term funds. Outflows in the liquid ultra-category were caused by the customary build-up of the balance sheet at year-end. Outflows occurred despite the fact that short-term rates peaked due to a tight liquidity environment. Even more noticeable withdrawals were caused by the quarterly seasonality of restricted liquidity that coincided with year-end, according to Anand Vardarajan, Business Head - Banking, Institutional Clients, Alternate Products and Product Strategy, Tata Asset Management.
The withdrawal in March, according to Himanshu Srivastava, Associate Director at Morningstar Investment Research India Private Limited, was brought on by the advance tax obligations that corporations must meet, particularly because March marks both the end of the fiscal year and the quarter.
"This trend suggests that investors are anticipating an interest rate cut later in the year, prompting them to reallocate their investments from shorter-duration profiles to longer-duration ones," Srivastava stated to CNBCTV18.
It is favorable for investors to enter the debt market at this moment since the market is displaying greater yields. Fixed deposits offer safe investment alternatives, corporate bonds earn more, and government bonds give stability. These factors combine to create a favorable investing environment for those looking to take advantage of market trends.
Furthermore, additional foreign money will flow into Indian government bonds as a result of their inclusion in the two global indices: the Bloomberg Emerging Market Local Currency Government Indices from January 31, 2025, and the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) commencing in June 2024. The demand for the bonds will rise as a result. The Association of Registered Investment Advisers member Jigar Patel stated: "Mutual funds with longer duration will benefit more." Therefore, it is anticipated that the portfolios holding longer duration debt funds and dynamic debt funds will gain more from the declining interest rates. The declining G-sec yield will also be advantageous to long-term G-sec funds."
