Debt fund investors move towards safety

The general pattern of movement of assets under management in the mutual fund industry shows investor preferences. Monitoring the movement of the debt fund AUM over the past year brings out some interesting observations. Data on debt funds mainly reflect inflows and outflows, although the valuation of assets under management is at market prices. The reason is that, in the case of debt, market fluctuations are only so large. In contrast, in equities, the market has surged over the past year and the AUM movement reflects market movement more than investor action. The preference for passive funds and ETFs is a palpable change. Our data points start from April 2019, when AMFI started publishing more detailed fund category data, compared only to previously published broad categories. We’ll be looking at data for April 2019, March 2020, and March 2021, which will give us some idea of ​​the direction.

Liquid funds were once the dominant category in the debt space, and remain so. However, the extent of domination is less than before. As in March 2021, the AUM liquid fund stood at Rs 3.67 lakh crore (INR 3.67 trillion) on average per month, out of the AUM open-ended debt fund total of Rs 13.88 lakh crore ( INR 13.88 trillion) on average for the month, represents 26.5%. In March 2020, it was Rs 3.82 lakh crore on Rs 11.48 lakh crore or 33.3%. In April 2019, it was even higher, 45.5%, or a crore of Rs 5.1 lakh on a crore of Rs 11.2 lakh. Investors in liquid funds are mostly companies because they need short-term deployment possibilities. The seven-day exit charge was a shock absorber. The decline in liquid fund returns may have prompted corporate investors, if the investment horizon permits, to switch to other categories.

The other palpable change has been a preference for quality, meaning less credit risk. As of April 2019, credit risk funds had an AUM of Rs 80.7 thousand crore, representing 7.2% of the total AUM of open debt of Rs 11.2 lakh crore. Although not a higher proportion, it has gradually lost interest from investors. In March 2020, the AUM of credit risk funds dropped to Rs 58.3 thousand crore, or 5.1% of the total AUM of Rs 11.48 lakh crore. The wave of defaults at various companies and the impact of the freeze and slowdown in growth have raised concerns. Subsequently, the Franklin Templeton incident occurred in April 2020. While there was no redemption of the six closed funds, it did impact feelings towards others. credit risk fund. As of March 2021, the category had assets of Rs 28,000 crore, which is only 2% of the total AUM of Rs 13.88 lakh crore.

When liquid funds and credit risks lost their corpus, which ones gained? Corporate bond funds and bank and PSU funds have grown in popularity. These categories represent better credit quality, that is, security, than credit risk funds. Corporate bond funds, with an AUM of Rs 60.4 thousand crore in April 2019 representing 5.4% of the total, rose to Rs 83 thousand crore in March 2020, or 7.3% of the total. total assets. In March 2021, it was Rs 1.55 lakh crore, or 11.2% of AUM debt. Likewise, bank and PSU funds increased from 34.6 thousand crore in April 2019 (3.1% of the total) to Rs 75 thousand crore in March 2020 (6.5% of the total) and are now at Rs 1, 2 lakh crore, or 8.8% of the total open-indebtedness AUM. The other category to gain in corpus is that of short-term funds, which also represent decent credit quality. From Rs 80.7 thousand crore (7.2% of the total) in April 2019, it rose to Rs 99 thousand crore (8.6% of the total) in March 2020 and then to Rs 1.48 lakh crore (10, 7% of the total) in March 2021.

Besides the major category changes mentioned above, there have been minor ups and downs. Let’s take a look at very short term, low duration and money market funds together, as they represent a portfolio maturity of less than one year, except for the very short maturity band of overnight funds and liquids. Together, these three categories represent 23.4% of the total AUM perpetual debt outstanding in March 2021. In March 2020 it was 22.1% of the total and in April 2019 it was 21%. . Some money can be passed from liquid funds to these categories, for relatively better returns, provided the investor has the required time horizon. These categories require a longer period than Liquid because the maturity of the portfolio is longer. Overnight funds gained between 2019 and 2020, from 1% of assets under management to 7.9%, but remained stable thereafter. In March 2021, overnight funds represented 6.4% of open assets under management. The returns are on the lower side. Dynamic funds are not as popular as the RBI rate cuts are believed to be over for now, but some AMCs have a particular positioning of their dynamic funds. The corpus has grown from 1.6% AUM in March 2020 to 1.9% in March 2021.

The market focuses on short to moderate maturity funds (lower volatility) with relatively better credit quality (lower credit risk). Safety is now a priority; sight-based gains (for example, lower interest rates) may occur later.

(The writer is a business trainer and an author.)

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