Conservative debt mutual fund investors are in love with shorter-duration debt funds. Mutual fund distributors say there is growing interest in categories like liquid funds, overnight funds, floater funds and ultra- and short duration funds. They believe that the shift is attributed to uncertainties over the central bank’s future policy stance.
In July, liquid and ultra-short duration funds received the highest inflows since the beginning of the financial year. Debt mutual funds witnessed a net inflow of Rs 63,870 crore in the month of July.
The inflow in debt funds was led by liquid funds which saw Rs 31,740 crore being pumped in, while money market funds also saw inflow of Rs 20,910 crore, according to data released by the Association of Mutual Funds in India (AMFI). Floater funds have been enjoying their spot under the sun of late. Many investors have been investing in these schemes and it is evident from the inflow numbers as well. These schemes saw net inflows of Rs 7,423 crore in July. Here’s a look at the data:
“As the interest rates have been low for a long time, there are expectations of an increase in the rates in the near future. Investors are hence inclined towards debt funds with shorter duration and risk. I believe that this is a good strategy. Investors should not venture into schemes with longer tenure papers in such market conditions. If and when the interest rates increase the impact on bond price will further have an impact on their debt portfolio. The longer the duration, the higher is this impact,” says Harshad Chetanwala, Founder, MyWealthGrowth, a financial planning firm, based in Mumbai.
A lot of theories are floating around the market about when rates will be revised. Issues like rising inflation are constraining the central bank from easing the rates further, say some experts. On the other, the rise in the number of Covid-19 infections in India is also posing a threat for the already vulnerable economy. In its last policy meeting, the Reserve Bank of India left policy rate unchanged. However, it was not a unanimous decision. There was opposition over maintaining an accommodative stance for longer.
Here’s a look at how these debt schemes have performed recently:
|Category||YTD returns (%)
||3-months returns (%)||1-year returns (%)|
|Ultra Short Duration||2.28||0.98||3.66|
“Inflation and uncertainties over the RBI’s future policy is the main reason people are investing in shorter duration funds. Once there is an interest rate reversal, investors would get better yield in these investment options on a risk adjusted basis. Most of the investors are moving to the shorter duration funds to play it safe. Categories of short duration with good quality credit papers like ultra-short term and liquid funds, which have maturity of less than 9-months are a good option at this point but with very moderate return expectations. Apart from these, we suggest arbitrage funds which are more tax-efficient over the short duration debt products,” says Shifali Satsangee, Founder, Funds Vedaa, a mutual fund distribution firm, based in Agra.