After a prolonged dry spell of outflows, debt mutual funds have made a triumphant return. What caused this sudden turnaround, and will the inflow cycle continue?
It’s been a long since we heard anything good about debt funds. Since December 2022, there was not a single month when debt funds recorded an inflow until April 2023.
But what is the reason behind this sudden inflow, and will this inflow cycle continue? Let’s find out.
After a long extended dry spell, debt funds have finally broken free and have witnessed an impressive net inflow of Rs 1.07 lakh crore in April 2023. A significant amount of inflows was seen primarily in liquid funds (+ Rs 28,730 crore), followed by money market funds (+ Rs 16,193 crore), ultra-short duration funds (+ Rs 15,089 crore), and overnight funds (+ Rs 4,128 crore). In short, short-duration funds were the star performers.
According to AMFI, because debt funds attracted such a major inflow, the total Asset Under Management (AUM) managed by mutual funds crossed the Rs 41.62 lakh crore mark for the first time in April 2023.
However, SIP data saw a slight decrease in the monthly flows through SIPs from Rs 14,276 crore invested in March 2023 to Rs 13,728 crore invested in April 2023.
Reason Behind The Sudden Inflow in Debt Funds
The reason why investors are flocking towards debt funds with renewed enthusiasm might be because of the recent inflation data. India’s retail inflation has reduced to an 18-month low of 4.7% in April 2023 as compared to March 2023 data of 5.66%. It offers a ray of hope that the RBI’s interest rate hike cycle might be peaking out. This change in sentiment has created a rush among investors to lock in higher yields that the current debt funds offer.
Active Equity Funds Take Backseat
If we look at the actively managed equity funds segment, it saw a net inflow of a mere Rs 6,480 crore. Small-cap, mid-cap, flexicap or multi-cap, large and mid-cap, and thematic funds saw notable inflows.
Amid a strong equity market rally, SIP flows have remained robust. But, the reason why equity funds attracted less inflow was that there were fewer New Fund Offers (NFOs) in April 2023.
Undoubtedly, April 2023 was the triumphant return of active debt funds. While equity fund flows remained optimistic during this period, if SIPs and NFOs pick up in the coming months, we may also see active equity attracting good inflows.
Observing how this trend evolves in the months ahead will shape the investment landscape and offer new opportunities for investors.
*The article is for information only. This is not investment advice.