Debt Funds Under Pressure, Equity Funds Shine! Why?

Debt Funds Under Pressure, Equity Funds Shine! Why?

Discover why debt fund inflow tumbled while equity fund inflows soared in September 2023.

Since the beginning of the year, equity funds have been in the spotlight, while debt funds have taken a back seat. There were moments, such as in April, May, and July 2023, when debt funds saw increased interest, but what happened in September 2023 is quite remarkable. Debt funds experienced the most significant sell-off of the year!

In contrast, equity funds saw a substantial inflow, and hybrid funds emerged as star performers.

Now, let us delve into the reasons behind the shift in investor behaviour, why debt funds faced a downturn, and why equity and hybrid funds are currently shining. 

What’s Happening?

The mutual fund industry saw a massive transformation in September 2023. Investors moved away from debt funds and shifted to equity funds. Following net outflows of Rs 25,873 crore in August 2023, debt funds witnessed even more outflows, totalling Rs 1,01,512 crore in September 2023. In contrast, equity funds observed substantial inflows of Rs 14,091 crore, though lower than the inflows of Rs 20,245 crore in August 2023. 

The table illustrates the amount of inflow and outflow of funds in the equity and debt mutual funds segment.

Why Debt Funds Felt the Heat?

According to the Economic Times, one key factor contributing to this trend was the rush by corporates to withdraw funds from liquid funds to fulfil their advance tax obligations as the quarter ended. This corporate withdrawal placed pressure on debt funds.

The second reason debt funds encountered challenges might be because of the volatility in the money market. The fluctuation in short-term interest rates and liquidity concerns in money market instruments could have made investors nervous.

Lastly, rising bond yields made debt funds less attractive. When bond yields rise, the prices of existing bonds tend to fall, which can result in capital losses for bondholders. 

These factors collectively led to outflows from debt funds.

Why Equity Funds and Hybrid Funds Category Soar?

By the end of September, the markets were trading at appealing valuations, making equity funds an attractive investment choice for investors. This might be the reason why equity funds saw demand. 

Secondly, the hybrid fund category, particularly the arbitrage fund, saw strong inflows amounting to Rs 10,175.55 crore. Arbitrage funds provide a balance between equity and debt, making them appealing to investors seeking diversification and risk management.

Introducing new fund offers, totalling approximately Rs 7,795 crore, played a significant role in attracting investors. New offerings likely provided investors with fresh investment options and choices.

Moreover, September 2023 marked a record-breaking gross SIP (Systematic Investment Plan) flow of Rs 16,420 crore, indicating growing interest among retail investors in mutual funds as a long-term investment option. 

What’s Next?

As reported by Business Standard, recent data reveals that the average quarterly AUM (Assets Under Management) of the mutual fund industry surged by an impressive 16% during the first half of the financial year 2023-24, reaching a substantial Rs 47 trillion. This substantial growth reflects the growing investor interest in the equity markets.

While this promising growth is noteworthy, it is essential not to overlook the significant sell-off in debt funds. This indicates the importance of adapting your portfolio allocation to changing market conditions. Diversifying your investments and staying in line with market dynamics can be vital in achieving financial goals and managing risk effectively.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The article is for information purposes only. This is not an investment advice.


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