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Debt funds steal the show in Feb 2024, liquid funds get maximum inflows

Debt funds continue to see most of the action in the short end of the yield curve and markets are, perhaps, waiting for clarity on the direction of interest rates.

Debt fund

Illustration: Binay Sinha

Sunainaa Chadha NEW DELHI
In February 2024, debt-focused funds attracted net inflows totalling Rs 63,809 crore, marking the second consecutive month of positive inflows. In January 2024, these funds experienced a surge of Rs 76,469 crore.

Liquid funds get maximum flows
Within the open-ended category, Liquid funds received the maximum inflows, followed by Corporate Bond Funds and Short Duration Funds, suggesting a notable preference for these investment options among investors in February 2024. 

"After fulfilling the advance tax payments in December 2023, corporates had likely directed excess investible money in liquid funds for a short period, thereby leading to huge inflows in the last two months. Liquid funds recorded net inflows of Rs 83,642 crore, while Corporate Bond funds saw net inflows of Rs 3,029 crore and Short Duration funds experienced a net inflow of Rs 2,346," said Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India Private Limited.

Lately, funds employing an active duration strategy have been experiencing moderate inflows. The increased investment in long-duration, Gilt funds, and Dynamic Bond funds indicates that investors are now showing interest in these categories, driven by the growing expectation of interest rate reductions.

Among the debt fund categories that witnessed the highest net outflows in January 2024 were Overnight Fund to the tune of Rs 17,376 crore, Low Duration to the tune of Rs 4,100 crore and Floater Fund to the tune of Rs 3,610 crore.  Medium Duration and Credit Risk funds persist in their trend of consistent outflows.

The other categories of debt funds that saw selling to a lesser extent included banking & PSU funds, credit risk funds, and medium duration funds. Most debt fund categories are feeling the pressure of the taxation effect.

Debt funds accounted for over 50 per cent of Feb inflows
Data analysed by brokerage IIFL shows that for February 2024, Debt funds alone accounted for 53.91% of the total fund inflows in February. Among other categories, equity funds accounted for 22.7% of the net inflows, hybrids for 15.45% of net inflows and passive funds 8.24%. Closed-ended funds saw net outflows in February 2024; albeit marginal. As of the close of February, the net AUM stood at Rs 54.54 Trillion or nearly $660 billion in dollar terms.

Net inflows into equity mutual fund (MF) schemes surged to Rs 26,860 crore in February, the highest since March 2022. The 23 per cent month-on-month rise in inflows came on the back of robust collections by new fund offerings (NFOs).

8 new NFO launches in Feb 2024

"The equity segment was also aided by 8 new fund launches during the month which cumulatively garnered Rs 8,692 crore. Among the equity asset class, the Sectoral/Thematic Funds category saw the highest inflows to the tune of Rs 11,262.7 crore. The category was aided by the launch of five new schemes during the month (Groww Banking & Financial Services Fund; quant PSU Fund; SBI Energy Opportunities Fund; WhiteOak Capital Banking & Financial Services Fund; WhiteOak Capital Pharma and Healthcare Fund) which cumulatively garnered Rs 7,178 crores during their NFO period," said Melvyn Santarita, Analyst,  Morningstar Investment Research India Private Limited.

The Large and Midcap category saw the second highest flows during the month among the equity categories- Rs 3,156.6 crore aided by the launch of Bajaj Finserv Large and Mid Cap Fund and PGIM India Large and Mid Cap Fund which cumulatively garnered  Rs 925 crore.

Despite the dip seen in net flows relative to previous months, the small-cap category continues to see robust flows-  Rs 2,922.4 crore in February 2024, which was the third highest among the equity categories. 

"Net flows dipped by 10% compared to last month where it witnessed Rs 3,256.9 crore. While gross purchases in the small cap category continued to be robust over the month, the redemptions in small cap category were the third largest among the equity categories possibly due to investors opting to book profits on the back of a sharp uptick in the performance of this category. Like the Small-cap category, the Midcap category too witnessed a drop in net inflows (-12% compared to January 2024) as it garnered Rs 1,808 crore," said Santarita.

The only category in equity which witnessed net outflows was the Focused Fund to the tune of Rs 532.8 crore. 

Interestingly, the large-cap category saw its third highest flows in 20 months with net inflows of Rs 921 crore in February 2024. That said, while the net inflows were positive, it also saw the second-highest gross redemption among the equity categories in February 2024.

"Both the midcap and the small-cap indexes have seen a sharp rally over the last 6 months and 1 year. Consequently, investors have also flocked to these categories with ever-increasing flows. Investors should note that while both the midcap and the small-cap categories have the potential to deliver good returns, these categories inherently are volatile with sharp drawdown risks. Therefore, investors should have a long-term time horizon while investing in these categories. Opting to invest in these categories via the SIP route is a good way by which investors can ride the volatility whilst dollar cost averaging over long periods," cautioned Santarita.

The other fund categories that saw net inflows in February 2024 include; flexi cap/ multi-cap funds Rs 5,207 Crore, value / contra funds Rs 1,867 Crore, and mid-cap funds Rs 1,808 Crore. Other inflows into equity funds were not too significant.

Hybrid flows robust; passive flows picking up

The combination of hybrid funds and solution funds got net inflows of Rs 18,288 Crore and is emerging as a key flow driver. However, just 2 fund categories dominated total hybrid flows in February 2024. 

"In the star hybrid category, net inflows into arbitrage funds stood at Rs 11,508 Crore and multi-asset allocation funds saw inflows of Rs 4,043 crore. In addition, equity savings funds saw net inflows of Rs 1,344 Crore and dynamic asset allocation funds (BAFs) saw inflows of Rs 1,287 Crore in February 2024. While arbitrage funds may be chipping away at liquid funds; the latest liquid fund flows numbers show that the arbitrage fund attractiveness for treasury may be saturating. We could see more money flowing back out of arbitrage funds into liquid funds. Multi asset allocation funds, BAFs and equity savings funds appear to be more of a bet on the asset allocation approach to mutual fund investing," said IIFL.

The month gone by also witnessed the launch of 10 passive schemes (6 Index funds, 1 Gold ETF and 3 Other ETFs) which cumulatively garnered Rs 1,278 crore.

Three big takeaways as per IIFL from February AMFI data 
  1. Debt funds continue to see most of the action in the short end of the yield curve and markets are, perhaps, waiting for clarity on the direction of interest rates. 
  2. On equity funds, there has been a slowdown in flows into mid-cap and small-cap funds even as there has been a shift towards thematic funds and large & mid-cap funds
  3. At higher levels of the Nifty and Sensex, IIFL expects reduced exposure to arbitrage funds as well as interest re-building in passive funds

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First Published: Mar 12 2024 | 11:34 AM IST

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