The combined allocation of debt mutual funds into corporate bonds and commercial papers (CPs) has declined sharply at July-end 2022 amid risk aversion post Infrastructure Leasing & Financial Services Limited (IL&FS) episode and COVID-19 pandemic, according to the RBI Bulletin.
Instead of this, fund houses have secured their investment by increasing the exposure to debt securities issued by state and central government.
As per the central bank bulletin, the combined allocation to corporate bonds and CPs has moderated to 42.2 percent at end-July 2022 from a peak of 77 percent at end-July 2018.
Meanwhile, MFs have increased their investments significantly in government securities, T-bills, and TREPS. The proportion of government securities (including T-bills) in the debt portfolio of mutual funds has increased in the recent period, reaching 27.2 percent at end-July 2022.
Debt mutual funds have also increased their exposure to TREPS after overnight funds have gained momentum and popularity. Overnight funds are funds that invest in overnight securities having a maturity of one day.
The assets under management (AUM) of overnight funds have grown by almost 10 times between April 2019 and July 2022 amid a notable shift in preference from liquid funds to overnight funds. This shift is primarily a result of the SEBI’s introduction of a graded exit load on investors who exit the liquid fund within seven days of their investment.
On the overall basis, the AUM of debt mutual funds stood at Rs 12.6 lakh crore at end of September 2022, increasing from Rs 3.7 lakh crore at March end.
However, the share of assets managed by debt mutual funds in the overall mutual fund industry decreased to 32.8 percent from 63.8 percent during this period with rise in other categories of mutual funds, viz., equity, balanced, and other schemes.
At end-June 2022, corporates remained the largest class of investors, contributing Rs 8.5 lakh crore to the AUM of Rs 12.5 lakh crore of debt MFs, typically investing in funds of shorter duration.
High net worth individuals (HNIs) are the second largest class of investors, accounting for Rs 3.2 lakh crore of AUM and favouring funds of relatively longer duration since their investment objectives are likely to be different from those of corporates.
Determinants of Debt Fund Flows
The cash flows generated by non-financial corporates have tracked the net change in AUM of corporates in debt MFs quite well in the recent period. Strong operational performance translates into higher cash flows and may be expected to translate into higher savings and investments by corporates in financial instruments, including mutual funds.
In the recent period of H2 2021-22 and H1 2022-23, debt MFs witnessed net redemptions as investors stayed away to avoid price risk amid hardening of bond yields.
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