Four-fold jump in fixed-income fund inflows

Fixed-income funds have witnessed a four-fold increase in net inflows this year, according to data published by the Association of Mutual Funds in India. At the end of October, net inflows this calendar year in this category stood at ₹1,52,304 crore, against ₹38,098 crore over the same period last year.

Interestingly, October was a popular month among fixed-income investors, with a net inflow of ₹52,125 crore. However, a closer filtering of the data shows that investors are pouring money into ultra-short and short-term debt funds, while withdrawing from longer-term bond funds in droves.

Income funds invest in instruments of longer tenure, such as government securities and corporate bonds, while shorter-term debt funds, with average maturity targets of 1-3 years, invest in commercial papers, short-term bonds and money market instruments. The fund inflow data, pared down further by Morningstar Research, shows that just this fiscal, ultra-short-term funds saw inflows of over ₹90,000 crore, double the April-October 2015 net inflow of ₹39,472 crore.

Short-term funds were just as popular among investors, with net inflows this fiscal of ₹87,330 crore, multiplying 3.5 times from the corresponding figure last year of ₹25,040 crore.

However, long-term bond funds saw net withdrawals of ₹6,638 crore from April to October 2016, against net inflows of ₹1,105 crore last year. “Till October,” said R Sivakumar, Head of Fixed Income, Axis Mutual Fund, “the expectation was that the rate cut cycle was coming to an end and the RBI would cut only up to 50 basis points more.

“And at the long-end, the market had already priced that in, while at the shorter end, the rates were still expected to outperform because of the rate cuts and the RBI’s announcements that it intended to maintain neutral liquidity. Short-term rates are more sensitive to overnight rates and liquidity conditions; that’s the reason you saw more inflows into this segment.”

However, the demonetisation threw a spanner in the works for fixed-income investors, with longer-duration funds delivering returns almost twice as much as at the shorter end this month. “Because of demonetisation, yields of 6.55 per cent have fallen to to 6.30-levels in the short term and most market players didn’t anticipate this move,” said Murthy Nagarajan, Head of Fixed Income, Quantum Mutual Fund. Many corporates have made 11-12 per cent returns on their long-term funds in the last two years and they had booked profits this year. But now, returns in this segment have risen to 15 per cent.” In hindsight, they booked profits at the wrong time. “If there was no demonetisation, our yields could have gone up to 7 per cent.”