Here's Why Debt Mutual Funds Turned Unappealing
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During the end of April, amidst the current COVID-19 pandemic lockdown, news of the Franklin Templeton Mutual Fund house winding down six schemes rocked the investment world. It was a huge blow for investors who were expecting investments they had to help sustain them in the ongoing crisis.
Since this shocker, investors have rushed to make redemptions from most of their debt mutual fund investments. As per CNBC TV18 news reports, an outflow of Rs 24,000 crore in a matter of last three days of the month end has occurred.
As per recent AMFI data released on 8th May 2020, the debt funds saw the most outflows for the previous month as seen below. It is seen that Credit risk funds, Low Duration Funds, Ultra Short Duration Funds and Short Duration Funds had the most number of outflows for the month of April.
Table 1: Inflows/Outflows of debt Funds
| Open ended debt Schemes |
Nov-19 |
Dec-19 |
Jan-20 |
Feb-20 |
Mar-20 |
Apr-20 |
| Overnight Fund |
20649 |
-8869 |
22652 |
-1474 |
26654 |
2603 |
| Liquid Fund |
6938 |
-71159 |
59682 |
43825 |
-110037 |
68848 |
| Ultra Short Duration Fund |
774 |
-2523 |
8153 |
-40 |
-29053 |
-3419 |
| Low Duration Fund |
4638 |
-1597 |
5562 |
3152 |
-19921 |
-6841 |
| Money Market Fund |
5136 |
-3006 |
6990 |
2553 |
-27402 |
-1210 |
| Short Duration Fund |
3490 |
3457 |
2904 |
4076 |
-11039 |
-2309 |
| Medium Duration Fund |
-928 |
-519 |
-253 |
164 |
-2164 |
6364 |
| Medium to Long Duration Fund |
-61 |
-146 |
-87 |
308 |
-592 |
-191 |
| Long Duration Fund |
30 |
18 |
-2 |
78 |
57 |
302 |
| Dynamic Bond Fund |
-135 |
-151 |
-84 |
15 |
-833 |
-1155 |
| Corporate Bond Fund |
2581 |
1383 |
1969 |
2841 |
-3791 |
4169 |
| Credit Risk Fund |
-1,899 |
-1191 |
-1215 |
-637 |
-5569 |
-19239 |
| Banking and PSU Fund |
7231 |
4770 |
3033 |
3205 |
-6304 |
6561 |
| Gilt Fund |
-289 |
387 |
-513 |
-156 |
747 |
2516 |
| Gilt Fund with 10 year constant duration |
16 |
3 |
17 |
49 |
84 |
93 |
| Floater Fund |
3256 |
714 |
497 |
1753 |
-5750 |
-932 |
| Total |
51428 |
-78427 |
109306 |
59711 |
-194915 |
56159 |
(Source: AMFI)
From the table above, you will notice that Credit Risk Funds have failed to attract any kind of attention for inflows since the past six months. Most of the credit risk funds had made investments in debt instruments issued by private entities to chase returns; and ever since the great IL&FS debacle, it has not attracted the investors' attention.
Except, Liquid Funds, Banking & PSU Fund, Corporate Bond Funds, Medium Duration Funds, Overnight Funds, and Gilt Funds are the only ones that received some inflow last month.
Image Source: Image by 41330 from Pixabay
Besides other default episodes, despite the stringent measures taken by the regulators that occurred in the past, have made most of the debt funds, the "supposedly less risky investment" unappealing till now. The fear of losing money is almost a deja vu moment for investors.
After Franklin Templeton Mutual Fund wound down six of its schemes, there was panic selling and the average AUM dropped drastically, as seen below in the graph.
Graph 1: Average Assets Under Management Dipped
(Source: AMFI)
The Average AUM of the Indian mutual fund industry due to market impact and net outflow witnessed by debt-oriented schemes and hybrid schemes has fallen to Rs 23.53 trillion. That said, in over 10½ years going by the Association of Mutual Funds in India (AMFI) quarterly data, the AAUM has grown nearly five times from Rs 5.83 trillion as of June 30, 2009, to Rs 23.53 trillion as of April 30, 2020.
However some experts are of the view that the recent outflows could be because of regular month-end withdrawals that large investors do. For the month of April out of the total redemptions of Rs 774,700.87, only a part of it is because of a general sense of panic about the Franklin Templeton MF winding down schemes could have contributed to this.
As seen in the graph below, the number of folios have increased and continue to rise. It is evident that people are making mindful choices to invest their hard-earned money.
Graph 2: Number of folios on the rise
(Source: AMFI)
Conclusion:
Do note that one should not invest in schemes that they are not aware of, especially in current times. Safety and liquidity are prime concerns. Remember, "Debt mutual fund investment isn't risk-free at all." Stick to mutual funds where the fund manager doesn't chase returns by taking higher credit risk. Further, asses your risk appetite and investment time horizon while investing in debt funds.
As a thumb rule: Choose mutual fund schemes from fund houses that follow prudent judicious investment processes and stringent risk-management systems.
Warm Regards,
Aditi Murkute
Senior Writer
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