Jan 27, 2024
Investors play safe, bet on money market schemes
Debt mutual funds (MFs) continued to register withdrawals in January. Data from the Association of Mutual Funds in India (Amfi) showed net outflows of Rs 10,316 crore. However, money market funds were outliers, registering inflows of Rs 6,460 crore.
Money market funds are those that invest in highly liquid, near-term instruments, such as cash, cash-equivalent securities, and debt securities with short-term maturity. Since these are typically for a horizon of less than a year, industry players say they provide a cushion against volatility.
“Investors could look at yields upwards of 7%, with the absolute returns proving attractive,” says Devang Shah, co-head of fixed income, Axis Mutual Fund. “It is mostly the institutional investors who put in money into debt funds. They were looking to reduce their positions, ahead of the Budget and MPC meet,” he added.
However, he said the industry could begin to see inflows into all categories of debt funds, over the next six to 12 months.
Vikas Garg, head of fixed income at Invesco MF, agreed, saying worries of the government going for a higher fiscal borrowing in the Budget led to investors pulling out money in January. Schemes such as overnight and short-duration funds saw outflows of close to Rs 4,000 crore, while liquid funds saw a withdrawal of over Rs 5,000 crore.
“With the Budget and MPC behind us, there is some clarity, and we could see inflows in other categories, with funds of two-five years in horizon looking good. Short-term, corporate bond, and banking/ PSU fund are categories that could see inflows soon,” Garg said.
Macro factors and the impact of high interest rates continue to bite, say analysts, which is reflected in the outflows. They expect a while for the impact of high interest rates to reduce.
“Though the magnitude of flows is slightly lower than last month, the dynamics and underlying fundamentals have remained similar. A weakening macro-economic scenario has likely led to investors turning cautious towards fixed income. While the rate hike cycle is expected to ease, it might be a while before we begin to see the impact of the interest rate risks cooling off. Owing to this, retail investors have been reducing their exposure to debt in favour of other asset classes like equity, which has witnessed a massive run-up,” said Kavitha Krishnan, senior analyst – manager research, Morningstar India.
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Despite the market having factored in the 25-bps hike undertaken by the MPC last week, the status quo pertaining to the ‘withdrawal of accommodation’ stance came as a surprise to few, with the RBI governor indicating more hikes ahead.
Garg said what happens in the next MPC in April will also depend to an extent on the next FOMC meet in March. In terms of a peak, 6.5% is fine in case the FOMC indicates another one or two hikes, he said.
He pointed out that we have almost reached an inflexion point in terms of rate hikes and with yield-to-maturity being stable, there is unlikely to be any mark-to market impact for investors.
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