Debt-oriented mutual funds experienced net outflows Against net inflows of Rs 65,372.40 crore in September 2022 amid rising interest rates and inflation 49,164.29 crore in August. When it comes to debt mutual fund category, liquid funds have the highest outflows, overall 59,970.30 crore, while August saw the highest net inflows, overall 50,095.82 crore. compared to the net outflow of -16,405.13 crores reported in August, Overnight Fund showed highest net inflows for the month of September 2022 33,128.33 crore net AUM of debt mutual funds fell in September 12,41,674.09 crore from 13,03,233.66 crore was registered in August.
Consumer Price Index (CPI) data showed retail inflation touched a five-month high of 7.41 per cent in September. As the Reserve Bank of India (RBI) is raising the repo rate in the event of high inflation to control inflation, the repo rate has been increased by 190 bps so far, which includes the last 50 basis point (bps) hike, Which takes it to 5.90 percent. Percentage Since debt mutual fund schemes invest in fixed-income securities, an increase in the repo rate and bond yield affects the net asset value (NAV), especially for long-term bond funds. The RBI’s upcoming MPC meeting in December is expected to hike interest rates as the yield on 10-year Government of India bonds touched 7.5% in October, the highest level in the past four months. Which investment approach should investors use for debt funds in the light of unforeseen market conditions, where debt is considered less volatile than equity?
Mr. Sandeep Bagla, CEO, Trust MF said, “In September, system liquidity was tight due to high unspent government balances and FPI outflows from equity markets. Additionally, the market expected a hike in the repo rate by RBI and its Market yields rose as a result. In an environment of high uncertainty and volatility, credit flows saw net outflows as returns were eroded.”
He further added that “The policies coming from RBI are expected to hike repo rates by another 60 bps, which may again create some volatility in the markets. Domestic inflation remains high and may moderate in the next quarter on account of the base effect. We at TRUST MF feel that inflation is likely to remain high for a long time due to higher food prices, international commodities and higher domestic wage pressures. We are advising our investors to invest in funds with maturities of less than 2-3 years as any interest rate is capable of generating more than 7% return without taking any risk.”
The ideal allocation for a retail investor can be 30% in Liquid/ Money Market Funds, 60% in Short Term Funds/ BPSU Debt Funds and 10% in Long Maturity Funds. We like to advise investors to stay underweight on the long end of the curve. While the reason for yields is already at 7.50%, it is possible that returns will go up if domestic inflation remains high,” Mr. Sandeep Bagla said.
The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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