AMFI data shows that debt index funds have accumulated more money than equity index funds since July this year. Experts say investors have shifted to passive debt schemes because of the rate tightening and volatility in the equity markets.
Mutual fund investors are fascinated with passive funds or index-based investments. However, they are investing more in passive debt funds, not equity funds. AMFI data shows that debt index funds have accumulated more money than equity index funds since July this year. Experts say investors have shifted to passive debt schemes because of the rate tightening and volatility in the equity markets.
Equity index funds and FOFs have accumulated a total AUM of Rs 3,293 crore since July in comparison to Rs 19,069 crore accumulated by debt index funds and FOFs. Since July, 34 index funds and FOFs have been launched in both equity and debt spaces by fund houses. Out of these 21 schemes were launched only in September. 17 of these 34 schemes are debt index funds and FOFs and the other 17 are equity index funds.
Here’s a monthly breakdown of how much the equity and debt index funds accumulated since July:
|Month||Equity index fund inflows||Debt index funds inflows
|July||1,109 cr||6,503 cr|
|August||858 cr||7,154 cr|
|September||684 cr||1,862 cr|
|October||642 cr||3,550 cr|
Mutual fund analysts believe that the RBI rate action is one of the primary reasons for debt index funds’s rising popularity. The RBI has hiked the repo rate by 190 bps (or 1.90%) cumulatively, resulting in short term yields (such as those on 1 year Treasury bills, CDs, etc.) moving up by 200 to 250 bps. Because of this, fund houses are launching a spree of debt index funds in the short to medium term maturity segment.
“Debt passives have become more popular in recent times, particularly since bond yields have been rising. This is clearly indicated by the increase in fresh issuances and monies raised within this category. Over the past 6 to 9 months, interest rates have seen a sharp upswing since RBI initiated its rate hike cycle earlier this year. Similarly, yields on longer dated Government securities and AAA rated bonds have risen by 80 to 100 bps during this period. Yields in the mid to long duration (5 to 10 year) segment appear to be attractive. Considering this, AMCs have been launching target maturity funds which invest in various liquid debt instruments including Government securities, State Development Loans and Corporate bonds with specific maturities,” says Dhaval Kapadia – Director, Managed Portfolios, Morningstar Investment Adviser India.
Target maturity funds have securities that are typically held till maturity thereby giving investors better visibility of the returns that they can expect if they stay invested in the fund till maturity of the underlying holdings. Further, these are open ended funds with low expense ratios. All this has led to an increased inflow into the debt index funds.
Mutual fund advisors also say that the huge inflows into passive debt funds should be seen as a reversal to mean. Debt mutual funds saw a lot of outflows after covid-19 hit India in 2020. Due to the rally in equity markets, portfolios have been inflated and equity exposure is too high. This is the time to re-balance those portfolios. Market volatility has also played a part in the slowing inflows into equity passive funds.
“I see these inflows into debt passives as a mean reversion to fixed income. Debt fund outflows have been huge after 2020 and this is an ideal time to get into duration funds. Target maturity funds are giving investors an option to lock in their money at very good rates. If you have three years, it makes for a good investment. Compare that to equities where last one year returns have been near zero in most diversified funds. Hence, it makes sense for new money to gravitate towards debt passives more than equities,” says Santosh Joseph, Founder, Germinate Wealth Solutions, based in Bengaluru.
Download The Economic Times News App to get Daily Market Updates & Live Business News.