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India's mutual fund industry witnessed one of its worst declines in assets under management (AUM) in recent months during December as a sustained rally in bond yields made debt investors nervous. The industry's combined AUM declined over six per cent to Rs 21.37 trillion against Rs 22.79 trillion in November. Such a steep fall pushed the industry two months behind to AUM levels last seen in October 2017.
The yield on Indian government's 10-year bond, which was hovering around 6.48 per cent in early September was on a gradual rise. But, the uptrend gained pace with the yield peaking at 7.4 per cent in late December, a rise of over 90 basis points in less than four months. Macro indicators have also been worsening with inflation rising, the government expected to miss its FY18 fiscal deficit target, crude oil prices rallying, etc.
December month witnessed heavy net outflow of Rs 1.64 trillion. A major portion of the outflows was from the debt funds (income and money market schemes) to the tune of nearly Rs 1.9 trillion. Fund managers attribute it to the quarter-end phenomenon wherein companies, generally, tend to redeem their assets in liquid funds for strengthening their cash and bank balances for the quarterly results besides for paying advance taxes. Typically, most of this money comes back to mutual funds by or before mid of the upcoming quarter, say industry experts.
However, the outflow from debt schemes was also an aberration, mainly on the back of sudden rise in bond yields leading to poor returns in debt funds.
Bond yields and bond prices are inversely correlated. As bond yields rise, bond prices fall (leading to lower net asset value for schemes) and vice-a-versa. Large investors like institutions as well as high net worth individuals (HNIs) are believed to have taken out some money from their debt portfolios to avoid/cut losses.
"It is an aberration and we don't see it continuing. Sudden steep fluctuations in bond yields did make some investors nervous at the latter part of December. Having said that, it is not worrisome and redeemed funds will come back by January-end or February," said chief executive officer (CEO) of a large fund house.
Returns in the last one week, as well as one month from the debt funds, have ranged from a negative 100 basis points to 50 basis points.
When asked, whether money from debt schemes shifted to equity category, the CEO said, "No, it did not happen. Typically, debt investors tend to remain in debt funds and there is a very small fraction of investors who tend to shift money in mutual funds while chasing higher yields."
"I believe, balanced funds will be more on investors' radar in 2018," he adds.
There was no major sign of money shifting from debt to equity. However, the equity (including ELSS) category witnessed a dip in inflows to about Rs 160 billion. This is about Rs 40 billion less than the average inflows seen in recent months.
Balanced category of funds remained steady and collected Rs 98 billion as fresh inflows. Barring this, all other categories saw an outflow of money — be it gilt schemes, gold ETFs or other ETFs.