Debt schemes see worst ever outflows in FY20; liquid funds suffer most

Net outflows were seen across debt categories, with liquid schemes accounting for Rs 1.1 trillion of outflows

The mutual fund (MF) industry saw the highest-ever outflow in debt schemes for any financial year closing, in 2019-20. A combination of hardening yields amid selling by foreign institutional investors (FIIs) and redemption pressure from corporate treasuries seeking to conserve cash in view of a coronavirus-induced lockdown led to Rs 1.94 trillion of net outflows from debt schemes in March.
 

Overall, the industry saw nearly Rs 5 trillion, or 18 per cent, of asset erosion in March, with the asset base shrinking to Rs 22.26 trillion from Rs 27.22 trillion at February-end.
 

Net outflows were witnessed across debt categories, with liquid schemes accounting for Rs 1.1 trillion of outflows. Duration funds, used by companies and institutional investors to park their funds, also saw sizeable outflows. Ultra-short duration funds saw Rs 29,000 crore of outflows in March. Low-duration funds, which invest in 6-12 months’ debt paper, saw net outflows of Rs 19,921 crore.

A spike in yields dents mark-to-market valuations of instruments held by debt schemes. Heavy selling by FIIs in March led to a liquidity crunch, which impacted liquid schemes, with negative returns. “This was an unusual movement in liquid schemes, which also took investors by surprise,” said Sunil Subramanian, MD at Sundaram MF.
 

Money market funds, which invest in instruments with maturity of up to one year, saw outflows of Rs 27,402 crore.

“Debt schemes saw redemptions as it was financial year end. Corporate treasuries also wanted to conserve cash due to the lockdown situation, which contributed to the investor pullout,” said D P Singh, executive director and chief marketing officer at SBI MF.

At the end of March, debt assets stood at Rs 10.29 trillion, shrinking 15.79 per cent from the previous month. In contrast, equity flows improved 8.6 per cent in March, with over Rs 11,722 crore of flows coming in the month. Incidentally, this was highest quantum of equity flows in 12 months.

 

“Equity schemes got some institutional flows, coming in through pension funds and the Employees’ Provident Fund Organisation,” said A Balasubramanian, MD and CEO of Aditya Birla Sun Life MF.
 

However, industry participants say a sharp erosion of the high-fee paying equity assets is a worrisome outcome of the market meltdown.
 

Nearly one-fourth of the equity assets were eroded in March, falling to Rs 5.78 trillion at the end of February from Rs 7.57 trillion at Feb-end.   Contribution through SIPs marginally improved 1.5 per cent to Rs 8,641 crore in March. For FY20, SIP contribution crossed Rs 1 trillion-mark.