Short duration schemes are seeing an uptick in investor inflows: Experts

Besides institutional and HNIs, retail investors showing interest, say experts

The fall in short-term rates is helping debt schemes (non-liquid schemes) regain some of their sheen, with investors seeing opportunity in short duration schemes. According to mutual fund (MF) players, these schemes have seen an uptick in investor flows in the last couple of months as the Reserve Bank of India’s (RBI’s) recent measures are pointing to a 'dovish' stance.

“The RBI's decision to cut repo rate by 25 basis points last month has led to a fall in short-term rates, which is driving investor flows into the short duration schemes. To add to this, the RBI's recent rupee-dollar swap plans are expected to infuse liquidity and further bring down yields,” said Dwijendra Srivastava, chief investment officer-debt, at Sundaram Mutual Fund MF.

“The inflows are not only coming from institutional and  high net worth investors, but retail investors are also showing interest,” Srivastava added.

Debt schemes have had a rough period in 2018-2019 as the category has seen Rs 1.3 trillion of outflows during the financial year. Rising interest rates, combined with credit events, led to heightened volatility in the debt markets and dampened investor sentiment. 

 

However, at least one of those factors shows signs of changing, with the RBI changing its stance.

"The RBI's policy stance has turned dovish; from a calibrated tightening to a neutral stance. Following this change in the stance, there has been a rate-cut. So, this is the right time for investors to put money in income funds where they could get some capital appreciation," said N S Venkatesh, chief executive of the industry body Association of Mutual Funds in India.

In 2018, the RBI undertook two back-to-back 25 basis points (bps) hike in the repo rate in the June and the August monetary policy meetings. Last month, the RBI cut the repo rate by 25 bps to 6.25 per cent, which was the new RBI Governor Shaktikanta Das’ first monetary policy.
 

Besides the repo rate cut, the RBI announced dollar-rupee swap on March 13, which could inject Rs 35,000 crore of rupee liquidity into the system.

“Given the higher yields that remained in the short-end after the liquidity crisis, the scope for shorter rates to ease is higher. Essentially, ultra-short, term short-term or medium-term accrual funds that hold short- to medium-corporate bonds are likely to benefit,” said Vidya Bala, head of mutual fund research, FundsIndia.com.

However, it remains to be seen whether flows into these schemes can reverse the trend of outflows seen by debt schemes. As of January 31, 2019, ultra  short and short duration schemes had a combined asset base of Rs 1.5 trillion, which accounted for 22 per cent of the overall debt category.