Debt mutual funds find their mother lode after mining market depths

Strike a rich vein after a tough three-year haul of ₹2.8 trillion in outflows

Debt mutual fund (MF) schemes found favour in 2024-25 (FY25), reversing the net outflows recorded in the prior three financial years.

 

Active debt-oriented schemes saw net inflows of ₹1.4 trillion in FY25, compared to a ₹23,000 crore outflow in 2023-24. Outflows were even higher in 2022-23 and 2021-22, at ₹68,000 crore and ₹1.84 trillion, respectively.

 

Experts attribute the flow reversal to favourable macroeconomic conditions, such as easing inflation, expectations of interest-rate cuts, and improved liquidity.

 

“With the Reserve Bank of India (RBI) maintaining a careful yet supportive stance, investors turned to debt funds as a means of capital preservation and predictable returns. The flight to safety, in the face of equity market volatility and global geopolitical uncertainties, further strengthened demand for high-quality fixed-income instruments,” said Nehal Meshram, senior analyst — manager research, Morningstar Investment Research India.

 

Bond yields dropped markedly last year, driving strong performance in funds with higher-duration papers. This, combined with volatility in the equity market during the latter half of the year, also supported debt fund inflows.

 

“When yields fall, bond prices rise. The longer the bond’s maturity, the greater the price appreciation. This drove smart gains for funds holding medium-to-long-duration bonds, attracting fresh inflows,” said Sandeep Bagla, chief executive officer of Trust MF. 

 

Most longer-duration debt funds, including gilt, long-duration, and corporate bond funds, generated returns exceeding 9 per cent in FY25, as bonds rallied on the back of strong demand and prudent fiscal policy.

 

Money market schemes captured the largest share of inflows, totting up ₹66,582 crore. Liquid funds and low-duration funds followed with ₹38,349 crore and ₹14,730 crore, respectively. These short-term investment schemes typically draw institutional investors.

 

Among the medium-to-long-duration funds, corporate bond funds racked up the highest inflows, attracting ₹14,570 crore.

 

Investment managers suggest that the upside for longer-duration bonds is now limited, with funds focusing on accrual-based strategies likely to outperform in the future.

 

“The RBI’s actions on rate cuts and liquidity measures have resulted in a slight steepening of the yield curve. Softening of the longer end of the curve should be viewed as an exit opportunity due to limited upside. We prefer to be overweight on accrual-based strategies within fixed-income portfolios,” said Motilal Oswal Private Wealth in a recent note.

 

Experts also believe shorter-duration schemes offer a more attractive opportunity at present.

 

“Given the RBI’s accommodative stance, interest rates should remain benign. However, rising US yields could prevent Indian long-bond yields from falling further, potentially steepening the yield curve. Short-duration funds are likely to perform well,” said Bagla.