Mutual Fund activity picks up in corporate bond market, shows data

Strong inflows lead to Rs 1 trillion rise in MF exposure in 2024

After remaining range-bound for nearly six years, mutual funds’ exposure to corporate bonds is showing signs of a pick up, driven by strong inflows into corporate bond funds and rising investor interest in hybrid schemes.

 

In 2024, the total value of mutual funds’ corporate bond holdings increased 18 per cent year-on-year (Y-o-Y) to reach Rs 6 trillion, a level last seen in 2021, according to data from the Securities and Exchange Board of India (Sebi).

 

This represents a significant rise from the Rs 5.1 trillion at the start of 2024. However, this exposure remained at the same level as in early 2018.

 

 

Over the past six years, debt funds have faced numerous challenges, including the 2018 IL&FS crisis, the pandemic in 2020, interest rate hike cycle in 2022, and changes in debt fund taxation in 2023.

 

These events led to a decline in inflows and curtailed mutual fund participation in the bond market. However, the trend now seems to be reversing.

 

Favourable interest rate cycles, strong performance over the past year, and the growing appeal of hybrid funds have led to increased mutual fund demand for debt instruments, including corporate bonds. 

 

Mutual funds primarily hold corporate bonds in two categories: corporate bond funds and banking & PSU funds.

 

While assets under management (AUM) of banking & PSU funds have seen a slight dip, the AUM of corporate bond funds surged 22 per cent Y-o-Y in 2024 to Rs 1.7 trillion.

 

This growth was driven by strong inflows and returns generated during the year.

 

Investors poured Rs 18,178 crore into corporate bond funds in 2024, with the majority of the inflows occurring in the second half of the year.

 

Experts attribute the increased demand to higher yields offered by corporate bonds and because the rally in government securities (g-secs) has largely run its course.

 

Corporate bonds are particularly attractive for investors with a short horizon of 2-3 years.

 

“Corporate bonds are an attractive option right now, especially for investors with a shorter investment horizon,” said Joydeep Sen, a corporate trainer in financial markets and author.

 

He added, “While rate cuts may benefit g-secs more, corporate bonds have the ‘spread’ advantage. The yield on AA-corporate bonds is currently around 50 basis points higher.”