Debt Funds – Further compression in volumes in Sep-20 quarter
The one story that stands out in the debt fund flows is how overall volumes (purchase + sales) compressed further. In the Jun-19 quarter, the total quarterly volumes in debt funds were closer to Rs118.50 trillion. By the Dec-19 quarter, when the COVID pressures started to build, total debt fund volumes had fallen to just about Rs67 trillion. If you look at the Sep-20 quarter, the volumes in debt fund have been just about Rs36.26 trillion. In short the debt fund flow volumes are down 70% in Sep-20 quarter compared to the year-ago period. This is clearly indicative of the pressures that corporate treasuries are facing.
Let us now turn to the specific flow picture within the debt fund category. For the Sep-20 quarter, the debt funds overall saw net inflows of Rs35,522cr, nearly one-third of the net flows in the previous quarter. This was largely driven on the positive side by Rs21,406cr of inflows into low duration funds, Rs15,561cr into short duration funds, Rs14,582cr into corporate bond funds, Rs13,440 cr into Banking & PSU funds and Rs12,122cr into money market funds. One standout feature was the sharp flow of funds into floater funds.
On the negative side, there was specific pressure visible only in the liquid funds. In the quarter ended Sep-20, liquid funds saw bulk of the net redemptions to the tune of Rs67,711cr. Of course, the credit risk funds also saw outflows but that was limited to just about Rs1,763cr as the worst fears around credit risk funds appear to have settled. In contrast, credit risk funds had seen outflows of Rs25,906cr during the Jun-20 quarter as the Templeton case was fresh in the minds of investors. Even among closed ended plans, the FMPs and capital protection plans saw outflows to the tune of Rs9,800cr during the quarter.
Equity funds see net selling in the Sep-20 quarter
For the Sep-20 quarter, the equity funds overall saw net outflows of Rs7,214cr, a trend we are getting to see after a fairly long gap. While active flows showed outflows, the flows were favourable in the passive side with index funds and index ETFs showing positive flows in the Sep-20 quarter. In terms of specific products under the equity fund category, the multi-cap funds accounted for half of the outflows during the quarter. That can be largely attributed to the uncertainty around these products after SEBI tweaked the definition and portfolio composition of multi-cap funds. Other than multi-cap funds; large cap funds, mid cap funds and value funds accounted for the balance outflows during the quarter. The only major class to see significant inflows were the Focused Funds.
Unlike in the case of debt funds, which are predominantly a corporate cum institutional product, the overall flows into equity funds (buying + selling) has not really shifted much. That can largely be attributed to the strong flow of SIPs into equity funds and retail investors willing to wait much longer and also having more patience with their equity fund portfolios. However, the equity fund outflows in the Sep-20 quarter almost look like the negation of a trend that began back in 2014.
There is one area of worry for equity funds. The Rs7,214cr outflows are despite SIPs infusing nearly Rs24,000cr, predominantly into equity funds and ELSS. So the SIP flows remain the single largest item of risk for the equity fund flows because lump-sum flows into equity fund have actually been deeply negative if you cancel out the SIP impact.
Outflows from Hybrid Schemes but inflows into Passive Funds
In the Sep-20 quarter, hybrid funds saw outflows of Rs16,340cr largely led by huge outflows from aggressive hybrid funds and arbitrage funds, accounting for 90% of the hybrid outflows. With yields in the bond market settling lower, the corporate investors have been getting less interested in arbitrage funds, where spreads are linked to yields. Passive flows have been robust at Rs23,484cr largely driven by equity ETFs and debt ETFs. Of course, even gold funds got Rs2,426cr inflows in the quarter. So the yellow metal’s allure continues.
The only thing real area of worry is the impact on equity fund flows overall if the SIP flows start to wane. That may not happen immediately but we have seen that when it gets bad, it can get really bad. Of course, the debt fund flows would return but that would be more contingent on improvements in corporate balance sheets.