Debt fund flows are back with a bang in July 2023

11 Aug 2023 , 09:51 AM

The big story of FY24 has been about the return of debt funds; and they are back with a bang. After robust inflows in April and May 2023, active debt funds saw net outflows of Rs14,136 crore in the month of June 2023. That was the end of the quarter and that is the time that most of the debt funds see outflows to take care of treasury needs and advance tax payouts. However, most of the liquid fund outflows have been reversed in July with overall debt funds seeing net inflows of Rs61,440 crore in July 2023. The action was still focused at the short end of the yield curve and not at the long end, which is logical considering that the debt market situation still remains fluid and ambivalent.

However, equity funds flows continued to be robust in July 2023 at Rs7,626 crore. This figure is lower than June 2023 but higher than the months prior to that. That could also be attributed to the skewed picture presented by the new fund offerings (NFOs) in July 2023. Out of the Rs6,723 crore of NFO flows in July 2023, debt fund flows accounted for more than 50%, largely backed by the slew of debt funds launched by the Bajaj Finserv AMC group. The equity fund flows via NFOs in July 2023 were largely dominated by the Canara Robeco Multi-cap fund and the sectoral funds from Bandhan AMC and HDFC AMC. However, the icing on the cake was the SIP flows crossing the Rs15,000 crore mark for the first time ever in history. However, these are gross inflows via SIPs and not net SIP flows.

Debt funds back with a bang in July 2023; equity, hybrids robust

Here is a quick look at how the monthly flows across fund categories panned out for the last 13 months. Solutions funds are merged into hybrid funds.

Month	Debt Fund  Flows (Rs crore)	Equity Fund  Flows (Rs crore)	Hybrid Fund  Flows (Rs crore)	Passive Fund  Flows (Rs crore)	Total MF Flows (Rs crore)
Jul-22	4,930	8,898	(5,035)	14,271	23,605
Aug-22	49,164	6,120	(6,509)	15,069	65,077
Sep-22	(65,372)	14,100	(2,475)	13,623	(41,404)
Oct-22	(2,818)	9,390	(2,647)	10,261	14,047
Nov-22	3,669	2,258	(6,385)	10,394	13,264
Dec-22	(21,947)	7,303	2,418	15,398	4,491
Jan-23	(10,316)	12,547	4,681	3,955	11,373
Feb-23	(13,815)	15,686	630	6,488	9,575
Mar-23	(56,884)	20,534	(12,148)	26,804	(19,264)
Apr-23	106,677	6,480	3,511	6,945	121,435
May-23	45,959	3,240	6,193	4,487	57,420
Jun-23	(14,136)	8,638	4,611	2,057	(2,022)
Jul-23	61,440	7,626	12,541	860	82,046

Data Source: AMFI

Here are some quick takeaways. Debt funds are back with a bang while hybrid funds and equity funds also reported robust numbers. For the first time, after a very long gap, passive flows into mutual funds were tepid. However, flows into equity funds and passive funds continued to be positive in each of the last 13 months. Hybrid fund flows have seen gyrations, in line with the quasi-debt fund product, arbitrage funds. Flows into arbitrage funds continued to dominate the hybrid funds story in the month of July 2023 also.

New fund offerings were moderate with total collections at just about Rs6,723 core, largely dominated by the debt fund NFOs a handful of thematic NFO issues. One good thing is that the gross SIP flows during the month of July 2023 crossed the Rs15,000 crore mark for the first time ever. That is reason to celebrate.

How the overall AUM mix evolved in July 2023?

The month of July 2023 once again witnessed a sharp spike in the overall AUM, which went up 4.48% over June at Rs46.38 trillion. In fact, since the start of this fiscal year FY24, the AUM of mutual funds is up 17.7%, largely explained by the frenetic rally in equities. This also marks a new high for mutual funds AUM, and this is an unprecedented high. While the AUM of debt funds remained constant over last month, the boost to equity fund AUM came from the rally in the market. The growth in overall AUM is largely explained by the growth in active equity fund AUM and alternate fund AUM, for the month of June 2023.

Month	Debt AUM  (Rs trillion)	Equity AUM   (Rs trillion)	Alternate AUM  (Rs trillion)	Total AUM  (Rs trillion)
Jul-22	12.46	14.16	10.88	37.75
Aug-22	13.03	14.78	11.26	39.34
Sep-22	12.42	14.63	11.12	38.42
Oct-22	12.45	15.22	11.58	39.50
Nov-22	12.57	15.58	11.93	40.38
Dec-22	12.42	15.25	11.92	39.89
Jan-23	12.38	15.06	11.87	39.62
Feb-23	12.30	15.02	11.83	39.46
Mar-23	11.82	15.17	12.09	39.42
Apr-23	12.99	15.85	12.47	41.62
May-23	13.49	16.57	12.85	43.20
Jun-23	13.48	17.43	13.22	44.39
Jul-23	14.17	18.25	13.69	46.38

Data Source AMFI

In a sense, the mix of the AUM shows a clear bias towards equities and alternatives in the last one year. However, it must be said that the AUM of debt funds has also picked up smartly in the last 4 months. In the last 4 months, while debt funds have gained in terms of flows, equity funds have more than compensated for the same through value accretion. But the big story in the above table is the fact that alternative funds have arrived as a distinct asset class for Indian investors. Here are the relative shares for the last 3 months.

Month	Active Debt Funds	Active Equity Funds	Hybrid  Funds	Passive Funds	Solution Funds	Close-ended Funds
May-23	31.23%	38.34%	11.80%	17.14%	0.81%	0.69%
Jun-23	30.35%	39.27%	11.84%	17.13%	0.81%	0.59%
Jul-23	30.56%	39.34%	11.88%	16.84%	0.81%	0.56%

While flows into equity funds have been steady, at best, the real boost to the AUM is coming from the price appreciation. In 3 out of the last 4 months, it is debt funds in general and liquid funds in particular that have seen all the action in the mutual fund space. In the month of July 2023, compared to June 2023, active equity and active debt funds have boosted their market share while hybrids have boosted their share marginally. It is passive funds that have lost market share over June 2023.

Active Debt funds: Treasury rule the roost in July 2023

Debt funds saw net inflows of Rs61,440 crore in July 2023. After sharp inflows into debt funds in April and May 2023, the treasury pressures had showed up in June. However, that has been reversed in July 2023 Now for how specific categories of debt funds have done, and let us start with the debt fund categories that saw inflows in July 2023. Liquid funds saw inflows of Rs51,938 crore, Money Market Funds Rs8,608 crore, Low Duration Funds Rs7,027 crore, Ultra short duration funds Rs2,865 crore and Floater Funds Rs2,001 crore. Other inflows were not too material

Among the categories that saw net outflows in July 2023 was dominated by Overnight Funds at Rs10,747 crore and Banking & PSU Funds Rs1,310 crore. The buying action in July 2023 has also been focused at the short end of the curve, especially in liquid funds. This is similar to the situation we had witnessed in the months of April and May 2023. Although it is a bet on interest rates topping out, there was not much of demand for longer tenure and longer duration debt funds. That means, markets still expect rate cuts to be some time away.

Active Equity Funds: net inflows stay robust in July 2023

For a number of months, all categories of equity funds saw net inflows. That has changed as investors are not getting more selective at elevated levels of the market. Let us look at the equity fund categories that saw net inflows. Overall, equity fund saw net inflows of Rs7,626 crore in July 2023. In terms of key categories seeing inflows; Small Cap funds saw inflows of Rs4,171 crore, mid-cap funds Rs1,623 crore, multi-flexi cap funds Rs1,568 crore, sectoral / thematic funds Rs1,429 crore and large & mid cap funds Rs1,327 crore.  

However, several categories saw net outflows also. For example, large cap funds saw net outflows of Rs1,880 crore in July 2023. Among other categories, focused funds saw net outflows of Rs1,067 crore and ELSS Funds Rs592 crore. One reason could be the limited contribution of NFOs, but the underlying trend is more important. There is a clear preference for alpha generating small cap and mid-cap funds while investors are avoiding large cap funds in favour of passive index funds and index ETFs. That has now led a number of small cap funds halting fresh inflows into their funds in the absence of adequate investment opportunities in that space. This could taper flows into small caps as the demand currently far exceeds the supply of quality paper in this space.

Hybrid flows positive, passive flows taper in July 2023

Overall, the combination of hybrid funds and solution funds got net inflows of Rs12,541 crore. However, the macro picture glosses over the fact that the one fund category that dominated the total flows in July 2023 was the arbitrage funds. In terms of net inflows, arbitrage funds saw net inflows of Rs10,075 crore while multi-asset allocation funds saw healthy inflows of Rs1,382 crore. Balanced Advantage Funds (BAFs) continued to see net outflows in July 2023, although it was muted at Rs317 crore. 

Passive funds again had a relatively forgettable month in July 2023 with net inflows of just Rs860 crore. This was driven by inflows of Rs1,179 crore into index funds and Rs456 crore into gold ETFs. However, index ETFs and FOFs (fund of funds) saw net outflows in July 2023.

How do we sum up the mutual fund flow story for July 2023? In a nutshell, debt fund flows were back with a bang, led by liquid funds. However, the next 2 months will give a more secular picture, of whether this interest in debt spreads to the longer duration debt funds also? On the equity side, investors are getting active on equity funds. However, as Nifty and Sensex trade at life-time highs, the investors are shifting from market representative large cap funds to alpha generating small, mid-cap and thematic funds. SIP flows for July 2023 crossed the Rs15,000 crore mark which is positive as it hints at active retail participation and retail stickiness. But the big story in July 2023 is that debt as an asset class is finally back with a bang!