Debt fund flows dominate once again in May 2023

11 Jun 2023 , 09:31 AM

However, that has been the story of April and May 2023; with active debt fund flows dominating in both the months. After seeing net inflows of Rs106,677 crore in April, debt funds saw another fruitful month with net inflows of Rs45,959 crore in May 2023. Debt fund flows literally dwarfed flows into equity funds, hybrid funds or even passive funds for the month of May 2023.

Equity fund flows were relatively tepid for the month of May with just Rs3,240 crore of net inflows. NFOs were almost negligible although SIP flows were at an all-time record in the month of May 2023 at Rs14,749 crore. Hybrid fund saw net inflows of Rs6,193 crore but that almost entirely came from arbitrage funds, which is virtually an extension of debt funds. Clearly, the RBI holding repo rates for 2 policies in a row led to investors betting on rates topping out. That has provided a good opportunity for investors to lock in high returns.

May 2023 was once again the story of debt fund flows

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)
May-22	(32,722)	18,529	5,293	12,229	(7,533)
Jun-22	(92,248)	15,498	(2,142)	13,110	(69,853)
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

Data Source: AMFI

Here are some quick takeaways. This is the second month in a row when debt fund flows dominated mutual fund flows. 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. The return of debt funds appears to be a reset of institutional allocation, as well as locking in higher rates.

New fund offerings were extremely tepid with total collections at just about Rs483 core, of which the closed ended FTPs were more than one-fifth. The Quant Business Cyle Fund and the Whiteoak Multi-asset allocation fund saw tepid flows, which is not surprising considering their limited marketing muscle. However, with big houses like HDFC AMC back in the NFO race, June should be a relatively better month for NFOs.

How has overall AUM mix evolved in May 2023?

The month of May 2023 saw a sharp spike in the overall AUM, which went up 3.8% over April at Rs13.20 trillion. This is the first time ever that AUM of Indian mutual funds has crossed Rs43 trillion and is in a new orbit. There has been a sharp spike in debt fund AUM, largely accounted for by the heavy inflows in May 2023. AUM of equity funds and passive funds also rallied, but that was more on the back of the strong rally in the stock markets.

Month	Debt AUM  (Rs trillion)	Equity AUM   (Rs trillion)	Alternate AUM  (Rs trillion)	Total AUM  (Rs trillion)
May-22	13.22	13.32	10.40	37.22
Jun-22	12.34	12.86	10.20	35.64
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

Data Source AMFI

In a sense, the mix of the AUM shows a clear bias towards equities and alternatives in the last one year at the expense of the debt funds AUM. The situation reversed in April 2023 with a sharp spike in the AUM of debt funds. That growth has continued in May also. 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
Mar-23	29.98%	38.48%	12.15%	17.69%	0.82%	0.84%
Apr-23	31.21%	38.07%	11.88%	17.27%	0.81%	0.77%
May-23	31.23%	38.34%	11.80%	17.14%	0.81%	0.69%

May 2023 was again dominated by debt funds, although its share has not gone up too  much over April. That is because the stock market appreciation led to a spike in the share of equity funds too. In fact, hybrid funds and passive funds saw their market share fall in the last two months, as flows have been muted and they have not gained much from index highs. 

Active Debt funds: big bang flows, but still at the short end

Debt fund saw net inflows of Rs45,959 crore in May 2023. Like in April, even May 2023 saw funds flowing back into debt in a big way, albeit at the shorter end of the yield curve. There were several categories of debt funds that saw big inflows in May 2023. Liquid funds saw inflows of Rs45,234 crore, Money Market funds Rs8,731 crore, ultra short duration funds Rs7,585 crore, short duration funds Rs4,055 crore and low duration funds Rs1,747crore. 

Among the categories that saw net outflows in May 2023 were Overnight Funds Rs18,910 crore and floating rate funds Rs2,378 crore. Like in April 2023, the action in May has also been focused at the short end of the curve. Although it is a bet on interest rates topping out, there was not much of demand for longer tenure and longer duration debt funds.

Active Equity Funds: several categories see selling pressure

For a number of months, all categories of equity funds saw net inflows. That has changed and investors have now become a lot more selective, which is not surprising considering the elevated levels of the market. Let us look at the equity fund categories that saw net inflows. Overall, equity fund saw net inflows of Rs3,240 crore in May 2023. In terms of key categories seeing inflows; Small Cap funds saw inflows of Rs3,283 crore, mid-cap funds Rs1,195 crore and large & mid cap funds Rs1,133 crore.  

However, several categories saw net outflows also. For example, large cap funds saw net outflows of Rs1,362 crore in May 2023. Among other categories, focused funds saw net outflows of Rs944 crore, ELSS Funds Rs505 crore and flexi-cap funds Rs367 crore. One reason could be the absence of NFOs. One trend is the preference for alpha generating small cap and mid-cap funds while investors avoid large cap funds in favour of index funds.

Hybrid flows positive, passive flows modestly positive

Overall, the combination of hybrid funds and solution funds got net inflows of Rs6,193 crore. However, the macro picture glosses over the fact that the one fund category that determined the total flows was the arbitrage funds. In terms of net inflows, arbitrage funds saw net inflows of Rs6,640 crore, multi-asset allocation funds Rs739 crore and equity savings funds Rs445 crore. However, Aggressive Hybrid Funds saw net outflows of Rs997 crore while the Balanced Advantage Funds (BAFs) saw net outflows of Rs757 crore. 

Passive funds again had a relatively modest month in May 2023 with net inflows of Rs4,487 crore. This was driven by inflows of Rs4,523 crore into index ETFs, which includes the equity and debt index ETFs. Flows into other categories of passive funds were relatively muted.

How do we sum up the mutual fund flow story for May 2023? Active debt funds sustained the momentum of April. On the equity side, investors are just getting a little more neutral on equities, especially with the market cap scaling new highs. SIP flows have been robust in May but the real story was about a lot of institutional investors stacking up on debt.