Debt fund outflows was the dominant story in September 2023

12 Oct 2023 , 07:09 AM

The big story of FY24 may have been all about the return of debt funds; but September was a month when debt funds once again saw heavy net selling. The reasons are not far to seek. With the end of the quarter, there is a rush from the corporates to withdraw from liquid funds to pay their advance tax liabilities. This is quite normal and that is why the maximum pressure you see in these quarter ending months is in the short end funds. After debt funds saw net outflows of Rs25,873 crore in August, the month of September 2023 saw debt fund outflows at Rs101,512 crore. However, the story was not just about the treasury selling. 

There has also been volatility in the money market yields while the long term yields have shown an uptrend, something debt funds are not too comfortable with. The net effect of the heavy debt selling was that despite net buying in equity funds, hybrid funds and passive funds, the actual total flow for the month of September was still negative at Rs(66,192) crore. Regarding the two key triggers for mutual fund flows; NFO inflows in September stood at Rs7,795 crore while the SIP flows for September 2023 were at a record level of Rs16,420 crore level. This is not only the highest SIP inflow even, but is also the first time that SIP flows have crossed Rs16,000 crore on a gross basis in a month.

Are hybrid funds the new kid on the block?

What was the big story in the month of September 2023? Clearly, equity funds are still seeing substantial inflows, but the category that is doing better in terms of inflows is the hybrid funds category. Passive funds have been going slow for some time since the volatile Nifty is not helping the index funds and index ETFs too much. Mutual funds may be long term investments, but the flows are still driven by short term considerations and immediate sentiments. That is the way markets work, after all.

Coming back to the story of hybrid funds, the month of September 2023 saw net flows into hybrid funds doing substantially better than equity funds too. One can argue that the hybrid fund story is being largely driven by arbitrage funds; and that is largely correct. But that is just half of the net flows into hybrid funds. The other half is coming from other forms of hybrid funds and the big star is multi-asset allocation funds, where NFOs are driving most of the flows. In fact, multi-asset allocation funds were more than 60% of the NFO flows.

Debt funds sell-off, equity funds sustain, hybrid steal the show

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)
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
Aug-23	(25,873)	20,245	17,273	4,535	16,181
Sep-23	(101,512)	14,091	18,650	4,720	(66,192)

Data Source: AMFI

Here are some quick takeaways. Debt funds flows have been negative in the month due to the typical quarter end treasury pressure, but also due to money market volatility and the prospects of rising bond yields. The year started positively for debt funds with strong inflows in April and May, but after that the sentiments have been generally negative. Hybrid fund flows are robust, but that is more due to the predominance of arbitrage fund inflows, but also becomes NFOs are helping multi-asset allocation funds. There has been a lot of short term funds shifting to arbitrage funds in search of higher returns and lower tax incidence. 

New fund offerings were strong with total collections at about Rs7,795 core, largely dominated by multi-asset allocation funds, followed by equity sectoral funds. One good thing is that the gross SIP flows during the month of September 2023 touched an all-time record level of Rs16,420 crore. It looks like retail investors are latching on to the mutual fund narrative in a rather aggressive way; and they are in it for the long haul.

How overall AUM mix evolved in September 2023?

The month of September 2023 saw a marginal downtick in the overall AUM, which went down from Rs46.64 trillion to Rs46.58 trillion over the previous month. The equity AUM has been driven higher by the rally in the markets but that was offset by the heavy selling in debt funds. In fact, since the start of this fiscal year FY24, the AUM of mutual funds is up 21.24%, largely explained by the frenetic rally in equities, but also by the surge in equity fund inflows. While the AUM of debt funds reduced, and passives are flat; it is the equity fund AUM and the hybrid fund AUM that has shown solid growth. Here is the story of how the AUM across fund categories evolved over the last one year.

Month	Debt AUM  (Rs trillion)	Equity AUM   (Rs trillion)	Alternate AUM  (Rs trillion)	Total AUM  (Rs trillion)
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
Aug-23	14.00	18.60	13.74	46.64
Sep-23	13.05	19.08	14.17	46.58

Data Source AMFI

Despite the massive sell-off in debt funds, the overall AUM has almost remained flat. However, the sub-plot is more interesting. While the debt funds saw a very sharp fall in the AUM, the equity funds, and the alternate funds (led by hybrid funds) saw a rather sharp spike in the AUM as can be seen in the table above. The question is what has this AUM shift done to the market AUM share of each of the category of funds. 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
Jul-23	30.56%	39.34%	11.88%	16.84%	0.81%	0.56%
Aug-23	30.01%	39.88%	12.03%	16.62%	0.81%	0.64%
Sep-23	28.02%	40.97%	12.62%	16.97%	0.82%	0.60%

There has been some interesting action in terms of shifts in share of AUM. Debt funds have seen the share deplete sharply by 200 bps in the last one month. That share has been distributed among equity funds, hybrid funds and passive funds in that order. 

Active Debt funds: Liquid Funds sold off in September 2023

Debt funds saw net inflows of Rs101,512 crore in September 2023. The outflows were from liquid funds which saw bulk of the outflows in the month. This was triggered by the phased withdrawal of I-CRR by the RBI as well as treasuries shifting to arbitrage funds for higher yields. Also, the end of the quarter has triggered some treasury related sell-off. Now for how specific categories of debt funds have done, and let us start with the debt fund categories that saw inflows in September 2023. Gilt funds saw marginal inflows of Rs278 crore, with other inflows being not too material. The bigger action in debt funds was on the sell side.

Among the categories that saw net outflows in September 2023 Liquid Funds saw outflows of Rs74,177 crore, money market funds Rs9,158 crore, ultra short duration funds Rs5,168  crore, floater funds Rs4,903 crore, corporate bond funds Rs2,460 crore and short duration funds Rs1,560 crore. Additionally, there was also selling overnight funds, banking & PSU funds, and low duration funds. Investors took aggressive exits from debt funds.

Active Equity Funds: net inflows taper in September 2023

For the month of September 2023, it was once again the large cap funds and the ELSS funds that saw negative flows, albeit marginal. Overall, equity funds saw net inflows of Rs14,091 crore in September 2023, which is sharply lower than the inflow of Rs20,245 crore in August 2023. The negative bias against ELSS and the large cap funds has been continuing for some time. In case of ELSS funds, the new tax regime funds reduced the interest levels in ELSS as a tax saving measure. In the case of large cap funds, investors are gravitating towards index funds for beta returns and small and mid-caps for alpha.

Let us turn to the equity funds that saw maximum inflows. Flexi/Multi Cap funds saw inflows of Rs3,588 crore, Sector / Thematic funds saw inflows of Rs3,147 crore, small-cap funds Rs2,678 crore, mid-cap funds Rs2,001 crore, large & mid-cap funds Rs1,334 crore and Value funds Rs1,291 crore.  The story is almost the same as last time. Thematic funds continue to be driven by NFOs while the alpha preference for small caps and mid-caps continues to be robust. Of course, we need to be wary of how the flows into small cap funds sustain, once more small cap funds start restricting fresh flows.

Hybrid flows are the big story of September 2023

Overall, the combination of hybrid funds and solution funds got net inflows of Rs18,818 crore. However, the macro picture glosses over the fact that the 2 fund categories dominated the total flows in September 2023 and accounted for 88% of the net flows into this category. We are talking about arbitrage funds with net inflows of Rs10,176 crores and multi-asset allocation funds with net inflows of Rs6,324 crore. However, even equity savings funds saw inflows of Rs1,221 crore while BAFs and aggressive hybrids also saw net inflows. All the hybrid categories were positive and hybrids beat equity fund flows in September.

Passive funds had a relatively quiet month in September 2023 with net inflows of Rs4,720 crore; almost the same as last month. This was driven by inflows of Rs3,242 crore into index ETFs, Rs1,682 into index funds. Gold fund inflows were marginal while FOFs (fund of funds) once again saw net outflows in September 2023.

Three key takeaways from the September 2023 MF story

How do we sum up the mutual fund flow story for September 2023? There are 3 key takeaways. Firstly, debt funds have taken it on the chin as money market volatility, debt yields and quarter end treasury needs worked against them. Secondly, non-debt categories continued to gain in terms of AUM contribution in the month of September. However, this was more due to the loss of flows for debt funds, than anything else. Lastly, hybrid funds are emerging as the next big narrative in Indian mutual funds, even as passive funds are taking a quiet breather after 2 years of aggressive growth. That would be the next big story to watch out for. Alternative asset classes are also arriving in a big way.