Indian mutual funds schemes focused on corporate bonds recorded their first outflows of this financial year in August, signaling a potential shift in investor sentiment, Reuters reported.
According to data from the Association of Mutual Funds in India, the outflow of 18.7 billion rupees ($211.8 million) from corporate bond, credit risk, and banking and PSU debt mutual fund schemes marks an abrupt reversal after net inflows of 237 billion rupees were recorded in the first four months of this fiscal year, which started in April.
Why are investors pulling out?
Fund managers note that the outflows in August can be largely attributed to investors booking profits on rising yields.
“Interest rates started inching up in India and globally. In August, long bond spreads rose sharply and corporate bond spreads also widened, leading to underperformance in bond funds,” said Sandeep Bagla, CEO of Trust Mutual Fund.
Bagla also added that redemptions occurred as investors booked profits and expectations of further domestic rate cuts faded. Reuters reported that he anticipates these outflows to continue in September, signalling potential challenges for fund managers in maintaining investor confidence.
Shift in investor behaviour
According to data from the Association of Mutual Funds in India, corporate bond, credit risk, and banking and PSU debt mutual fund schemes experienced combined outflows of 18.7 billion rupees ($211.8 million) in August, marking a sharp reversal after net inflows of 237 billion rupees were recorded in the first four months of this fiscal year, which started in April.
Fund managers highlighted profit booking as an outcome of strong returns. “Investors have seen reasonably high returns in corporate bond categories over the last two years, but with most of the monetary easing behind us, some have booked gains,” said Anurag Mittal, head of fixed income at UTI Asset Management.
He added that credit risk categories are witnessing outflows as investors are chasing more returns in alternative assets.
Corporate bond yields rose in August, tracking government bond yields amid concerns over fiscal slippage and debt supply. The move in corporate debt yields managed to outpace its sovereign peers, Reuters said in a news report.
Corporate bond market outlook
Despite this outflow, bankers claimed that companies will continue to tap the bond market for funding as yields remain lower compared to bank loans for many issuers, and overall demand remains strong.
“It is unlikely that the August dip will materially slow down the pace of corporate bond issuances as they continue to benefit from robust demand,” said Nikhil Aggarwal, founder and group CEO of online bond platform Grip Invest.
“Beyond asset management companies, we are observing a strong surge of investments into bonds from both institutional and retail investors,” he further noted.
Flows into bonds could regain pace if growth-inflation expectations shift and the Federal Reserve signals a more aggressive easing cycle, Mittal said.
“Government bonds and state debt offer better risk-reward at this point,” said Shantanu Godambe, vice president – investments at DSP Mutual Fund, adding that flows could also shift to other segments in fixed income, as per the Reuters report.
