Here's Why Debt Mutual Funds Turned Unappealing - Outside View by PersonalFN

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Here's Why Debt Mutual Funds Turned Unappealing
May 19, 2020

During the end of April, amidst the current COVID-19 pandemic lockdown, news of the Franklin Templeton Mutual Fund house winding down six schemes rocked the investment world. It was a huge blow for investors who were expecting investments they had to help sustain them in the ongoing crisis.

Since this shocker, investors have rushed to make redemptions from most of their debt mutual fund investments. As per CNBC TV18 news reports, an outflow of Rs 24,000 crore in a matter of last three days of the month end has occurred.

As per recent AMFI data released on 8th May 2020, the debt funds saw the most outflows for the previous month as seen below. It is seen that Credit risk funds, Low Duration Funds, Ultra Short Duration Funds and Short Duration Funds had the most number of outflows for the month of April.

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Table 1: Inflows/Outflows of debt Funds
Open ended debt Schemes 19-Nov 19-Dec 20-Jan 20-Feb 20-Mar 20-Apr
Overnight Fund 20649 -8869 22652 -1474 26654 2603
Liquid Fund 6938 -71159 59682 43825 -110037 68848
Ultra Short Duration Fund 774 -2523 8153 -40 -29053 -3419
Low Duration Fund 4638 -1597 5562 3152 -19921 -6841
Money Market Fund 5136 -3006 6990 2553 -27402 -1210
Short Duration Fund 3490 3457 2904 4076 -11039 -2309
Medium Duration Fund -928 -519 -253 164 -2164 6364
Medium to Long Duration Fund -61 -146 -87 308 -592 -191
Long Duration Fund 30 18 -2 78 57 302
Dynamic Bond Fund -135 -151 -84 15 -833 -1155
Corporate Bond Fund 2581 1383 1969 2841 -3791 4169
Credit Risk Fund -1,899 -1191 -1215 -637 -5569 -19239
Banking and PSU Fund 7231 4770 3033 3205 -6304 6561
Gilt Fund -289 387 -513 -156 747 2516
Gilt Fund with 10 year constant duration 16 3 17 49 84 93
Floater Fund 3256 714 497 1753 -5750 -932
Total 51428 -78427 109306 59711 -194915 56159
(Source: AMFI)

From the table above, you will notice that Credit Risk Funds have failed to attract any kind of attention for inflows since the past six months. Most of the credit risk funds had made investments in debt instruments issued by private entities to chase returns; and ever since the great IL&FS debacle, it has not attracted the investors' attention.

Except, Liquid Funds, Banking & PSU Fund, Corporate Bond Funds, Medium Duration Funds, Overnight Funds, and Gilt Funds are the only ones that received some inflow last month.

Besides other default episodes, despite the stringent measures taken by the regulators that occurred in the past, have made most of the debt funds, the "supposedly less risky investment" unappealing till now. The fear of losing money is almost a deja vu moment for investors.

After Franklin Templeton Mutual Fund wound down six of its schemes, there was panic selling and the average AUM dropped drastically, as seen below in the graph.

Graph 1: Average Assets Under Management Dipped

The Average AUM of the Indian mutual fund industry due to market impact and net outflow witnessed by debt-oriented schemes and hybrid schemes has fallen to Rs 23.53 trillion. That said, in over 10½ years going by the Association of Mutual Funds in India (AMFI) quarterly data, the AAUM has grown nearly five times from Rs 5.83 trillion as of June 30, 2009, to Rs 23.53 trillion as of April 30, 2020.

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However, some experts are of the view that the recent outflows could be because of regular month-end withdrawals that large investors do. For the month of April out of the total redemptions of Rs 774,700.87, only a part of it is because of a general sense of panic about the Franklin Templeton MF winding down schemes could have contributed to this.

As seen in the graph below, the number of folios has increased and continue to rise. It is evident that people are making mindful choices to invest their hard-earned money.

Graph 2: Number of folios on the rise


Do note that one should not invest in schemes that they are not aware of, especially in current times. Safety and liquidity are prime concerns. Remember, "Debt mutual fund investment isn't risk-free at all." Stick to mutual funds where the fund manager doesn't chase returns by taking higher credit risk. Further, asses your risk appetite and investment time horizon while investing in debt funds.

As a thumb rule: Choose mutual fund schemes from fund houses that follow prudent judicious investment processes and stringent risk-management systems.

At PersonalFN, we select and recommend mutual funds on quantitative and qualitative parameters using our S.M.A.R.T Score Matrix:

  • S - Systems and Processes
  • M - Market Cycle Performance
  • A - Asset Management Style
  • R - Risk-Reward Ratios
  • T - Performance Track Record

If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect. Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

Author: Aditi Murkute

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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