Debt fund inflows were down by 62% in August. Where should you invest now? 

The August report from the Association of Mutual Funds in India (AMFI) highlighted a significant downturn in net inflows within the Indian mutual fund industry for the given time period. The total net inflow for the industry experienced a notable drop of 43%, amounting to Rs 1.08 lakh crore in August compared to the previous month's figure of Rs 1.89 lakh crore in July of the same year. AMFI's data specifically indicated a substantial 62% decrease in inflows related to debt mutual funds as a major contributing factor to this decline. In August 2024, debt funds recorded inflows of Rs 45,170 crore, significantly lower than the robust inflows of Rs 1.19 lakh crore reported in July.

In August, out of the 16 categories of debt mutual funds, 12 recorded net inflows. The top three categories with the highest inflows were Overnight funds at Rs 15,105.93 crore, followed by liquid funds at Rs 13,594 crore, and money market funds. These categories collectively contributed around 86% of the total inflows. Conversely, banking and PSU funds faced the highest outflow of Rs 1,549 crore, a considerable shift from the Rs 307 crore outflow seen in July.

Experts attribute the decrease in inflows in August to investors becoming more cautious and preferring shorter-term, secure investment options while keeping an eye on interest rate trends. There has been a noticeable increase in investors' interest in active duration strategies, leading to significant inflows in categories like Gilt Funds, Gilt Funds with a 10-year constant duration, Dynamic Bond Funds, Medium to Long Duration, and Long Duration Funds.

"The recent trend reflects a preference for low-risk and highly liquid investment options. Investors showed a preference for categories with shorter maturity profiles, such as short term, corporate bond and ultra short duration funds, for temporary parking of funds," said Nehal Meshram – Senior Analyst – Research – Morningstar Investment Research India.

Where should you invest now

"There could be several reasons for drop in debt fund inflows some of the common reasons being rate cut expectation, debt taxation changes, changing asset allocation into equities, etc. Indian G-Sec yields have broadly remained range bound in recent months and the 3-5 year bond yields remain attractive. For the debt portfolio we prefer funds with short duration(1-3 years) or Target Maturity Funds (3-5 years) and funds with high credit quality (>80% AAA exposure).  Historically, during periods of declining interest rates, long duration debt funds significantly outperform FDs and short duration debt funds," said Jiral Mehta, Senior Research Analyst, FundsIndia.

She added: "If you are looking for higher returns than FD, have a 1-2 year timeframe and are willing to tolerate higher volatility (if interest rates temporarily rise), you can also consider tactically investing in Long Duration Debt Funds with High Credit Quality. There is a risk that the interest rate could increase temporarily due to unforeseen factors - adverse weather events, food price shocks, supply side disruptions due to geopolitical tensions, volatility in commodity prices, etc. An increase in interest rates can have an impact on funds with high durations."

"Gilt funds have already seen significant inflows over the past two months, with Rs 1,902.09 crore in the current month, up from Rs 1,261.63 crore last month," said Meshram.