Debt mutual fund investors play it safe, shun risky long-term funds

Debt mutual funds are going through challenging times with investors shunning schemes with securities that are considered risky. Investors are moving money from longer term schemes to short-term safer funds. For instance, liquid, corporate-bond, low-duration and ultrashort categories saw inflows while there were outflows from credit risk and dynamic bond funds.

The aversion to schemes with riskier papers started with defaults by IL&FS, which spread to other NBFCs. With Essel Group's promoters too coming under the scanner for their inability to bring in funds or shares as top-up following the sharp fall in price of Zee group companies, investors are preferring safer bets to higher returns.

“Many investors are reassessing their risk-taking ability and moving to safer debt categories,”says Kaustubh Belapurkar, director (fund research), Morningstar India. Debt mutual funds, however, added ₹90,500 crore in January 2019. ET takes a look at various debt fund categories.


Liquid /Ultra Short term Funds: This category, which invests money in in very short-term market instruments such as treasury bills, government securities and call money, has seen the maximum inflows in the last few months. These funds invest in instruments up to a maturity of 91days. The product suits investors with limited appetite for long-term funds.

Corporate Bond funds: They invest atleast 80% of their corpus in AA+ paper and have medium duration. Due to the high quality of portfolio, investors continued to add this category to their portfolios.

Credit Risk Funds: This category has witnessed sharp outflows because funds invest atleast 65% of their corpus in AA or below rated corporate bonds. With muual funds’ promoter funding practices coming under criticism, investors are staying away from this category.

Dynamic Bond Funds: Given the volatile interest rate movement, investors shifted some money away from this category. These funds invest in a mix of government securities and corporate bonds, and adjust the duration of the portfolio to increase returns for investors.

Low Duration: Investors are also putting money in these schemes, which typically invest in debt and money market instruments such that the duration of the portfolio is between 6 to 12 months. These funds typically offer higher return than liquid fund and carry low duration risk.

Category break-up

Debt fund category	Corpus (Rs crore) in December, 2018	Corpus (Rs crore) in January, 2019	Absolute change (Rs crore)
Corporate Bond	47,499	50,628	3,129
Credit Risk	85,239	84,738	-501
Dynamic Bond	20,716	90,909	-807
Liquid	4,14,319	4,99,784	85,465
Low Duration	77,697	80,231	2,534
Medium Duration	40,652	39,703	-949
Ultra Short Duration	50,007	53,524	3,517

Source: Accord Fintech, compiled by ETIG Database