Below par debt returns spurs move to equity mutual funds

Rising equity markets, lower returns from fixed-income investments and several new fund offers (NFOs) by large fund houses have seen the equity pie get bigger at the cost of liquid and debt funds over the past year.

As per data from HDFC MF assets of equity-oriented schemes rose to 43.1% in September 2021, compared to 37.5% in September 2020. Assets of liquid funds slipped from 19.3% to 13%, while debt-oriented funds declined from 32.8% to 30.5%. Overall AUM of the fund industry rose 36.74% year-on-year to ₹36.73 lakh crore in September from ₹26.86 lakh crore.

"Low returns from liquid funds and better taxation in arbitrage funds, saw some investors moving there," said A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund.


Arbitrage funds, classified as equity-oriented funds, saw their assets surge to ₹1.06 lakh crore in September compared to ₹66,000 crore a year back.

Over the last year, liquid funds have returned 3.11%, while the arbitrage funds category has returned 3.33%.

"It has been a one-way rally over the last 18 months with strong participation from retail investors. With every rise in the market, there are a set of conservative investors who want to protect downside and prefer investing in equity-oriented hybrid products," said Raghav Iyengar, chief business officer, Axis Mutual Fund.

Hybrid funds are categorised as equity MFs and there has been investor interest in categories like balanced advantage which alter equity allocations based on market valuations.

Financial planners also point out that after the Franklin episode, investors were reluctant to put money into debt funds, with many of them preferring to put money in bank deposits.