Debt mutual funds faced a massive outflow of ₹1.13 lakh crore in September 2024, following two months of inflows, including ₹45,169 crore in August. This reversal was driven by large corporate redemptions to meet second quarter advance tax obligations, according to Nehal Meshram, Senior Analyst at Morningstar India.
Breaking down the data
Liquid funds were hit hardest, with outflows of ₹72,666 crore, accounting for 63.8% of the total.
Money market funds lost ₹23,421 crore, and overnight funds saw redemptions of ₹19,363 crore.
“These categories typically see large withdrawals during tax payment cycles as corporates pull surplus funds to settle liabilities,” Meshram explained.
Other debt categories, including ultra-short duration, banking & PSU, and floater funds, also recorded outflows.
Despite the overall decline, corporate bond funds attracted inflows of ₹5,039 crore, followed by gilt, long-duration, and short-duration funds, reflecting a shift towards funds that stand to benefit from a potential decline in interest rates.
Investment outlook
As the Reserve Bank of India (RBI) recently kept its key policy rate unchanged but shifted its stance to ‘neutral,’ signalling possible rate cuts ahead, debt mutual funds, especially long-duration and corporate bond funds, could see improved performance.
“As rates fall, bond prices rise, leading to better returns for investors,” said Adhil Shetty, CEO of Bankbazaar.
Anurag Mittal, Head of Fixed Income at UTI AMC, highlighted that the RBI’s confidence in stable inflation opens the door for policy easing, benefiting bondholders and long-term debt fund investors.
Avnish Jain, from Canara Robeco Mutual Fund, added that “short-term bonds have already rallied following the RBI’s decision,” with further gains expected if rates are cut.
With interest rate cuts potentially on the horizon, long-duration funds are well-positioned for gains, making them a promising option for investors seeking to capitalise on falling rates.