Short-term debt MFs lead ₹6,525 crore outflow amid investor redemptions in February

Debt-oriented mutual funds witnessed an outflow of ₹6,525 crore in February, a sharp reversal from the strong inflow of ₹1.28 lakh crore in the preceding month, chiefly due to redemptions in short-duration funds.

Notably, 10 of 16 debt mutual fund categories reported net outflow during the month, data with Association of Mutual Funds in India (Amfi) showed.

"Despite short-term redemptions, debt funds remain an important allocation tool, and flows may stabilize in the coming months as market conditions evolve," Nehal Meshram, Senior Analyst, Manager Research, Morningstar Investment Research India, said.

Notwithstanding the outflow, the asset base of debt mutual funds marginally increased to ₹17.08 lakh crore in February-end from ₹17.06 lakh crore at the end of January, the data showed.

As per the data, debt mutual funds experienced an outflow of ₹6,525 crore in February following an inflow of ₹1.28 lakh crore in the preceding month.

"Fixed income was largely negative, except for the liquid and corporate bond categories," Anand Vardarajan, Chief Business Officer, Tata Asset Management, said.

Despite the outflows, liquid funds saw the inflow at ₹4,977 crore, followed by corporate bond funds (₹1,065 crore) and short-duration funds (₹473 crore).

However, several short-term debt categories witnessed heavy redemptions, with ultra-short duration funds (₹4,281 crore), money market funds (₹276 crore), low-duration funds, and overnight funds (₹2,264 crore) seeing the highest outflows.

Together, these four categories accounted for 90% of total redemptions.

Further, medium to long duration and gilt funds saw marginal inflows reflecting continued investor interest.

"Investors may be positioning themselves for interest rate cuts by the RBI in the coming months, which could lead to capital appreciation in long-duration bonds. Additionally, gilt funds remain attractive due to their low credit risk and sovereign backing, making them a preferred choice during periods of economic uncertainty," Meshram said.

Further inflow in equity mutual funds dropped 26% to ₹29,303 crore in February from ₹39,688 crore registered in January. The inflow was at ₹41,156 crore in December. The decline was primarily due to a significant decline in investments in small and midcap schemes, amid continued market volatility.

Overall, mutual funds attracted over ₹40,000 crore in the month under review as compared to a staggering inflow of ₹1.87 lakh crore in January suggesting a cautious approach from investors in the mutual funds space.