Why shorter-term debt mutual funds are attracting big inflows

Funds maturing in up to six months, including liquid and ultra-short duration funds, got the highest inflows in three months in July, swelling the total debt inflows to ₹73,700 crore ($10 billion), according to the Association of Mutual Funds in India.

Rising inflation is constraining the central bank from easing further even as the economy remains vulnerable following a deadly wave of coronavirus infections. The Reserve Bank of India last week left its key rate unchanged but one policy member dissented over maintaining an accommodative stance for longer.

“On a risk-adjusted basis, most investors are moving to the shorter end, and want to just play safe,” said Arun Kumar, head of research at FundsIndia. The consensus among investors is that interest rates are going to go up in the next one-to-two years, “and whenever that happens, the longer the duration of fund, the higher the negative impact.”

Shorter-tenor debt is expected to provide flexibility to investors amid policy uncertainty as it prevents them from getting locked in for a longer duration. Fund purchases have therefore tapered off toward the long end.

Liquid funds, with maturity up to three months, got ₹31,740 crore of inflows in July, while money-market funds got ₹20900 crore, according to data from the Association of Mutual Funds in India. Medium-to-long term funds saw outflows of ₹1,733 crore, while government bond funds with a duration of 10-year saw sales of ₹47.2 crore.