Debt funds market went through a churn in last 2 months; who are top losers and gainers

Investors were more bothered about capital protection rather than above FD returns from debt funds, especially after the recent shutdown of a few debt mutual fund schemes of Franklin Templeton

Kumar Shankar Roy Jun 23, 2020

Debt fund strategyIt is tough selling a debt fund today. Franklin Templeton’s winding up of six funds, and the ongoing corporate distress, has made mutual fund investors edgy. No longer does the tax-advantage over bank deposits work as a pull-factor – especially when you are not even sure if your capital is protected.

Ever since Franklin announced its plan to shut down the six debt funds and stopped redemption/investment in a controversial move that is now being fought against in court by some aggrieved investors, debt funds have suffered a crisis of confidence. Returns no longer entice investors that much, as does the perception of safety.

Perception is an intangible, and is a subjective topic. Nevertheless, investors are today acting on perception. Risk has overshadowed returns. We at RupeeIQ study wanted to see how AMCs and funds have been impacted by the perception game. We looked at two data points: AUM of funds as on April 23 (when FT made its announcement) and today i.e. June 19. As is common knowledge, credit risk funds have found very few takers in an atmosphere vitiated by risk-aversion. But as our findings indicate, investors are possibly going beyond the usual factors that dictate buying and selling of debt funds. To know more, keep reading.

Category trends

Out of the 15 debt fund categories we studied, two categories as a whole showed a sharp drop in assets under management (AUM) for the funds concerned. The first one is credit risk funds who as a category have seen nearly 40% decline in AUM to less than Rs 30,000 crore mark. The second one is the medium duration fund category, which has seen AUM between April 23 and June 19 decline by 22% to less than Rs 20,000 crore mark.

As many as five debt categories showed a healthy 15-40% rise in AUM. They are Gilt funds, Liquid funds, Banking & PSU debt funds, Long duration funds and corporate bond funds. Put together, these five categories have seen about Rs 1.2 lakh crore AUM added in this period. Relatively safer investment avenues (government securities or G-secs/ top-rated papers) such as gilt funds, banking and public sector unit (PSU) funds, and corporate bond funds have witnessed good inflows in the past few weeks.

Fund category AUM- 19/06/20 AUM – 23/04/20 Change (Rs Cr) Change (%)
Gilt 15,067 10,999 4,068 36.99
Liquid 4,67,426 3,85,680 81,746 21.20
Banking & PSU debt 95,945 79,357 16,588 20.90
Long duration 2,341 1,980 361 18.23
Corporate bond 99,968 86,196 13,772 15.98
Money market 66,658 61,606 5,052 8.20
Short duration 1,01,039 95,209 5,830 6.12
Floater fund 33,859 32,188 1,671 5.19
Low duration fund 84,646 81,096 3,550 4.38
Medium to long duration 10,178 9,759 419 4.29
Ultra short duration 74,814 73,276 1,538 2.10
Dynamic bond 17,169 17,378 (209) (1.20)
Overnight 86,545 90,178 (3,633) (4.03)
Medium duration 19,854 25,589 (5,735) (22.41)
Credit risk 29,449 48,576 (19,127) (39.38)
All open-ended schemes    Source: AMFI website    * Previous month average AUM taken where applicable

Liquid funds

The liquid fund category, susceptible to the whims and fancies of quarter end cash balance withdrawal by corporates, continues to be the largest fund category with over Rs 4.67 lakh crore. Out of the 39 funds studied, 21 funds saw AUM drop between April 23 to June 19. The biggest notable laggards were Franklin India Liquid Fund (decline of Rs 7,244 crore) and Baroda Liquid Fund (down Rs 2,507 crore). The Franklin liquid scheme falling out of grace may be connected to the larger six fund shutdown plan.

During the IL&FS default event, liquid funds were the worst hit. But this time around, liquid funds did not see much AUM loss as a category. Bank-backed fund-houses saw staggering rise in liquid fund AUM, with IDFC Cash (up Rs 5,728 crore or 73%), HDFC Liquid (up Rs 41,783 crore or 65%), ICICI Prudential Liquid Fund (up Rs 13,053 crore or 32%) and SBI Liquid Fund (up Rs 11078 crore or 23%). Kotak Liquid also saw a robust 25% AUM jump.

Do note that these figures may be based on the closing AUM of the previous calendar month, except in the case of schemes where the AUM movement within the current calendar month (both upward and downward) is more than 10% cumulatively from the previous disclosed AUM. In such cases, the AUM of the day when this limit of 10% is triggered are displayed, and such disclosed AUM becomes the reference AUM for future disclosure of AUM during that month, for movement of AUM if any.

Short duration funds

Short duration funds are the second biggest debt fund category. They target investments in the 1 to 3 year bucket. This space has one of 6 Franklin funds being shut — Franklin India Short-term Income. Curiously, none of the large short duration funds saw a large negative AUM shock post the Franklin event. SBI Short Term Debt Fund, ICICI Prudential Short Term Fund and IDFC Bond Fund Short Term Plan saw between 9-14% AUM rise. Kotak Bond Short-term Fund saw 16% jump. Large funds that are AUM race laggards in this segment are Nippon India Short-term and L&T Short Term Bond Fund, both down in the 8-9% range.

Large laggards
Fund name AUM – 19/06/20 AUM – 23/04/20 Change (Rs Cr) Change (%)
L&T Overnight 1,138.73 2,851.28 (1712.55) (60.06)
Aditya Birla Sun Life Credit Risk Fund 1,902.68 4,052.41 (2149.73) (53.05)
Kotak Credit Risk Fund 2,013.94 4,205.11 (2191.17) (52.11)
HDFC Credit Risk Debt Fund 6,326.21 12,028.53 (5702.32) (47.41)
Aditya Birla Sun Life Medium Term 2,009.99 3,441.59 (1431.60) (41.60)
Kotak Medium Term Fund 1,434.87 2,449.39 (1014.52) (41.42)
Baroda Liquid 3,898.80 6,406.78 (2507.97) (39.15)
Funds with over Rs 2000 cr assets (ex-Franklin) Source: AMFI website  * Previous month average AUM where applicable
Large leaders
Fund name AUM – 19/06/20 AUM – 23/04/20 Change (Rs Cr) Change (%)
IDFC Cash 13,557.60 7,828.89 5728.71 73.17
HDFC Liquid 1,06,030.96 64,247.40 41783.56 65.04
DSP Banking & PSU Debt 3,057.07 2,156.02 901.04 41.79
SBI Magnum Gilt Fund 3,360.95 2,403.05 957.90 39.86
SBI Banking and PSU Fund 6,940.02 4,992.83 1947.19 39.00
ICICI Prudential Banking & PSU Debt 11,860.44 8,851.16 3009.28 34.00
ICICI Prudential Liquid Fund 54,684.04 41,630.26 13053.78 31.36
Funds with over Rs 2000 cr assets        Source: AMFI website    * Previous month average AUM where applicable

Credit risk funds

Credit risk funds are the worst affected seeing outflows of tens of thousands of crores. Even before the Franklin MF event, investors were getting nervous about such funds that bet on debt securities with lower ratings and hope that the securities will be upgraded in the future.

The biggest funds in this category have seen 40-50% decline in AUM, with HDFC Credit Risk Debt Fund (down 47%), ICICI Prudential Credit Risk Fund (down 39%), Kotak Credit Risk Fund (down 52%) and Aditya Birla Sun Life Credit Risk Fund (down 53%) leading the laggards. SBI Credit Risk Fund lost just under 17% AUM in the same period. Since Franklin India Credit Risk Fund was frozen for redemptions, it didn’t see an AUM reduction.

Overnight funds

The risk perception about debt funds has truly gone a tectonic change. This becomes clear when we look at how AUM of some of the overnight funds has changed. You can of course argue that money parked in overnight funds are very liquid and may be withdrawn at the drop of a hat due to the nature of money that comes into such schemes. Overnight funds are held to be the safest and have portfolios that hold debt securities which mature in a day.

A look at AUM of overnight funds shows that there has been a small drop in overall AUM of this category. Two large funds Aditya Birla Sun Life Overnight Fund and UTI Overnight Fund have seen 24-25% drop in AUM. Another fund, with at least Rs 5,000 crore AUM, Nippon India Overnight Fund, lost 14% AUM in this period. Some AMCs like Franklin, UTI AMC and Nippon, which have exposure to Vodafone-India debt, have suffered outflows from even unrelated schemes as the investors appeared to be taking a cynical view of those fund-houses.

Do note that these figures are based on the closing AUM of the previous calendar month, except in case of schemes where the AUM movement within the current calendar month (both upward and downward) is more than 10% cumulatively from the previous disclosed AUM. In such cases, the AUM of the day when this limit of 10% is triggered are displayed, and such disclosed AUM becomes the reference AUM for future disclosure of AUM during that month, for movement of AUM if any.

Medium duration funds

Medium duration debt funds invest in bonds maturing in 3 to 4 years. This category saw a steep 22% drop in AUM. Though IDFC Bond Fund Medium Term Plan saw 6.5% jump in the same period, this is more of an exception. Another large fund in this space, SBI Magnum Medium Duration Fund, was able to manage keep its AUM in this period with barely a scratch. However, 15 of 16 medium duration schemes posted AUM drop.

Large funds in this category including ICICI Prudential Medium Term Bond Fund (down Rs 1,373 crore or 21.9%), Kotak Medium Term Fund (down Rs 1,013 crore or 41.4%) and Aditya Birla Sun Life Medium Term (down Rs 1,431 crore or 41.6%) appear to have gone out of favour.

One of the reasons for investors pulling out of medium duration funds as a category could be credit profiling. As per CRISIL, as of April 2020, 92% of investments in debt mutual funds were in G-secs, cash and cash equivalents, bank fixed deposits and the top-rated AAA or A1+ categories. But variation can be seen within categories like medium duration. As investors become wary of rating distribution, they may have exited on fears of rating downgrades etc.

Banking & PSU debt funds

Category-wise liquidity profile has shown that banking and PSU (94.6%) funds, just around the Franklin event, had one of the highest allocation to liquid assets (including sovereign papers, and cash and equivalents) as of April 2020. So, when the sentiment turned in favour of safety, Banking & PSU debt funds saw strong inflows. It can be speculated that some flows came from redemptions in credit risk (25%) and medium duration (51%) which coincidentally had the lowest exposure to such ‘safe’ issuers.

The banking & PSU debt fund category saw a sharp 20.9% uptick in AUM. Naturally, large funds in this space reaped rich rewards. ICICI Prudential Banking & PSU Debt saw AUM going up by over Rs 3,000 crore/34% to Rs 11,860 crore. Kotak Banking and PSU Debt Fund crossed Rs 7,000 crore AUM mark, thanks to a 30% boost. IDFC Banking & PSU Debt Fund touched Rs 17,600 crore AUM level, helped by over Rs 3,206 crore or 22.3% jump. Notably, Axis Banking & PSU Debt Fund grossed Rs 16,000 crore in AUM on account of nearly 18% growth in AUM.


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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