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The trend of debt mutual funds gaining prominence in financial intermediation (a process that channels funds between third parties with a surplus and those with a lack of funds) poses the possibility of a spillover risk in the financial system emanating from these non-banking intermediaries.
According to the RBI Bulletin released on Monday, a period of dwindling returns can lead to outflows from debt MFs even in the presence of various market fundamentals. Some of these fundamental market indicators also play a role in determining flows and returns.
Behavioural pattern
Therefore, the RBI said it is important to understand the behavioural pattern of investors in debt MFs, and linkages between flows and returns. The empirical exercise suggests that past returns contain information about current flows in debt MFs but not vice-versa, it said.
The flows into the debt MFs exhibit seasonality, witnessing redemption by corporates at every quarter-end, especially at the end of the financial year, mainly to meet tax payment obligations.
As of June-end, corporates remained the largest class of investors, contributing ₹8.5-lakh crore to the asset under management (AUM) of ₹12.5-lakh crore of debt MFs, typically investing in funds of shorter duration. High-net-worth individuals are the second largest class of investors, accounting for ₹3.2-lakh crore of AUM, favouring funds of relatively longer duration.
In contrast, retail investors in the US hold vast majority of MF assets (nearly 88 per cent), including substantial money market fund assets. Institutional investors hold a relatively small share of 12 per cent MF assets which are mostly in money market funds. International experience suggests that countries with more-developed capital markets tend to have more-developed fund Industries.
Shift in preference
However, households prefer banking products over regulated funds in countries where banks have historically played a significant role in the financial ecosystem.
While equity assets form a major share of MF assets, developed economies like US are witnessing increased flows to debt MFs due to ageing population. The AUM of overnight funds has grown by almost 10 times between April 2019 and July 2022 amid a notable shift in preference from liquid funds to overnight funds.
This shift is primarily a result of the SEBI’s introduction of a graded exit load on investors, who exit the liquid fund within seven days of their investment. Further, SEBI’s initiative to allow MFs to offer instant access facility in overnight schemes has increased the attractiveness of overnight funds.
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