Investors shun equity, prefer bond funds

Fund houses in India have witnessed an increase in assets under their management over the past one year. Be that as it may, the flows have largely been in income and liquid funds, not in equity schemes.

Here, we discuss trends in inflows into various fund houses under debt and equity categories and why investors preferred one class of funds or a set of fund houses more than the others.

Tepid Equities

The key indices (Sensex, Nifty) were up 17 per cent in the past one year, while the broader markets indices have returned 18-19 per cent.

But equity assets under management were up just 1.4 per cent from September 2011 to September 2012. This indicates that that there may have been an outflow from fund houses, apart from their dividend payouts.

The volatility that marked the market behaviour in 2011 may have led investors to exit funds, thus missing out on the rally from late last year.

In fact, the share of diversified equity funds, which accounted for 26 per cent of the total assets under management for the industry last year, is down to around 21 per cent this time round.

Among the larger players, HDFC and UTI saw increases in equity assets under management while Reliance saw an exodus. Most other top fund houses managed to retain the same corpus level as last year.

Bonds the flavour

Amid fairly high interest rates, income and dynamic bond funds were investors’ favourite for parking funds.

Bond funds witnessed 74.2 per cent increase in assets under management. The best funds in this category delivered 14 per cent returns, while the average returns were around 10 per cent. These return levels are much better than what fixed deposits could manage.

When viewed from a tax-efficiency stand point, especially for units held for more than a year, the returns are much higher than fixed or even company deposits. From accounting for little over a third of all assets under management, bond funds now account for over 46 per cent of the total pie.

With banks reducing interest rates over the past one year, investors may have turned to bond funds. Dynamic bond funds generally benefit from both rising as well as falling interest rates, as they manage the maturity profile of their holdings appropriately.

Liquid funds did not see any significant increase in assets under management. The Reserve Bank of India capped the amounts that banks could park in liquid funds from late last year. This may have restricted inflows.

Liquid funds are often pitched as an alternative to savings bank accounts on account of the higher returns together with reasonable liquidity that they provide. The best liquid funds delivered 8-9 per cent over the past one year.

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