By Dharamraj Dhutia
MUMBAI (Reuters) -Indian mutual funds may see limited near-term interest in corporate bonds schemes after recording their first outflows of this financial year in August, as rising yields prompted profit booking, fund managers said.
“Interest rates started inching up in India and globally. In August, long bond spreads rose sharply and corporate bond spreads also widened, leading to underperformance in bond funds,” said Sandeep Bagla, CEO of Trust Mutual Fund.
Bagla said redemptions occurred as investors booked profits and expectations of further domestic rate cuts faded. He expects outflows to continue in September, signalling potential challenges for fund managers in maintaining investor confidence.
Corporate bond, credit risk, and banking & PSU debt mutual fund schemes saw aggregate outflows of 18.7 billion rupees ($211.8 million) in August, an abrupt reversal after net inflows of 237 billion rupees in the first four months of this fiscal that started in April, according to data from the Association of Mutual Funds in India.
Still, bankers said corporates are unlikely to be deterred from tapping the bond market for funding as yields remain lower than bank loans for many issuers and overall demand remains solid.
“It is unlikely that the August dip will materially slow down the pace of corporate bond issuances as they continue to benefit from robust demand,” said Nikhil Aggarwal, founder and group CEO of online bond platform Grip Invest.
“Beyond asset management companies, we are observing a strong surge of investments into bonds from both institutional and retail investors,” he added.
Other fund managers highlighted profit booking as an outcome of strong returns.
“Investors have seen reasonably high returns in corporate bond categories over the last two years, but with most of the monetary easing behind us, some have booked gains,” said Anurag Mittal, head of fixed income at UTI Asset Management.
He added that credit risk categories are seeing outflows as investors chase superior returns in alternate asset classes.
Corporate bond yields spiked in August, tracking government bond yields amid concerns over fiscal slippage and debt supply. The move in corporate debt yields outpaced sovereign peers.
Flows could re-emerge if growth-inflation expectations shift and the Federal Reserve signals a more aggressive easing cycle, Mittal said.
“Government bonds and state debt offer better risk-reward at this point,” said Shantanu Godambe, vice president – investments at DSP Mutual Fund, adding that flows could also shift to other segments in fixed income.
($1 = 88.2925 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
