Why There Is Trouble Brewing In Debt Market?

Debt funds have witnessed a huge outflow in September. Should investors be worried?

- Himali Patel

The volatility at the equity markets is a well-known fact and there are phases when it might underperform. During such uncertain times, it is necessary to park some funds in debt products. Debt mutual funds primarily invest in fixed income instruments like government securities, bonds, treasury bills and money market instruments. They are best suited for the investors who do not want to take chances by investing in a highly volatile equity market. But what happens when the debt funds themselves go through myriad uncertainties?

The mutual fund industry’s asset under management (AUM) stood at 22.04 lakh crore (trillion) in September, a dip of 12.5 per cent against the AUM of 25.20 lakh crore in August. The debt funds for September saw the outflows of 2,44,522 crore.

Rahul Singh, Fund Manager (Fixed Income), LIC Mutual Fund Asset Management, said “Outflow was triggered mostly due to three reasons - default by infrastructure finance company IL&FS, negative interest rate views and liquidity issues in non-banking finance corporation (NBFC) and housing finance sector.

Let’s take a look at how the prevailing scenario is impacting the investors, and what should they do in a volatile time ahead, which is expected to stay for a longer period than anticipated.

Domino Effect

A recent shocking default over asset-liability mismatches at IL&FS led to panic in the Indian financial sector. The investors are worried about its impact on the credit market as well as on other NBFC’s.

Mahendra Kumar Jajoo, Head (Fixed Income), Mirae Asset Global Investments (India), said, “Mutual funds provide the safest and fastest exit of all options and therefore it’s no surprise that panicked investors rushed out of debt mutual funds.”