Debt funds see over ₹75,500 crore outflows in December: Should you still invest for long-term?

Debt funds witnessed an outflow of ₹75,560 crore in December, marking a rise from the previous month's ₹4,706.7 crore outflow, according to Association of Mutual Funds in India (AMFI) data. Liquid funds saw ₹39,675 crore outflow, while credit risk funds experienced an outflow of ₹368 crore as compared to ₹253.7 crore in November.

Conversely, corporate bond funds observed an inflow of ₹188 crore, contrasting the previous month's outflow of ₹1,578.4 crore.

Other categories with less than one year of maturity also witnessed net outflows.

Himanshu Srivastava, Associate Director at Morningstar Investment Research India, attributed the December outflows to corporate advance tax requirements, primarily due to quarter-end obligations. Liquid funds bore the brunt of this trend, witnessing the highest net outflows, along with other categories with less than a year's maturity.

"While the broader consensus is that the increasing interest rate cycle has peaked, there is a lack of clarity over the timing of the possible reversion in the interest rate scenario. Such a scenario has complicated investment decisions in this segment for investors. Moreover, the robust performance of equity markets has been drawing increased attention from investors, resulting in them shifting from other asset classes towards equities," Srivastava said.

In an earlier conversation with CNBC-TV18, Sandeep Yadav, Head of Fixed Income at DSP Mutual Fund, stressed the cyclical nature of debt funds in response to ongoing interest rate cycles.

Yadav added that the current high yields are an opportune moment for investors, indicating that as yields decrease, debt funds become more attractive.

Yadav emphasised the need for a vigilant approach, advocating close monitoring of RBI policy rates, fiscal policies, and global trends influencing yields and equity indices.

He advised investors to consider the aggressive segments within the debt category, especially in declining yield scenarios, recommending long-duration bonds and dynamic bond fund categories.