By Dharamraj Dhutia
MUMBAI (Reuters) -Indian mutual funds expect inflows into short- and medium-term debt schemes to pick up in the coming months after September’s outflows hit a six-month high, as renewed rate cut expectations lift sentiment, according to fund managers.
Mutual funds recorded outflows of 1.02 trillion rupees ($11.55 billion) last month, primarily led by withdrawals from liquid and money market schemes, according to data from the Association of Mutual Funds of India.
September’s outflows were the highest since March, and excluding seasonal factors, the biggest since December.
The outflows were driven by profit-taking by institutional investors and due to corporate advance tax payments. But flows have since rebounded as investors seek short- and medium-term debt schemes, which could benefit from further rate cuts by the Reserve Bank of India, said Anurag Mittal, head of fixed income at UTI Mutual Fund.
“Investors appear to prefer accumulation with controlled duration exposure,” Mittal added.
OUTLOOK FOR DURATION FUNDS
Fund managers expect inflows into debt schemes to accelerate as some investors move out of overnight funds and into short- and medium-term products, encouraged by heightened expectations of more rate cuts.
“Given RBI’s dovish stance due to lower inflation expectations in the coming months, inflows should move more into duration funds like corporate bond, short-term, and gilt funds,” Murthy Nagarajan, head of fixed income at Tata Mutual Fund, said.
When rate cuts are expected, short-term bonds typically stand to gain first, making them more attractive to investors.
Nagarajan added that flows into overnight, liquid, and money market schemes could decline marginally.
Earlier this month, the RBI kept rates unchanged but signalled that lower inflation had created policy room to support growth.
India’s retail inflation dropped an eight-year low of 1.54% in September, and the October print is expected to slip below 1%.
Markets are pricing in a potential rate cut in December, with some expecting another reduction in February 2026.
“Currently elevated yields and low running inflation provide a favorable risk-reward scenario for measured duration exposure through these funds to benefit from the expected rally,” said Vikas Garg, head of fixed income at Invesco Mutual Fund, who expects stronger inflows into short-term and corporate bond funds in the next few months.
($1 = 88.3425 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Sonia Cheema)
