Why are investors putting more money in debt passive funds?

Mutual fund investors are fascinated with passive funds or index-based investments. However, they are investing more in passive debt funds, not equity funds. AMFI data shows that debt index funds have accumulated more money than equity index funds since July this year. Experts say investors have shifted to passive debt schemes because of the rate tightening and volatility in the equity markets.

Equity index funds and FOFs have accumulated a total AUM of Rs 3,293 crore since July in comparison to Rs 19,069 crore accumulated by debt index funds and FOFs. Since July, 34 index funds and FOFs have been launched in both equity and debt spaces by fund houses. Out of these 21 schemes were launched only in September. 17 of these 34 schemes are debt index funds and FOFs and the other 17 are equity index funds.

Here’s a monthly breakdown of how much the equity and debt index funds accumulated since July:

Month Equity index fund inflows Debt index funds inflows
July 1,109 cr 6,503 cr
August 858 cr 7,154 cr
September 684 cr 1,862 cr
October 642 cr 3,550 cr

Data: MorningstarMutual fund analysts believe that the RBI rate action is one of the primary reasons for debt index funds’s rising popularity. The RBI has hiked the repo rate by 190 bps (or 1.90%) cumulatively, resulting in short term yields (such as those on 1 year Treasury bills, CDs, etc.) moving up by 200 to 250 bps. Because of this, fund houses are launching a spree of debt index funds in the short to medium term maturity segment.

“Debt passives have become more popular in recent times, particularly since bond yields have been rising. This is clearly indicated by the increase in fresh issuances and monies raised within this category. Over the past 6 to 9 months, interest rates have seen a sharp upswing since RBI initiated its rate hike cycle earlier this year. Similarly, yields on longer dated Government securities and AAA rated bonds have risen by 80 to 100 bps during this period. Yields in the mid to long duration (5 to 10 year) segment appear to be…

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