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Corporate bond funds lure most inflows in over 2 years
//business-finance.news-articles.net/content/202 .. ond-funds-lure-most-inflows-in-over-2-years.html
Published in Business and Finance on Wednesday, July 30th 2025 at 18:01 GMT by The Financial Express🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source
Corporate bond funds saw record inflows of Rs 11,983 crore in May 2025 the highest in 26 months driven by RBI's surprise rate cut and liquidity boost. AUM rose 14.5% YTD. Investors locked into 2-5-year tenures, though future inflows may slow amid limited easing scope.
Corporate Bond Funds Attract Record Inflows Amid Shifting Investor Sentiment
In a significant development for India's mutual fund landscape, corporate bond funds have emerged as a top choice for investors, drawing the highest inflows in more than two years. This surge reflects a broader shift in market dynamics, where fixed-income instruments are gaining traction amid uncertainties in equity markets and evolving interest rate expectations. As per the latest data from industry trackers, these funds have seen net inflows surpassing previous highs, signaling renewed confidence in debt-oriented investments that prioritize stability and predictable returns.
The resurgence of corporate bond funds comes at a time when global and domestic economic indicators are pointing towards potential rate cuts by central banks. In India, the Reserve Bank of India (RBI) has maintained a cautious stance on monetary policy, but market participants are betting on easing measures to stimulate growth. This anticipation has made corporate bonds, which are debt securities issued by companies to raise capital, particularly appealing. Unlike government securities, corporate bonds often offer higher yields to compensate for the slightly elevated credit risk, making them a sweet spot for investors seeking better returns without venturing into high-volatility equities.
According to reports from the Association of Mutual Funds in India (AMFI), corporate bond funds recorded net inflows of over Rs 10,000 crore in the most recent month, marking the highest figure since early 2022. This influx is not isolated; it builds on a trend observed over the past few quarters where debt funds, in general, have been outpacing equity funds in terms of fresh investments. For context, during the height of the equity bull run in 2021 and 2022, investors poured money into stocks, often overlooking fixed-income options. However, with stock market valuations reaching stretched levels and geopolitical tensions adding to volatility, there's a noticeable pivot towards safer havens.
Experts attribute this inflow bonanza to several intertwined factors. Firstly, the yield curve dynamics have played a pivotal role. As short-term interest rates remain elevated due to RBI's repo rate hikes in response to inflation, longer-duration corporate bonds are locking in attractive yields before any potential rate reductions. Investors are essentially front-loading their portfolios to benefit from capital appreciation when rates fall, as bond prices move inversely to yields. "This is a classic duration play," notes a senior fund manager from a leading asset management company. "With inflation cooling off and growth concerns mounting, the odds of a rate cut cycle are increasing, making corporate bond funds an ideal vehicle for yield hunting."
Moreover, the credit quality of corporate bonds has improved markedly in recent years. Post the IL&FS crisis in 2018, which shook investor confidence in non-banking financial companies (NBFCs), regulatory reforms have strengthened the debt market ecosystem. The Securities and Exchange Board of India (SEBI) has introduced stricter norms for credit rating agencies and mandated higher liquidity buffers for mutual funds, reducing the risk of defaults. As a result, AAA-rated corporate bonds, which dominate the portfolios of these funds, are seen as nearly as safe as government securities but with a yield premium of 50-100 basis points. This has lured conservative investors, including high-net-worth individuals (HNIs) and institutional players, who were previously sidelined by low bank deposit rates.
Diving deeper into the data, the inflows into corporate bond funds have been broad-based, with both active and passive strategies benefiting. Actively managed funds, which allow portfolio managers to select bonds based on credit analysis and market timing, have seen the lion's share. Passive funds tracking corporate bond indices have also gained momentum, offering low-cost exposure to a diversified basket of high-grade debt. Comparatively, other debt categories like gilt funds and dynamic bond funds have witnessed moderate inflows, but corporate bond funds stand out due to their balanced risk-return profile. For instance, while gilt funds are purely exposed to government securities and thus sensitive to interest rate movements, corporate bond funds provide a cushion through corporate credit spreads.
This trend is also reflective of broader investor behavior in a post-pandemic world. Retail participation in mutual funds has skyrocketed, thanks to digital platforms and systematic investment plans (SIPs). However, with equity SIPs facing headwinds from market corrections, many are diversifying into debt SIPs. Corporate bond funds, with their monthly dividend options and tax-efficient structures (especially for those in higher tax brackets via indexation benefits on long-term capital gains), are proving to be a compelling alternative. Tax reforms in recent budgets have further sweetened the deal, as debt funds held for over three years qualify for long-term capital gains tax at 20% with indexation, making them more attractive than fixed deposits which are taxed at slab rates.
From a macroeconomic perspective, the inflows into corporate bond funds could have ripple effects on the broader economy. Increased demand for corporate debt lowers borrowing costs for companies, facilitating capital expenditure and expansion plans. This is particularly crucial at a time when bank lending growth is moderating due to higher risk weights on certain sectors. Industries like infrastructure, manufacturing, and renewables, which rely heavily on bond markets for funding, stand to benefit. Analysts predict that if the inflow momentum sustains, it could lead to a virtuous cycle where improved corporate access to funds boosts economic activity, potentially aiding India's ambition to achieve a $5 trillion economy.
However, it's not all smooth sailing. Risks linger on the horizon. A sudden spike in inflation or a delay in rate cuts could lead to mark-to-market losses in bond portfolios, eroding investor returns. Credit events, though less likely in the current environment, remain a concern, especially for lower-rated bonds that some funds might include for yield enhancement. Fund houses are advising investors to align their investments with their risk appetite and investment horizon, emphasizing that corporate bond funds are best suited for those with a medium to long-term view, ideally 3-5 years, to weather interest rate volatility.
Looking ahead, the outlook for corporate bond funds appears optimistic. With global central banks like the US Federal Reserve signaling potential rate easing, Indian markets are likely to follow suit. This could further amplify inflows, potentially pushing yields lower and driving bond prices higher. Industry observers estimate that if the current trend persists, corporate bond funds could see assets under management (AUM) swell by 20-30% over the next year, outstripping other debt categories.
In conclusion, the record inflows into corporate bond funds underscore a maturing investor base in India that's increasingly sophisticated in navigating market cycles. By blending safety with yield, these funds are not just luring capital but also contributing to a more resilient financial system. As the economic narrative evolves, keeping an eye on RBI's policy moves and global cues will be key for investors aiming to capitalize on this debt renaissance. Whether this marks the beginning of a sustained debt boom or a temporary refuge from equity turbulence remains to be seen, but for now, corporate bond funds are undoubtedly in the spotlight.
(Word count: 1,028)
Read the Full The Financial Express Article at:
[ https://www.financialexpress.com/money/corporate-bond-funds-lure-most-inflows-in-over-2-years-3875300/ ]
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