Financials I Non-Lending Sector Check - Rate Cuts To Boost Flows In Longer-Duration Funds: Motilal Oswal

Motilal Oswal Report

Over the past couple of years, assets under management of the MF industry has recorded a 29% compound annual growth rate driven by strong growth across categories except the debt segment, which grew at a modest pace of 2.9%.

Equity/Hybrid/Liquid/ETFs have reported a 41%/33%/20%/ 31% CAGR over the same period.

Since achieving an all-time high of Rs 11 trillion in January 2021, the AUM of debt-oriented schemes declined to reach Rs 7.7 trillion in March 2023. The decline was led by ~250 bp hike in interest rates during the same period and the scrapping of indexation benefits for taxation. Nevertheless, with rate cut expectations round the corner, recent trends are indicating increased traction in inflows.

While investments in liquid schemes maintain their momentum, longer-duration schemes (1-10 years) witnessed significant outflows during FY22-FY23. In FY24, the trends reversed with modest inflows, and in FY25 the momentum seems to have picked up.

The US Fed rate cut in Sep-24 after four years may signal the start of declining RBI repo rates in the near future. This would improve the attractiveness of the longer-duration schemes for investors, aided by likely capital appreciation gains and improved yields. After the commencement of the RBI repo rate cuts in Jan-19, in one-year, the returns of the long-duration schemes and Gilt were at an all-time high of 14.4% and 13.4% in Jan-20.

As the AUM mix in the debt segment tilts towards longer duration funds, the yield on debt AUMs is likely to improve for AMCs. This could partially cushion the impact of the telescopic structure on equity yields.

Click on the attachment to read the full report:

DISCLAIMER

This report is authored by an external party. NDTV Profit does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of NDTV Profit.

Users have no license to copy, modify, or distribute the content without permission of the Original Owner.