The report also pointed out that the chase for returns ends up masking the illiquidity premium in debt schemes, as higher returns attract incremental investor flows.
Further, the report stated that corporate investors are concentrated in large-sized schemes as smaller fund houses are unable to compete on expense ratios because of lower economies of scale.
There is also a higher likelihood of bailout. "A large fund size is also incentive compatible from an investor point of view, as such funds have significant systemic spillovers, potentially improving possibilities of bailouts”.
The high share of corporate and high-net worth investors (HNIs) in debt funds make them more vulnerable to large exits.
The report pointed out that corporate investors and HNIs accounted for 90 per cent of the aggregate assets under management in debt funds.
The report observed that debt funds’ risk-aversion has continued.
“The proportion of liquid securities in holdings of debt MFs reached an all-time high in April 2020, reflecting risk aversion and liquidity storing,” the report pointed out.
Corporate defaults have taken a toll on debt MFs.
“Resource mobilisation by MFs suffered from idiosyncratic shocks such as corporate defaults during the second half of 2019-20, with pressure intensifying in March 2020. Open-ended debt-oriented schemes accounted for net outflows of Rs 1.94 trillion,” the report said.