Debt mutual funds have seen a surge in inflows of about Rs 31,708 crore between March 27 and March 31 as investors aim to avoid losing indexation benefits from April. This trend of inflows in March is a departure from the net outflows observed into income and debt-oriented schemes over the last three years, according to the Association of Mutual Funds in India (AMFI) data. The inflows are category-wise, with target-maturity debt funds at the top with a net inflow of over Rs 13,000 crore followed by corporate bonds at over Rs 9,500 crore, while dynamic bonds and gilts follow at over Rs 2,800 crore and Rs 2,600 crore, respectively, as per data compiled by Value Research.
Mutual fund houses such as Aditya Birla Sun Life, ICICI Prudential, HDFC, SBI, and Kotak have been the primary beneficiaries, with Aditya Birla Sun Life Corporate Bond Fund alone receiving net flows of over Rs 3,000 crore. Corporate bonds and target-maturity funds account for 70 per cent of the holdings among the top 10 positions, as per a note from Value Research.
Last month, the government amended the Finance Bill 2023 to tax capital gains arising from debt mutual funds at progressive tax slab rates of investors for any holding period. Earlier, gains from debt funds were taxed at 20 per cent if sold after three years, with indexation allowing for a reduction in the tax burden by taking inflation into account. This indexation benefit is no longer available for these funds. The change in tax policy has resulted in investors seeking to take advantage of the previous tax arbitrage and park their money in debt mutual funds before the end of the financial year.
Market estimates suggest that institutional investors account for around 70 per cent of investments in debt mutual funds, while retail investors, including high net-worth individuals, make up the remaining 27 per cent. From April onwards, analysts anticipate fresh investments to shift towards bank deposits where interest rates have been rising following the Reserve Bank of India’s policy rate hikes.
Debt mutual funds were popular among investors because of three principles: returns, liquidity, and tax arbitrage. With the changes in tax policy, debt mutual funds may lose their attractiveness, and bank deposits could become a preferred investment option. According to a research note by Crisil, “The tax benefit distinguished them from conventional debt instruments such as bank fixed deposits which could now get a boost.”