Last-minute rush brings record flows into select debt mutual funds

The last-minute rush to invest in debt mutual funds before March 31 – when the tax benefits for these products ended – resulted in record flows into various schemes. According to data from Value Research, fund categories like Target Maturity, Corporate Bond, Gilt, Dynamic Bond and Banking and PSU Debt saw total inflows of at least ₹39,325 crore between March 27 and 31. These funds saw total flows of ₹750 crore in the first three weeks of March. The final figures for the month could be higher as these calculations may not have captured some of the late flows on March 31.

In the last week of March, investors shifted money from liquid funds and even fixed deposits into schemes with longer maturities and stable returns. Target Maturity Funds, which offer visibility of returns and come with a low cost, saw a bulk of flows in the period garnering ₹15,265 crore, followed by corporate bond funds that got ₹10,402 crore, according to Value Research. “Investors have taken the advantage of high rates and long-term capital appreciation by locking in money with a long term view,” said A Balasubramanian, managing director, Aditya Birla Sun Life Mutual Fund.

With the government on March 24 announcing the removal of long-term capital gains tax benefit for debt mutual funds, wealth managers had asked investors to lock money into debt mutual funds with longer maturities in this window. Many of these schemes could give 7-8% pre-tax returns.

From April 1, capital gains from debt mutual funds are being taxed as per the income tax slab of the individual. Before that, the indexation benefit for debt fund investments held for at least three years lowered the tax outgo compared to several other fixed-income products. “Attractive yields, advantage of long-term capital gains tax with indexation benefits and chance of a capital appreciation, if interest rates were to head down, lead to a surge in flows into debt funds,” says Ashish Shankar, MD, Motilal Oswal Private Wealth.

A rising interest rate environment has led to outflows from debt funds betting on long-term securities, which have been dragged down by mark-to-market losses. The Reserve Bank of India started the rate hikes in May 2022 and raised repo rate by 250 basis points since May 2022.

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