Debt mutual funds log Rs 40K-crore inflow before tax tweak cut-off

Investors snap up popular medium- to longer-duration debt funds to lock in higher returns

After a prolonged spell of outflows and some bad news on the tax front, debt funds had something to cheer for in the last week of the financial year 2023, which ended on March 31. Investors poured in about Rs 40,000 crore into popular medium- to longer-duration debt funds between March 27 and 31 — the last five days of the month —according to an analysis by Value Research, a firm that maintains a mutual fund database.

The spurt in demand was driven by a rush among investors to lock in higher returns in longer-duration debt funds before the change in taxation came into force. In a surprise move on March 24, the government had announced that debt mutual funds would no longer attract long-term capital gains tax (LTCG) or get the indexation benefit. Instead, the gains made on such investments would be charged according to individual tax slabs. The government, however, provided the grandfathering benefit for investments made up to March 31, 2023. Hence, investors had over a week’s time to invest in debt schemes and avail of the LTCG benefits.

“There has been an acceleration in debt mutual fund flow towards the end of the financial year to take advantage of the long-term capital gains benefit,” said A Balasubramanian, managing director & chief executive officer (CEO), Aditya Birla Sun Life AMC. Under LTCG taxation, which was applicable on investments of over three years, gains were taxed at 20 per cent, after adjusting for inflation. This is known as indexation.

The data released by Value Research shows that target maturity funds received the highest net inflows at Rs 15,265 crore, followed by corporate bond funds, which received over Rs 10,400 crore. Among schemes, Aditya Birla Sun Life’s corporate bond fund recorded the highest net inflow at Rs 3,100 crore. ICICI Prudential MF’s All Seasons Bond Fund witnessed net inflows of Rs 1,900 crore.

The surge in inflows is expected to have given a boost to the assets under management (AUM) of debt funds that have seen consistent outflows in 18 months. In February, investors withdrew a net of Rs 13,800 crore from debt funds. As a consequence of persistent outflows, the AUM held by debt schemes were down over 10 per cent in the past year to Rs 13 trillion. Experts attribute the outflows to an adverse rate-hike cycle, and the absence of liquidity with corporate houses.

In the run-up to the change in the tax structure, investment advisors said they had advised their clients to invest in debt to lock in higher post-tax gains. 

Fund houses, too, had handed out fliers to investors suggesting they invest in debt MFs to avoid a higher tax burden.