Debt mutual funds in India saw huge outflows in March; Rs 56,884 crore was withdrawn from debt funds last month, according to data from the Association of Mutual Funds of India. This was the highest in the last six months and significantly more than the Rs 13,815 crore outflows in February.
What's driven the debt funds outflows?
Short-duration funds like liquid funds, overnight funds, ultra-short-duration funds and money market funds saw outflows last month. Liquid funds itself saw outflows of Rs 56,924 crore in March; overnight funds and ultra-short duration funds saw outflows of over Rs 8,000 crore and Rs 10,000 crore respectively.
Investors, typically corporates, park huge sums of money in short-duration funds like overnight and liquid funds. As cash demand rises towards the end of the quarter, they withdraw this money. These funds typically invest in liquid and debt securities of very short tenure. Therefore, they are highly liquid and thus preferred by corporates to park their money.
But, this time around the finance minister Nirmala Sitharaman's move to remove the tax arbitrage that debt funds enjoyed may also have played a role as some investors may have moved a part of their short-term allocations to long-duration funds and new investors would also have rushed in to park their money in long duration funds before the new rules kicked in from April 1.
"A lot of redemptions tend to take place from liquid funds during March every year to pay advance taxes. But, portfolio movements from short-term debt to the longer end of the yield curve also contributed to this dramatic outflow figure," said Aniruddha Bose, chief business officer, FinEdge.
Earlier, in debt funds, long-term capital gains, that is when such funds were held for more than three years, were taxed at 20 per cent with indexation benefits. What indexation meant is, taxes were calculated after taking inflation into account and thus could help bring down taxes over time, if debt funds were held for the long term. In the amended Finance Bill last month, it was notified that investments in mutual funds where not more than 35 per cent is in equity shares will now be taxed at the investor's income tax slab rate from April 1. This rule wouldn't be applicable for investments made before that, so the investors rush to park money in long-duration debt funds by March 31.
Corporate bond funds saw net inflows of Rs 15,626.16 crore in March. Long-duration funds, banking and PSU funds, gilt funds and dynamic bond funds also saw strong inflows ranging between Rs 4,000 crore to over Rs 6,000 crore last month.
Mutual Funds witnessed significant assets under management (AUM) churn in March 2023 on the back of changes in tax laws, agreed Ajaykumar Gupta, CBO at Trust Mutual Fund.
"A large portion of the outflows channelled back into duration funds, which saw inflows totalling Rs 39,000 crore. With an inflow of Rs 27,000 crore target maturity funds/index funds was the largest beneficiary as investors reallocated funds in long-duration funds to avail indexation benefits," said Gupta.
With debt funds losing their indexation benefits from April 1, they are now at par with other debt instruments like bank fixed deposits. The question many would have is whether money should still be invested in debt funds.
"Investors should look at debt funds beyond tax efficiency, theses funds also provide investors with real-time liquidity enabling the investor to withdraw money within a day," said NS Venkatesh, CEO of the Association of Mutual Funds of India (AMFI).
In the long-term, debt funds also offer the benefit of interest rate movements, he further noted.
