Debt MFs see inflow of ₹31k cr in single week

“Net investments into schemes where investors have three- to five-year horizon typically was a little over ₹31,000 crore in the last week of March,” said A. Balasubramanian, chairman, Association of Mutual Funds in India (Amfi), the nodal association for mutual funds.

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The inflows are significant, considering that investors had pulled out an average ₹14,235 crore from debt schemes every month in FY23. These include schemes like overnight funds, liquid funds, and ultra-short-duration funds, where the investments are for the short term. Amfi data for the week includes schemes where allocations are normally made for the long term (see table).

The amended finance bill 2023, which was passed by the Lok Sabha on 24 March, deemed the transfer of units of specified mutual funds acquired on or after 1 April, as short-term capital gains, taking away the indexation benefits of cost of acquisition in computing capital gains and bringing them on par with bank fixed deposits.

Till 31 March, capital gain on debt schemes held for at least three years would be taxed at a flat 20% after indexation. According to new rules, capital gains on these funds will be added to an investor’s income, and taxed at the applicable slab rate without indexation.

The government’s move led to a surge in investors parking their funds in long-duration debt funds to avail of the benefits before the 31 March deadline. The weekly inflows were also driven by the entry of investors who were otherwise waiting, as they expected the interest rate cycle to have peaked, Balasubramanian said.

Bond yields and prices move inversely. In a rising rate cycle, as witnessed since May 2022, investors sell bonds purchased previously and buy those after a hike by the Reserve Bank of India to avail of higher coupon rates.

This drives down the prices of the bonds they sell, while they hunt for higher yields. When rates begin to fall, investors flock to paper with higher coupons, raising the bond prices.

MF industry veterans such as Nilesh Shah, managing director and group president, Kotak AMC, expects more allocations to equity or hybrid schemes from FY24.

The funds attracting investors in the last week of March were corporate bonds, credit risk funds, and medium to long duration funds.