After massive outflow in March, debt-oriented mutual funds witnessed a sharp turnaround in April as they attracted ₹1.06 lakh crore with liquid schemes accounting for 60 per cent of the inflow.

Barring credit risk and banking and PSU fund categories, all the other segments witnessed net inflows and expectedly, categories having shorter maturity profiles were the biggest beneficiaries, the data with the Association of Mutual Funds in India (AMFI) showed.

Going ahead, debt mutual funds are likely to witness a decline in inflows since the tax benefits from indexation are not available from April 1 onwards, V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

Spurt in debt fund inflows

According to the data, debt mutual funds witnessed an inflow of ₹1.06 lakh crore in April as compared to a net outflow of ₹56,884 crore in the preceding month.

"While March’s outflow was a natural and expected year-end phenomenon, it is difficult to ascertain the reason behind this sudden turn in liquid fund inflows," Mayank Bhatnagar, Chief Operating Officer, FinEdge, said.

The huge inflow has pushed the assets under management (AUM) of fixed income funds or debt funds from ₹11.81 lakh crore in March to ₹12.98 lakh crore last month.

Liquid fund

In terms of categories, liquid funds received the highest net inflows of ₹63,219 crore, accounting for 60 per cent of the total flows of debt funds during the month under review. This was followed by the money market fund category that attracted ₹13,961 crore and ultrashort duration fund that saw a net infusion of ₹10,663 crore.

"After meeting the tax liabilities of the last financial year in March, corporates would have parked their excess investible money in liquid fund and ultrashort duration fund categories, for a short period, thereby leading to huge inflows in these categories," Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, said.

Also, investors would have preferred to invest in categories with shorter maturity profiles such as low duration, money market and short duration funds since there is still some degree of uncertainty over the direction that the Reserve Bank of India (RBI) could take with respect to interest rates going ahead, he added.

Floater funds received net inflows of Rs ₹3,911 crore due to their ability to withstand changing interest rates scenarios On the other hand, credit risk fund and banking and PSU fund segments saw outflows to the tune of ₹356 crore and ₹150 crore, respectively.

Flows in the debt mutual funds are expected to be impacted going forward due to the new tax rules, whereby investments in debt mutual funds that are bought on or after April 1, 2023, will be taxed as short-term capital gains at applicable tax rates. That is, capital gains from debt funds, international funds and gold exchange-traded funds, irrespective of their holding period, will be taxed at an individual's relevant applicable tax rate.

Debt mutual funds held for more than three years will no longer enjoy indexation benefits and additionally, existing Long-Term Capital Gain benefits will continue for investments made on or before March 31, 2023.

Indexation takes into account the inflation during the holding period of a mutual fund unit and consequently increases the purchase price of the asset and this reduces the tax.

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