The debt mutual funds saw an outflow at Rs 56,884 crore in March 2023 versus Rs 13,815 crore outflow in February, data released by the Association of Mutual Funds in India (AMFI) said. This is the highest in six months. In the calendar year 2023, the debt category has seen total outflows of Rs 81,015.51 crore. Among the categories, liquid funds saw the highest outflow of Rs 56,924.13 crore, followed by money market funds.
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Money market funds witnessed outflows of Rs 11,421.65 crore.
Liquid funds are preferred by investors to park their money for short periods of time. They invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. This may be one of the reason for the category witnessing the highest outflow.
According N S Venkatesh, chief executive at AMFI," An outflow from liquid funds was expected because this is normal treasury management at the end of the financial year. Companies need to pay advance tax. Interest rates have peaked, so investors find it more attractive to invest in debt funds."
Notably, Reserve Bank of India (RBI) has been raising repo rate since May before hitting the pause button in March.
Talking more about the data, corporate bond fund saw the highest inflow of Rs 15,626 crore in March versus Rs 662 crore in February. Medium to long duration fund saw an inflow of Rs 128.21 crore. The credit risk inflow stood at Rs 157 crore.
It looks that investors focus shifted to long duration funds. This may be because of new Finance Bill rules on taxation. Debt investments till March 31, enjoyed the earlier favourable taxation regime.
The Finance Bill amendment said to classify capital gains arising from debt mutual funds as only short-term capital gains. The government said that investment in mutual fund where not more than 35 percent is invested in equity shares of Indian company (which is debt funds) will be deemed as short-term capital gains.
The announcement was done on March 24 and the provision became effective from April 1. In order to take benefits of the low long term capital tax (LTCG) regime, investors were seen purchasing these funds in the last week of March, experts said.
Earlier, AMFI data showed that over 3 year tenor debt MFs saw biggest inflows.
Before the new provision was passed, debt mutual funds were treated as long-term investments if held for more than 3 years and taxed at the rate of 20 percent along with indexation benefits or 10 percent without indexation. Those with a holding period of less than 3 years were taxed according to their tax slab.
With the changes, investments in debt mutual funds are now being taxed as short-term capital gains only. Indexation benefit and tax at a 20 percent rate have also gone away.
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