Debt mutual funds witness massive inflows after the Finance Bill amendment.
Overview of Debt Mutual Funds:
Debt mutual funds are investments that primarily invest in fixed-income securities such as bonds, debentures, and government securities. These funds are considered to be a relatively safer investment option compared to equity mutual funds, as they provide stable returns over some time. Debt mutual funds are particularly popular among investors who seek regular income and stability in their investments.
Finance Bill amendment and its impact:
In March 2023, the Finance Bill amendment classified capital gains from debt mutual funds as only short-term ones. The government clarified that investment in mutual funds where not more than 35 percent is invested in equity shares of Indian companies (which are debt funds) will be deemed as short-term capital gains. This announcement led to inflows in debt mutual funds, as investors rushed to take advantage of the low long-term capital gains (LTCG) tax regime. The new provision became effective from April 1, 2023, further fueling the inflows into these funds.
Analysis of inflows into debt mutual funds:
According to Value Research data, debt mutual funds witnessed inflows of Rs 31,708 crore from March 27 to March 31, 2023. Among the different types of debt mutual funds, target maturity funds (TMFs) saw inflows of Rs 13,361 crore, while corporate bond funds witnessed inflows of Rs 9,526 crore in the same period. Banking and PSU funds received inflows of Rs 3,347 crore, while dynamic bond funds and gilt funds saw Rs 2,886 crore and Rs 2,608 crore, respectively. Mutual fund sources indicated that inflows into debt funds since the Finance Bill amendment was passed were close to Rs 50,000 crore.
Before the new provision was passed, debt mutual funds were treated as long-term investments if held for more than three years and taxed at 20 percent, along with indexation benefits or 10 percent without indexation. Those with a holding period of fewer than three years were taxed according to their tax slab. With the changes brought about by the Finance Bill amendment, investments in debt mutual funds are now being taxed as short-term capital gains only, and indexation benefits and the tax rate of 20 percent have been done away with.
Conclusion:
The Finance Bill amendment has significantly increased inflows into debt mutual funds, particularly in the last week of March 2023. While the new provision has done away with certain tax benefits for investors, it has boosted the popularity of debt mutual funds. Investors should carefully analyze their investment goals and risk appetite before investing in any financial instrument.
