Debt mutual funds see slower inflows than hybrid and equity
While equity and hybrid assets grew 1.8 times since November 2023, debt assets grew only 1.3 times. A combination of the 2023 taxation overhaul, which eliminated indexation benefits, and a persistent lack of retail awareness has led to net outflows of ₹22,105 crore this year.
Plain-vanilla debt mutual funds have been slow to attract fresh flows for over two years now, and 2025 was no exception, even as hybrid and equity mutual funds outpaced these fixed-income schemes.
The total assets of debt mutual funds have grown 1.3 times since November 2023 to ₹20 trillion as of November 2025, compared to hybrid and equity assets, which have grown 1.8 times over the same period.
The total assets for hybrid funds stood at ₹11.4 trillion, and those for equity stood at ₹35.4 trillion as of November, according to data from the Association of Mutual Funds in India (Amfi).
The reasons for lower inflows into debt mutual funds are primarily due to changes in taxation and lower awareness about the product, according to experts.
On 1 April 2023, the government removed the indexation benefit on debt mutual funds. Before the removal of indexation, if one had invested in a debt mutual fund, they would have been taxed at 20% on long-term capital gains with indexation benefits.
Currently, in debt mutual funds that invest less than 35% in equity purchased on or after 1 April 2023, the gains are taxed entirely at the applicable income tax slab rate of the unit holder, regardless of the holding period, without indexation benefits, which has disappointed investors.
Taxation hurdles
Sirshendu Basu, head of product management & strategy at Bandhan AMC, said that since debt mutual funds are taxed at the investor’s applicable marginal rate, post-tax returns have declined for most investors.
“With AAA-equivalent debt funds offering around 6.75% pre-tax returns, investors are increasingly exploring hybrid fund categories in search of improved post-tax outcomes, while being mindful of the relatively higher risk involved," he added.
“Taxation changes impacted institutional investors because money invested before the change continues to enjoy indexation benefits through grandfathering," said Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India). “Now, new money in debt mutual funds is being allocated purely based on category merits," he added.
Moreover, awareness about debt funds is also lower than that of equity funds, especially among retail investors, according to experts.
“Equity investing has benefited from years of storytelling around wealth creation, SIPs, and compounding," said Sneha Pandey, fund manager, debt at Quantum Mutual Fund.
“Debt, on the other hand, is still poorly understood in terms of its role in portfolio stability, income generation, and risk management, and as a result, investors either go ‘all-in’ on equity for growth or stick to fixed deposits (FDs) for safety, leaving limited room for debt mutual funds," Pandey added.
“For equity mutual funds which invest at least 65% in equities, the capital gain realised within 12 months is taxed at 20% as Short-Term Capital Gains (STCG). Whereas if the gains are realised after 12 months, it is considered as Long-Term Capital Gains (LTCG) and is taxed at 12.5% on amounts exceeding ₹1.25 lakh per financial year," said Abhishek Kumar, a Sebi-registered investment advisor (RIA).
- Since November 2023, debt fund AUM grew 30% to ₹20 trillion, while equity and hybrid funds surged by 80%.
- Debt funds recorded net outflows of ₹22,105 crore in 2025, a sharp reversal from the ₹50,379 crore inflows in the same period last year.
- The removal of indexation benefits on 1 April 2023 remains the primary hurdle, making post-tax returns on debt funds less attractive than hybrid alternatives.
- The share of retail and HNI investors in debt assets fell from 24% to 21% over the last year, suggesting a shift toward FDs or equities.
- Amfi has formally requested the government to restore indexation benefits in the upcoming Budget to level the playing field.
Shift to hybrids
Whereas for hybrid funds with 35% to 65% equity exposure, the capital gains realised within 24 months are taxed at the unit holder's income tax slab rate, while gains realised after 24 months are taxed at 12.5% without indexation benefits, Kumar added.
The share of retail investors and high-net worth individuals (HNIs) in the total assets of debt funds has also come down over the last year. It has fallen from 24% in September 2024 to 21% in September 2025, as per the latest data available on the specific investor category from Amfi. For hybrid mutual funds, the share of retail and HNIs to total assets has fallen from 83% to 82% in the same period. For equity mutual funds, it has stagnated at 91%.
Ahead of Budget 2025, Amfi has proposed restoring indexation benefits to encourage flows into debt mutual funds.
“It is our humble and logical request to kindly revisit the withdrawal of indexation on long-term debt investments and restore the status quo ante by amending the tax laws, reintroducing the indexation benefit on long-term capital gains from debt funds made up to 31 March 2023," Amfi said in a statement.
Looking ahead, fund managers anticipate stable growth for debt mutual funds, with no sudden surges in inflows.
“Debt mutual funds will likely have steady growth. They have a long way to go to reach the majority of small ticket investors," said Killol Pandya, head of fixed income at JM Financial AMC.
Bafna noted that debt funds are becoming more attractive because RBI is increasing cash flow into the system and elevated spreads due to higher bank ‘credit-deposit ratios’. Specifically, low-duration funds currently offer yields of about 0.30% to 0.40% higher than one-year FDs, while short-duration funds offer 0.50% to 0.75% more, he said, adding these returns are expected to stabilize after March, making now a good time to invest.
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