Indian mutual funds see debt inflows before tax tweak kicks in

MUMBAI: Indian mutual funds are seeing a spurt in inflows into debt-oriented schemes ahead of a change in the country’s taxation process effective April 1, several fund managers said on Tuesday.

The country will tax investments in debt mutual funds as short-term capital gains, according to recent amendments to the finance bill - a move that is feared could take away some benefits that have so far made these investments popular.

“We saw inflows coming in on Monday, and more are expected in the next couple of days in target maturity funds, short-term funds as well as corporate bond funds, some inflows are also seen in government bond funds,” said Murthy Nagarajan, head of fixed income investments at Tata Asset Management.

Investments made before March 31 would be taxed as per the current rules, leading to the rush.

At least two mutual fund managers have estimated inflows of around 50 billion rupees ($608.35 million) in the system after government’s decision to take away long term tax benefits for debt mutual funds.

This is in stark contrast to outflows from debt schemes that typically take place in March.

“The broader industry is seeing some inflows after the tax announcement, and mutual funds could be seen buying slightly longer duration papers,” said Pankaj Pathak, fixed income fund manager at Quantum Asset Management.

The change could spur growth in bank deposits and lead to lower inflows in some debt mutual funds schemes, according to fund managers.

Fund managers are recommending that retail investors, individuals with high net worth, and corporates invest in debt schemes ahead of the tax change kicking in, market participants said requesting anonymity, as they are not authorised to speak to media. Money is getting invested in corporate bonds with a tenure of three years or more, as well as government bonds, Tata Asset Management’s Nagarajan added.

Fund managers have said that once the measure is effective, demand for corporate bonds especially with above three-year maturity may weaken. However, not everyone agrees.

“Overall, I do not see this as a big dampener for the entire debt category. Mutual funds provide liquidity, which is not available otherwise,” said Devang Shah, co-head, fixed income at Axis Mutual Fund.

“If someone wants to have benefits of capital gains, mutual funds will continue to be one of the preferred choice.”