Tax changes slow new MF scheme launches; demand for debt funds takes a hit

Product launches by mutual funds (MFs) have entered the slow lane this financial year (2023-24), with debt fund launches grinding to a halt after the loss of indexation benefit.The industry had launched 253 new schemes in 2022-23 (FY23), with a majority of offerings being on the fixed-income side. So far this financial year, the total number of launches has stood at 24, with just three of them being on the debt side.MF executives say they are tracking the demand situation before coming out with any new debt offering.“The demand in general has come down owing to a loss in indexation benefit, both from individual investors and corporates. We will look to launch products if the demand situation improves,” says a senior MF executive.In FY23, target maturity funds (TMFs) had emerged as the leading category for launches as fund houses set out to create a bouquet of offerings in the TMF space, which was fast gaining traction among corporate and retail investors.There was optimism among fund houses that TMFs may emerge as a strong alternative to bank fixed deposits (FDs) that have historically received the lion’s share of household savings.A total of 65 TMFs were launched in FY23, with fund houses coming up with differentiated products with better risk/reward propositions to maximise yields, and also make their product stand out in a sea of offerings.TMFs are passively managed debt funds that come with a specific date of maturity. They offer predictable returns if the investor stays invested until the date of maturity. Most schemes specifically invest in government securities and state government bonds.However, with the change in taxation from this financial year, the industry has been forced to stall its TMF plans.Going by inflows seen in index funds in April 2023 (including both active and passive funds), the demand for TMFs does seem to have declined. Index funds received net inflows of just Rs 147 crore in April — the lowest since December 2020. The net inflows had hovered around Rs 5,000 crore in most parts of FY23.“The attractiveness of debt funds has come down for sure. We are still recommending medium-to-longer horizon debt schemes but mostly to people in lower tax brackets. Products like TMFs still make sense for certain sections of investors like those who want to lock in money for longer durations in expectation of capital gains,” says Vinod Jain, founder, Jain Investment Advisors.Debt funds used to enjoy preferential taxation until FY23 by way of long-term capital gains (LTCG) tax benefits. However, with LTCG getting scrapped for debt funds from this financial year, debt schemes have lost their sheen. This has forced fund houses to explore new fund options to prevent fixed income flows from diverting to other investment options like bank FDs and bonds.The hybrid space is one option that MFs have set their sights on. Hybrid schemes investing 35-65 per cent in equity still qualify for 20 per cent taxation with indexation benefits, provided the investor stays invested for more than three years.Edelweiss MF has recently launched a hybrid fund under the multi-asset structure which will predominantly be fixed-income-oriented, with exposure to equities, gold, and silver. The portfolio construction strategy of the scheme will be 45-55 per cent in fixed income, 35-40 per cent in equity arbitrage, and 10-15 per cent in gold and silver arbitrage.The debt-plus-arbitrage strategy will keep volatility lower as in the case of debt schemes, while also ensuring lower tax outgo for investors.

Tax changes slow new MF scheme launches; demand for debt funds takes a hit

The debt-plus-arbitrage strategy will keep volatility lower as in the case of debt schemes, while also ensuring lower tax outgo for investors

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Tax changes slow new MF scheme launches; demand for debt funds takes a hit

The debt-plus-arbitrage strategy will keep volatility lower as in the case of debt schemes, while also ensuring lower tax outgo for investors

Listen to This Article

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