The government’s decision to remove the tax arbitrage between bank fixed deposits could dampen flows into debt mutual funds. In addition, funds such as the Gold ETF, Gold ETF fund of fund, and any fund of funds that invest in other equity, debt or gold MFs that fall into the debt fund category for taxation purposes may also witness a decline in flows.

“While trying to remove the tax arbitrage between FDs and debt funds, the tax change extends to innovative products offered by MFs which serve as a stepping stone for Indian investors’ journey towards financialisation. This invariably may get impacted due to a comparison with the past and thereby, delay the financialisation objective. This should be reviewed and corrective changes should be made to many products that incorrectly bundle under the debt funds umbrella from a taxation perspective,” said Chirag Mehta, CIO — Quantum AMC.

Who’s impacted?

MF players have over ₹12-lakh crore under various debt funds.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said this is a blow to debt market as more money will move to bank FDs and sovereign gold bonds. The biggest gainer will be the exchequer with increasing tax revenue, he added.

A Balasubramanian, Chairman of the Association of Mutual Funds in India, and MD, Aditya Birla Sun Life AMC, told businessline that the move will have a major impact on international funds, gold and fund-of-funds than on domestic debt funds.

Experts said since this change comes into effect from the next financial year, between now and April 1, 2023, could be a good time for debt investors to allocate to debt category MFs to the extent required and thereby lock in the preferential tax treatment.

‘Welcome move’

Bond market players, however, welcomed the move. Srikanth Subramanian, CEO, Kotak Cherry, said there will be renewed retail interest in the corporate bond market and this will also add depth to liquidity which will mean better pricing for the end customer.

Vishal Goenka, co-founder, IndiaBonds, said,“We always encourage investors to have fixed income in their portfolio for adequate diversification and the proposed changes will make direct bond investments by individuals more attractive.”

Shares of HDFC AMC and Aditya Birla Sun Life AMC dropped 4 per cent each to ₹1,671 and ₹340, respectively, while Nippon Life India AMC was down 1 per cent at ₹206. UTI AMC dipped 5 per cent to ₹658.