Net inflows into debt mutual fund schemes plunged by 83% in FY26, falling from ₹1.38 lakh crore in FY25 to ₹22,262 crore. The sharp decline was largely driven by hardening yields amid heightened macroeconomic uncertainty, which dampened investor interest.
Rahul Singh, head – fixed income, LIC Mutual Fund, said that the end of the interest rate cycle reduced the appeal of duration strategies. Additionally, US tariffs and broader global pressures weighed on the rupee and weakened foreign investor sentiment.
He further noted that a surge in the credit-deposit ratio led public sector banks to borrow aggressively, pushing yields higher. This, in turn, prompted investors to trim their exposure to longer-duration debt instruments. Moreover, geopolitical tensions in West Asia increased India’s import bill, triggering capital outflows and raising the likelihood of rate hikes due to currency and inflationary pressures. Together, these factors created a challenging environment for debt markets and significantly impacted fund flows throughout the year.
Macro Pressures
D P Singh, Joint CEO of SBI Mutual Fund, highlighted a shift in investor preference toward hybrid schemes as another key reason for the decline in inflows into pure debt funds. Data indicates that hybrid categories, particularly multi-asset allocation schemes—which are mandated to invest at least 10% in three asset classes—saw an 87% surge in inflows from FY25 to FY26.
However, funds with higher debt exposure saw a decline. Conservative hybrid funds (with 75–90% debt allocation) saw net inflows decline by 71%, while balanced advantage funds (with flexible debt exposure ranging from 0–100%) recorded a 10% drop in inflows during FY26.
Singh expects the trend of gaining debt exposure through hybrid funds to persist. He also attributed the muted inflows in debt schemes to consistently rising yields over the past year, which resulted in subdued returns. While he anticipates an improvement in inflows in FY27, he expects them to remain below historical highs.
Retail Outlook
Dhirendra Kumar, CEO of Value Research, pointed out that debt schemes in India are largely dominated by institutional investors. Significant redemptions of around ₹3 lakh crore in March played a major role in the sharp decline in overall inflows between FY25 and FY26.
He explained that structural changes in the asset class, such as the removal of indexation benefits, which eliminated the tax advantage debt funds previously held over fixed deposits. As a result, many investors and treasurers have reallocated funds within the fixed-income space, moving toward arbitrage funds, target maturity funds, and direct government securities as interest rates peaked.
For retail investors, he emphasised that the fundamentals remain unchanged. “Debt funds continue to be a sensible option for parking money for one to three years. They offer greater flexibility than fixed deposits, no lock-in, and similar tax treatment.”
He believes that debt funds are now evolving into their intended role—as straightforward cash management tools for households rather than tax-arbitrage instruments. “Flows may remain volatile due to institutional dominance, but the relevance of debt funds in retail portfolios is as strong as ever,” he said