In a sharp reversal at the tail end of the financial year, debt-oriented mutual fund schemes in India witnessed massive net outflows of ₹2.03 lakh crore in March 2025, according to the latest AMFI (Association of Mutual Funds in India) data. This contrasts sharply with the otherwise strong performance in FY2024-25, which saw overall net inflows of ₹1.38 lakh crore into debt mutual funds.

This March redemptions spree has been attributed largely to corporate advance tax payments, a pattern that aligns with the usual seasonal withdrawal trend at fiscal year-end.

All 16 Debt Fund Categories See Net Outflows

March turned out to be a challenging month for debt funds as all 16 AMFI-classified debt fund categories reported net outflows. Among these, the liquid fund category bore the brunt of the redemptions.

Major Hit on Liquid and Ultra-Short-Term Categories

Liquid funds, which are frequently used by corporates and institutions for short-term deployment of surplus capital, saw the steepest redemption pressure. The category alone witnessed outflows of ₹1,33,034 crore, accounting for nearly two-thirds of the total debt fund outflows in the month.

Overnight funds weren’t spared either, with ₹30,015 crore in redemptions, followed by money market funds which recorded ₹21,301 crore in outflows. These short-duration debt instruments are usually the first to be liquidated when companies prepare for tax payments and year-end financial adjustments.

Seasonal Trends and Corporate Behavior at Play

According to Nehal Meshram, Senior Analyst – Manager Research at Morningstar Investment Research India, this trend is not unusual. She pointed out that corporate and institutional investors routinely redeem short-duration debt funds in March to meet advance tax liabilities, address annual compliance requirements, and manage balance sheet adjustments.

This cyclical behavior is seen year after year, causing temporary pressure on short-duration debt funds, especially in March, the closing month of the fiscal year.

Long-Duration Funds Hold Ground Amid Market Volatility

Interestingly, not all debt fund categories were equally impacted. Longer-duration debt funds, such as medium to long-duration and gilt funds, held up relatively well.

These funds witnessed muted redemptions, which analysts attributed to investor optimism around softening monetary policy, especially amid signs of cooling inflation and potential rate cuts by the Reserve Bank of India (RBI) in the coming quarters.

Meshram further added, “With the RBI adopting a cautious yet supportive stance, investors continued to prefer long-duration debt funds for their capital preservation potential and predictable returns.”

Why March Was the Exception, Not the Norm

Despite the March outflows, FY2024-25 was a turnaround year for debt mutual funds. The category, which had recorded net outflows of ₹23,097 crore in FY2023-24, bounced back strongly with net inflows of ₹1.38 lakh crore in FY2024-25.

This resurgence was backed by several favorable macroeconomic factors, including:

• Declining inflation trends

• Improved real interest rates

• A more stable policy outlook from the RBI

• Volatility in equity markets, especially in the first half of the year, due to geopolitical tensions and fears of US tariff hikes

As a result, many investors turned to debt funds in a classic “flight to safety” strategy, allocating capital to fixed-income instruments for capital protection and steady returns.

Expert Outlook: March Dip Is Likely Transient

Akhil Chaturvedi, Executive Director & Chief Business Officer at Motilal Oswal AMC, downplayed the March outflows, stating that the redemptions were primarily seasonal and related to year-end corporate activities.

He highlighted that the selling at the shorter end of the yield curve was expected due to advance tax payments, while at the long end, some profit-booking was seen following a rally in long-dated bonds.

Market watchers believe that April 2025 onward, inflows into debt mutual funds could regain momentum, particularly if:

• Bond yields continue to soften

• The RBI maintains its supportive policy stance

• Liquidity conditions improve further

Investor Strategy Going Forward

For investors, the March dip in debt funds is a temporary blip. The core fundamentals of the debt market remain intact, especially as rate-cut expectations remain alive and inflation continues to show signs of moderation.

Short-term investors may still need to time their entries and exits carefully, particularly in the liquid and money market fund space, which remains vulnerable to seasonal and cyclical movements.

However, for long-term investors, especially those focused on duration strategies, the outlook appears more favorable, with steady returns and capital protection making long-duration funds a viable option.

Final Takeaway

While the March 2025 outflow of ₹2.03 lakh crore from debt mutual funds may raise eyebrows, it's largely in line with historical seasonal behavior. The broader picture still reflects a positive year for debt funds, driven by macroeconomic improvements, favorable interest rate signals, and a flight to fixed-income safety during equity volatility.

As we head into FY2025-26, investor focus is expected to return to high-quality debt funds, especially if bond yields continue to trend lower, offering better risk-adjusted returns in the fixed-income space.

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