Revamped debt fund tax slows the roll of new MF launches

The launch of new schemes by mutual funds (MFs) has decelerated due to changes in debt fund taxation.

During the first half (H1) of this financial year (April–September 2023), fund houses introduced a total of 73 new fund offerings (NFOs), compared to 183 in the second half (H2) of 2022-23, or FY23 (October–March), according to data from the Association of Mutual Funds in India.

However, a higher proportion of equity and hybrid fund launches has driven up average collections.

NFOs in the ongoing financial year have averaged approximately Rs378 crore, compared to around Rs 226 crore in H2FY23.

In total, NFOs collected approximately Rs 27,600 crore in H1 of 2023-24 (FY24), compared to roughly Rs 41,300 crore in the preceding six-month period.

Debt funds, including both open-ended and closed-ended, comprised the majority of NFOs in FY23.

However, with changes in taxation, new debt fund launches have declined.

In FY23, there were a total of 79 active and 64 passive debt fund launches.

In comparison, there have been only seven debt fund launches in the first six months of FY24.

With debt funds losing their tax advantage, MFs have been banking on higher offtake for hybrid schemes.

MFs introduced nine schemes in various hybrid categories, primarily in the balanced advantage, multi-asset, and arbitrage spaces, in the first six months of FY24.

Fund houses have also aimed to differentiate their products from both asset allocation and taxation perspectives.

Two fund houses, 360 ONE and WhiteOak Capital, introduced their schemes in a lesser-known category known as a balanced hybrid.

These schemes differ from balanced advantage funds (BAFs) in terms of their flexibility for fund managers to shift allocations between equity and debt.

In balanced hybrid funds, fund managers must maintain a minimum 40 per cent allocation to both equity and debt.

In contrast, in BAFs, fund managers are free to decide the proportion of equity and debt, although most BAFs maintain a minimum of 65 per cent equity exposure to qualify for equity taxation.

Equity scheme launches were also prominent during the period, driven by positive equity market sentiment.