Even after a month of strong inflows, debt mutual funds witnessed outflows in August, triggered by concerns over a potential goods and services tax (GST) cut announced on Independence Day. As a result of the expected GST cut, investors were on the sidelines during the month, as lower tax revenue for the government could increase government borrowing in the second half of the year and push bond yields higher.
According to the Association of Mutual Funds of India (Amfi) data, debt mutual funds (MFs) recorded outflows of ₹7,879 crore in August, compared to inflows of ₹1.06 trillion in July. had seen inflows of ₹45,169.3 crore in August last year.
When the government issues more bonds, it leads to an oversupply in the market, which pushes bond yields higher and prices lower. Bond prices and yields move in opposite directions. The yields for the 10-year g-sec have hardened 22 basis points (bps) in August. The government has pegged the a year based on 2023-24 consumption data. Finance minister Nirmala Sitharaman told Mint in an interview on 5 September that the expected boost from the consumption stimulus will mean that the Union government will retain its budgeted fiscal deficit target of 4.4% this financial year.
Shweta Rajani, head of mutual funds at Anand Rathi Wealth Ltd, said higher government borrowing could impact the , leading to negative sentiment in the bond market. She added that investors will wait for clarity on the government’s borrowing calendar and monetary policy before re-entering debt schemes, “after which we might see some growth in inflows.”
Debt fund outflows
Another reason for outflows in debt mutual funds was due to advance tax payments made by investors.
Suranjana Borthakhur, head of distribution and strategic alliances at Mirae Asset Investment Managers (India), said that debt funds saw outflows in August largely because institutional investors pulled out money from liquid and short-term schemes to meet advance tax and quarter-end requirements, after deploying heavily in July.
“This is seasonal and not structural. Flows should stabilise once tax-related withdrawals ease, and if the interest rate outlook turns clearer, we could see fresh allocations into short- and medium-duration funds,” she added.
Within debt schemes, liquid funds saw the highest outflows, worth ₹13,350 crore in August, which were mainly pulled out to make tax payments, said experts.
While gilt funds saw outflows worth ₹928 crore, corporate bond funds saw outflows worth ₹825 crore in August.
Equity MFs
Equity mutual funds received inflows worth ₹33,430 crore in August, a 22% drop from the previous month.
However, experts say that the 22% drop in inflows is not due to negative sentiment but rather a fall in new fund offers (NFOs) in the month. There were only three equity NFOs in August compared to 10 equity NFOs in July.
“It is just an aberration as the inflows have maintained their annual average of ₹33,000 crore, which was seen during the period of August 2024 to August 2025,” said Viraj Gandhi, CEO at Samco Mutual Fund.
He added that this is visible as NFOs were mostly thematic funds in the last month. “In August, a result of lower NFOs, flows into thematic funds have also fallen 59% quarter on quarter to ₹3,893 crore.
There were only 2 NFOs for thematic schemes in August; this number was 7 in July.
Within equity schemes, flexicap funds received the highest inflows, worth ₹7,679 crore. They were followed by midcap and smallcap funds, which received inflows worth ₹5,330 crore and ₹4,992, respectively.
“Despite valuations in mid- and small-cap funds having looked stretched a few months ago, inflows continue to remain robust with over ₹10,000 crore coming into these categories for two consecutive months, reflecting investors’ growing conviction in the broader market’s long-term opportunities,” said Borthakhur.
Systematic Investment Plans (SIP) contributions dipped marginally by 0.7% to ₹28,464 crore in August as foreign outflows impacted the sentiment a bit.
Gold ETFs
Investors have also been aggressively looking at gold exchange-traded funds (ETFs), which is reflected in the inflows into these ETFs, which were at ₹2,189 crore in August, the highest since January this year. With currency volatility and global uncertainty, gold is seen as a safe haven, and central banks actively buying gold are making it an obvious choice for investors, said Anand Vardarajan, chief business officer at Tata Asset Management.