Finance & Economy | News & Insights

Bringing Back Credit Risk Appetite in Debt Mutual Funds

Published: December 13, 2023


  • The Securities and Exchange Board of India (SEBI) has recently put forward a proposal to introduce a new category of high-risk debt mutual funds. This initiative is designed to appeal to retail investors with a higher risk appetite and a more nuanced understanding of risk.
  • The funds within this proposed high-risk category are expected to benefit from relaxations in sectoral and exposure norms, along with the flexibility to employ high-risk investment strategies. These allowances are anticipated to enable these funds to generate relatively higher returns, thereby positioning them competitively in the market.
  • Although this proposal is still in its preliminary phase, CareEdge Ratings views it as a positive development for the debt mutual fund sector. Over the last few years, debt mutual funds have been facing headwinds amid credit crisis, Covid-19 led liquidity disruptions, regulatory shifts followed by cycle of rising interest rates and subdued returns.
  • Furthermore, the Finance Bill of 2023 introduced amendments to the taxation of debt mutual funds. Under these amendments, mutual fund schemes with no more than 35% of their assets invested in equity shares are now classified for short-term capital gains, effectively removing the indexation benefits previously available.


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