Debt mutual funds have lost significant market share in India's mutual fund industry over the past six years, even as their assets under management grew 35% and the category added nearly 19 lakh investor accounts. This move does not necessarily imply that investors are giving up on fixed income in their portfolios, rather it is an increasing trend to get fixed income exposure in hybrid funds and other alternative investment products, through which investors can diversify their fixed income allocation, according to industry executives.

Key Highlights

• Debt mutual fund AUM grew 34.8% to Rs 17.51 lakh crore, but industry share fell from 50.97% to 21.29%.
• Hybrid fund AUM quadrupled to Rs 12.17 lakh crore, emerging as the new preferred route to debt exposure.

Debt Funds Gain AUM, But Overall Share Declines Sharply

According to data from the Association of Mutual Funds in India (AMFI) and MFI360 Explorer, debt-oriented schemes had 50.97% of the average AUM of all the mutual funds in the country in June 2020 with Rs 12.99 lakh crore out of Rs 25.49 lakh crore.

The debt-fund AUM grew by 34.8% to Rs 17.51 lakh crore by June 2026, including liquid and overnight funds. The overall industry AUM, however, increased by more than three times, increasing the debt funds' share to Rs 82.22 lakh crore, and dropping it significantly from its previous share of 22.54% of the total.

The decline is even more pronounced when measured by investor accounts. Debt mutual fund folios rose 25.6% to 91.47 lakh from 72.85 lakh over the same period, adding 18.62 lakh new accounts. However, total mutual fund folios surged from 9.15 crore to 27.86 crore, reducing debt funds' share of overall folios from 7.96% to just 3.28%.

Three Key Factors Driving the Shift

Industry experts point to three main factors behind the changing allocation pattern: the sharp post-pandemic equity mutual fund inflow rally, changes in the tax treatment of debt funds, and the growing popularity of hybrid and alternative investment products.

Shweta Rajani, Head - Mutual Funds at Anand Rathi Wealth said, "The drop in debt fund AUM share is mainly driven by a shift in asset allocation toward equity for long-term investing, alongside the loss of debt funds' earlier tax advantage over fixed deposits." She noted that debt funds once carried a clear tax edge over FDs, but today that treatment is broadly on par.

The tax advantage for debt funds weakened after the Finance Act, 2023 removed indexation benefits for investments made on or after April 1, 2023, in schemes investing up to 35% of their portfolio in domestic equities. Earlier, investors holding such funds for more than three years were taxed at 20% with indexation benefits; they are now taxed at their applicable income-tax slab rate, effectively aligning debt fund taxation with fixed deposits.

Also Read: Debt Mutual Funds See Rs 2.47 Lakh Crore Inflows in April: AMFI

Equity Rally and Investor Comparisons Reshape Preferences

The post-pandemic equity rally has also mechanically increased equity's share of overall industry assets. Vipin Bhandari, Head of Retail Business at ICICI Prudential Asset Management Company, said, "Mark-to-market gains in equities have boosted equity's weight in industry AUM, while the tax changes made debt funds less attractive for high-income investors, prompting many to shift toward hybrid products instead."

Large investors and family offices have also increasingly turned to alternative investment products for their debt exposure. Reflecting this shift, debt mutual funds recorded net outflows of Rs 1.09 lakh crore in June 2026, following outflows of Rs 96,949 crore in May, while equity funds attracted inflows of Rs 28,973 crore in June after Rs 22,908 crore in May.

Shweta Rajani noted, "Investors today compare debt funds against a much wider set of alternatives than they did six years ago, adding that debt funds yielding around 7% are no longer benchmarked against fixed deposits but against equity returns - a comparison in which they tend to lose out."

Hybrid Funds Emerge as the New Route to Debt Exposure

The clearest beneficiary of this shift has been the hybrid-fund category. AMFI data said that in June 2026, AUM in hybrid funds has increased more than four-fold to Rs 12.17 lakh crore from Rs 3.03 lakh crore in June 2020. The share of the hybrid category in the entire industry on AUM has also increased to 14.8% from 12.3% during the same period.

Within the asset management category, the growth was most pronounced in the category of arbitrage funds, where the AUM increased to Rs 3.44 lakh crore from Rs 73,079 crore, and Dynamic Asset Allocation/Balanced Advantage Funds grew to Rs 3.21 lakh crore from Rs 85,056 crore. Multi Asset Allocation Funds experienced one of the highest growths with assets growing from Rs 12,260 crore to Rs 2.14 lakh crore. The growth in the Balanced Hybrid/Aggressive Hybrid Funds was greater than five times, from Rs 1.11 lakh crore to Rs 2.55 lakh crore, while Conservative Hybrid Funds grew to Rs 29,705 crore from Rs 10,591 crore.

Vipin Bhandari said, "When money stopped flowing directly into debt funds, the industry effectively built out the hybrid category as an alternative channel, adding that when the debt allocation within hybrid funds is included, overall debt exposure across the industry is much larger than standalone debt fund AUM suggests."

Alternatives Widen the Fixed-Income Menu Further

The range of options available to investors seeking fixed-income exposure has also expanded well beyond traditional mutual funds. Rajani noted that debt PMS, debt AIFs, structured products and market-linked debentures have all become increasingly attractive alternatives to standalone debt funds, though she attributed a comparatively smaller share of the overall shift to this trend relative to asset allocation changes and taxation.

For wealth-management clients, structured products have emerged as a preferred option for longer-term allocations. Shweta Rajani explained that such products offer higher returns than typical debt funds while carrying relatively lower market risk, adding that clients with long-term or generational wealth horizons typically hold limited debt exposure, apart from using overnight or short-term debt funds for temporary parking of funds.

The broader trend points to a fundamental shift in India's fixed-income market - the question for investors is no longer simply whether they want debt exposure, but where they want to hold it, and what combination of return, taxation, liquidity and risk they are willing to accept in the process.