Debt funds see Rs 2.19 lakh crore inflow in April as investor sentiment cools on equities

In April, debt funds experienced a notable shift in investor sentiment, with a substantial inflow of Rs 2.19 lakh crore compared to outflows of Rs 2.02 lakh crore in the previous month. This movement highlights a growing preference for debt instruments as corporates and individuals seek safer investment avenues amidst ongoing market uncertainties. The mutual fund industry's average assets under management (AUM) consequently rose by 4.2% to Rs 69.50 lakh crore, up from Rs 66.70 lakh crore in March, driven primarily by these fixed-income investments. 

The majority of the allocation to debt funds was focused on liquid and liquid-plus strategies, indicating a preference for short-term placement of funds in anticipation of future investment opportunities. Specifically, Rs 1.19 lakh crore was added to liquid funds, with overnight and money market funds also attracting significant amounts of Rs 23,900 crore and Rs 31,500 crore, respectively. These figures demonstrate a deliberate strategy by investors to prioritize liquidity while waiting for more favorable market conditions.

"The April rebound was broad-based, with 12 out of 16 debt mutual fund categories reporting net inflows. The surge in April inflows also reflects a return to normalcy and reaffirmed confidence in fixed income instruments, particularly among corporates redeploying idle cash following year-end disbursements. Liquid funds witnessed highest net inflows of INR 1,18,656 crores, reversing more than 89% of their March outflows. Similarly, overnight funds and money market funds attracted INR 23,899.98 crores and INR 31,507.04 crores respectively, as short-term instruments regained favor amid stable monetary conditions and strong liquidity. The significant inflows also extended to ultra short and low duration funds, which garnered INR 26,733.81 crores and INR 9,370.62 crores respectively, signaling renewed interest in slightly longer short-term strategies offering better risk-adjusted returns," said Nehal Meshram, Senior Analyst – Manager Research, Morningstar Investment Research India.

Short-duration debt funds (Returns as of May 2025)

Top Funds - 3 Month	Return (%)	Top Funds - 6 Month	Return (%)	Top Funds - 1 Year	Return (%)
Franklin India Short Term Income Plan - Direct	192.10	Franklin India Short Term Income Plan - Direct	192.10	Franklin India Short Term Income Plan - Direct	192.10
DSP Credit Risk Fund - Direct	15.64	DSP Credit Risk Fund - Direct	17.87	DSP Credit Risk Fund - Direct	23.09
HSBC Credit Risk Fund - Direct	15.28	HSBC Credit Risk Fund - Direct	17.44	HSBC Credit Risk Fund - Direct	22.41
Aditya Birla Sun Life Credit Risk Fund - Direct	6.46	Aditya Birla Sun Life Credit Risk Fund - Direct	8.54	Aditya Birla Sun Life Credit Risk Fund - Direct	17.94
Aditya Birla Sun Life Medium Term Plan - Direct	5.24	Aditya Birla Sun Life Medium Term Plan - Direct	7.28	Aditya Birla Sun Life Medium Term Plan - Direct	14.90

According to the latest data, Franklin India Short Term Income Plan - Direct Plan has emerged as the top performer across all timeframes—delivering an astonishing 192.10% return over 1 year, which also reflects in its 3-month and 6-month performance. This figure, however, may reflect a one-off gain, fund restructuring, or base effect and warrants deeper scrutiny.

Next in line are DSP Credit Risk Fund - Direct Plan and HSBC Credit Risk Fund - Direct Plan, both of which have delivered impressive short-term gains. DSP's 6-month and 1-year returns stood at 17.87% and 23.09%, respectively, while HSBC’s came in at 17.44% and 22.41%.

Other notable names include Aditya Birla Sun Life Credit Risk Fund and Aditya Birla Sun Life Medium Term Plan, which consistently feature in the top 5 across multiple timeframes. These funds have benefited from tactical duration plays and a favourable credit environment.

For investors seeking stability with moderate returns, these top-performing short duration funds present compelling options. However, it’s critical to evaluate associated credit risk, liquidity, and portfolio composition before investing.

Equity funds

In contrast, equity schemes witnessed a varied response, with flexicap funds receiving Rs 5,542 crore, slightly down from Rs 5,615 crore in March. Small-cap and midcap funds also saw marginal reductions, gathering Rs 4,000 crore and Rs 3,314 crore, respectively. However, sectoral and thematic funds observed a significant increase, collecting Rs 2,001 crore compared to only Rs 170 crore in March.

This shift suggests a nuanced investor approach towards equities, balancing between stability and sector-specific opportunities. Arbitrage funds, benefiting from their tax-efficient structure, recorded inflows of Rs 11,790 crore, a stark reversal from the previous month's outflows.