Retail revolution needed: Five reasons to add fixed income mutual funds in your portfolio

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In recent years, the decline in debt mutual fund investors has been alarming. Since 2020, folios in fixed income funds have dropped to 7.1 million from 8.1 million even as equity-oriented fund folios have skyrocketed to over 1.5 billion from 638 million. While the percentage of total MF assets to bank fixed deposits has risen to 31% in 2024 from 16% in 2020, the ratio of fixed income assets under management to bank deposits remains a paltry 7.5% as of October 2024.

For context, in the US, fixed income MF assets are at $6.16 trillion, about 31% of the $20 trillion in bank deposits. The contrast highlights the untapped potential of debt MFs in India’s household savings landscape.

Several factors have contributed to this trend, especially taxation changes that have reduced the appeal of debt MFs for institutional and high net worth individual (HNI) investors. Currently, institutions dominate fixed income AUM with a 64% share, while individual investors, mostly HNIs, account for 36%. Retail investors who have driven the meteoric rise in equity MFs through systematic investment plans are yet to experience the benefits of fixed income MFs.

For fixed income MFs to flourish, a real retail revolution is needed. Investors must understand the advantages these funds offer beyond taxation. Here are five compelling benefits of fixed income MFs for retail investors:

Unlike fixed deposits (FDs), where breaking it means paying penalties and losing or earning lower interest on the entire amount, fixed income MFs allow partial withdrawals without penalties. Need ₹1 lakh from your ₹5 lakh investment? No problem. Your remaining ₹4 lakh continues to grow undisturbed. Moreover, you can add to your existing investment whenever you have surplus