Bank certificates of deposit (CDs) have replaced government securities as the largest investment in debt mutual funds, reaching a 25% share by March 2026. This trend follows tax rule changes that pushed investors toward shorter-term schemes, leading to nearly ₹60,000 crore in inflows for money market funds while gilt funds saw significant outflows.
Indian debt mutual funds have significantly changed how they invest, with Bank Certificates of Deposit (CDs) now becoming the largest holding in their portfolios. Data from the Securities and Exchange Board of India (SEBI) shows that as of March 2026, CDs made up 25% of debt fund assets, up from 15.9% in March 2024. During the same period, the allocation to Government Securities (G-Secs)—which were previously the preferred asset class—fell to 14% from 21.7%.
This shift is primarily driven by changes in debt fund taxation introduced in 2023. Under current rules, investments in debt funds are taxed at the investor's individual income tax slab rate rather than offering lower long-term capital gains tax rates with indexation benefits. This has reduced the appeal of longer-duration schemes, such as Gilt funds, which typically hold government bonds with longer maturity periods.
Investors have consequently moved toward shorter-horizon schemes, such as money market funds, which invest in liquid instruments like CDs and commercial paper. This preference is clear in the flow of money: money market funds recorded inflows of ₹59,478 crore in the 2025-26 fiscal year. In contrast, Gilt funds, which focus on government bonds, saw investors pull out ₹7,799 crore.
Beyond CDs, the data also highlights a growing interest in corporate debt, which increased its share of mutual fund portfolios to 17% from 15.2% over the last two years. This suggests that fund managers are searching for higher yields in the corporate sector to compensate for the tax-neutral or tax-inefficient nature of these funds for many investors.
For investors, this change in asset allocation brings new considerations. While CDs are generally seen as safe, short-term instruments issued by banks, they carry different risks compared to sovereign-backed G-Secs. In times of extreme market stress, liquidity—the ability to sell assets quickly without affecting their price—can become a challenge in short-term markets. Additionally, because these funds are now heavily oriented toward shorter durations, they are less sensitive to interest rate changes than long-term bond funds, but they remain vulnerable to shifts in central bank policies and overall market liquidity conditions.
The key monitorable for investors going forward will be whether this trend persists or if a change in interest rate cycles encourages a return to longer-duration government bonds. Investors should also watch how fund managers balance the need for safety with the search for returns in a tax-adjusted environment.