Summary of this article
Debt funds in 2025: AUM growth was driven mainly by liquid, money market and short-duration funds, indicating tactical allocations focused on safety and liquidity.
Investor behaviour: Inflows and outflows suggest active management rather than a long-term shift away from equities.
2026 outlook: Improving GDP growth, stable inflation and earnings recovery may revive equity interest, reducing the need for heavy debt parking.
Portfolio approach: Short-term goals can stay fully in short-duration debt funds, while medium- to long-term investors may benefit from a balanced equity–debt allocation.
In 2025, debt funds saw strong traction among investors and emerged as a preferred parking avenue. In fact, during CY25, debt mutual funds witnessed a 15.8 per cent growth in AUM, reaching close to Rs 18.09 trillion, which was primarily led by short-term oriented segments such as liquid funds, money market funds, ultra-short duration funds, and short-duration funds. These segments registered an AUM growth of nearly 35–40 per cent, clearly indicating that investors used debt funds as a temporary allocation rather than a long-term strategic shift.
This trend suggests that investors prioritised capital preservation, liquidity, and lower volatility, as equity markets remained uncertain and largely flat in 2025. Amid global uncertainty driven by Trump’s tariffs and policy actions, investors adopted a cautious approach, choosing to wait on the sidelines and deploy capital selectively while seeking stability during volatile equity conditions.
“This behaviour is further supported by flow data. In October 2025, debt funds saw inflows of nearly Rs 1.59 lakh crore, followed by outflows of about Rs 25,000 crore in November and Rs 1.34 lakh crore in December, indicating that these allocations were actively managed and tactical in nature. A similar pattern was visible in arbitrage funds, which saw inflows of about Rs 4,100 crore in November, but these dropped sharply to around Rs 126 crore in December, broadly in sync with debt fund flows,” informs Manish Srivastava, Executive Director, Anand Rathi Wealth.
Meanwhile, equity funds recorded inflows of about Rs 28,000 crore in December, showing that long-term equity commitments were intact and that investors were using debt and arbitrage funds mostly as parking mechanisms rather than an exit from risk assets.
Looking ahead to CY26, equity is expected to regain traction as macro conditions and earnings improve. Q2 FY26 GDP grew 8.2 per cent year-on-year, driven by strong services and manufacturing growth, with full-year FY26 growth expected at 7.3 per cent.
With inflation remaining below average, nominal GDP growth is likely to be around 9 per cent, supporting corporate earnings. Earnings forecasts also point to a recovery, with Nifty 50 earnings expected to grow 8 per cent in FY26 and accelerate into FY27, while mid and small cap segments are projected to deliver healthy double-digit growth, despite near-term volatility from global uncertainties.
“For investors, it is suggested to plan portfolios strategically based on investment objectives and time horizon, rather than reacting to short-term market noise. If you are investing for short-term objectives, such as a tenure of less than one year, staying 100 per cent allocated to short-term oriented debt funds like liquid funds, money market funds, and ultra-short duration funds can be considered, as these categories have delivered returns in the range of 6.5–7 per cent with low volatility. Investors in higher tax brackets may also consider arbitrage funds for better tax efficiency,” says Srivastava.
If the objective is medium to long-term, diversifying across equity and debt with an 80:20 asset allocation helps maintain stability, liquidity, and growth exposure, while allowing investors to ride through market cycles. This approach ensures that portfolios remain resilient in the short term, while staying positioned to benefit from a potential equity recovery as CY26 progresses.
