“This decline can largely be attributed to heavy redemptions in the Liquid and Overnight Fund categories, which saw net outflows of over ₹48,325 crore. These categories typically see high institutional flows and are more sensitive to short-term liquidity needs and treasury management decisions,” said Nehal Meshram, senior analyst–manager research, Morningstar Investment Research India.
However, other debt categories showed resilience and gained traction. Corporate bond funds emerged as a standout, drawing in ₹11,983 crore, likely due to the combination of attractive yields and improved credit visibility. Similarly, Money Market Funds witnessed inflows of ₹11,223 crore, supported by their short-term nature and favourable carry in a stable interest rate environment.
Investor appetite was also evident in Low Duration Funds and Ultra Short Duration Funds, which received ₹3,133 crore and ₹1,847 crore, respectively. According to Meshram, this trend reflects investor preference for moderate risk strategies that still offer higher returns than overnight instruments.
A notable development in May was the return of flows into Gilt Funds, marking their first positive month of 2025. The regular gilt category alone pulled in ₹1,386 crore.
“Gilt Funds, for the first time in 2025, witnessed net inflows led by the regular gilt category, which attracted ₹1,386 crore. This reversal in trend was likely driven by growing expectations of a prolonged rate cut cycle, which strengthened investor appetite for duration-oriented strategies,” said Meshram, adding, “As yields began to soften in anticipation of accommodative monetary policy, long-term government securities became more attractive due to their potential for capital gains. This sentiment also extended to medium and longer duration funds, which recorded modest inflows during the month.”
On the equity side, flows moderated slightly, reflecting near-term caution. However, systematic investment plans (SIPs) remained steady, indicating that retail investor confidence hasn’t wavered. “While large-cap and flexi-cap inflows dipped, valuations in these segments could soon revive investor interest,” said Suranjana Borthakur of Mirae Asset. Meanwhile, hybrid funds, especially arbitrage, balanced advantage, and multi-asset schemes, gained popularity as tools to navigate volatility while staying invested.
Interestingly, Arbitrage Funds have become a preferred temporary parking space for investors waiting for clearer opportunities, reflecting a more strategic approach to fund deployment.
While the headline figure for debt mutual funds in May points to outflows, a deeper look shows a market in transition, with investors tactically rebalancing their portfolios, signaling that investor behaviour is maturing, moving away from blanket panic or euphoria, and toward measured, diversified allocation.