Why debt funds are suddenly dumping government bonds for bank cash

A quiet revolution is reshaping India's debt mutual fund industry, with fund managers dumping safe government bonds in favor of bank cash. Recent data shows that Certificates of Deposit (CDs)—short-term debt instruments issued by banks to raise immediate funds—have overtaken government securities as the largest holding in debt fund portfolios. This major shift was triggered by a taxation change that removed the long-term capital gains tax benefit for debt mutual funds. Since investors can no longer use indexation to lower their tax bills on long-term bonds, mutual funds have pivoted toward shorter-duration assets to maximize quick yields. This trend is a massive win for commercial banks, which are currently struggling to attract traditional deposits. It allows banks to tap into a massive pool of mutual fund capital to fund their credit growth, though it leaves debt funds highly exposed to short-term interest rate volatility.