HNIs pivot to private credit as equity valuations rise and debt MF tax benefits disappear

Highlights

• Elevated equity valuations and the removal of long-standing tax benefits for debt mutual funds are prompting high net-worth individuals (HNIs) to reassess their investment strategies. One clear outcome of this shift: rising interest in private credit and other debt products that offer attractive risk-reward dynamics.
• The shift gained momentum after the 2023 Union Budget, which announced that, effective April 1, capital gains from debt mutual funds would be taxed at an investor’s marginal income-tax rate.  
• The withdrawal of tax benefits for debt mutual funds has pushed HNIs towards managers who employ more active strategies within fixed income. This includes dynamic allocation between corporate and government securities, duration management, the use of interest-rate derivatives, and selective leverage.
• With equity markets trading at elevated multiples and traditional debt losing some of its tax attractiveness, the rebalancing towards private credit appears set to continue—driven by stability, customisation, and superior risk-adjusted returns.

There has been a visible uptick in allocation towards debt among affluent investors. A lot of family offices, corporate treasuries, ultra-HNIs and HNIs have started looking more at debt as an alternative in the safety bucket. This trend is partly driven by profit-booking in equities and a move towards more stable fixed-income products. Private credit funds offer more consistent returns on a risk-reward basis.

Change in indexation benefits 

The shift gained momentum after the 2023 Union Budget, which announced that, effective April 1, capital gains from debt mutual funds would be taxed at an investor’s marginal income-tax rate. The earlier indexation benefit, which allowed gains to be adjusted for inflation, was withdrawn to create a level playing field across debt products. This triggered a significant migration of HNI money towards alternative investment funds (AIFs), which offer structured debt exposures.

Recent data from the Securities and Exchange Board of India (SEBI) shows that cumulative net investments by AIFs in debt securities stood at ₹1.16 lakh crore as of March 2024, with debt instruments comprising 30% of total cumulative net investments. Post this taxation change, HNIs are finding the post-tax risk-reward firmly tilted in favour of these funds.

Withdrawal of tax benefits 

Private credit funds typically deliver higher returns, often in the range of 5–10% above what traditional debt products like fixed deposits and non-convertible debentures offer. The withdrawal of tax benefits for debt mutual funds has pushed HNIs towards managers who employ more active strategies within fixed income. This includes dynamic allocation between corporate and government securities, duration management, the use of interest-rate derivatives, and selective leverage.

Conclusion 

As investment sophistication rises, the way HNIs classify private credit is also evolving. Earlier seen only as a part of alternative allocations, private credit is increasingly viewed as a core component of fixed-income portfolios. The strong growth is driven by greater awareness among companies and promoters, the suitability of private credit for specific business situations, and the flexibility it offers in structuring solutions.

With equity markets trading at elevated multiples and traditional debt losing some of its tax attractiveness, the rebalancing towards private credit appears set to continue—driven by stability, customisation, and superior risk-adjusted returns