Constant income tax reforms are driving high-net-worth individuals (HNIs) in India towards dynamic portfolio models. According to Dennis Gabriel, Partner at Upwisery Private Wealth, recent changes in the taxation of debt instruments, especially mutual funds, are reshaping long-term investment strategies.

“The opportunity that the Global Bond Index could have created for Indian investors may not be fully realised,” he said.

Debt mutual funds (MFs) and target maturity funds (TMFs), which were once ideal for debt investments, have become less attractive due to the new tax treatment.

Gabriel pointed out that the shift away from capital gains (CG) tax benefits for debt MFs is a major concern.

“CG tax benefits were meant to reward investors for participating in the country’s economic growth and managing risks,” he explained. However, the current tax system, which applies slab rates, treats debt MFs like fixed deposits, making them far less appealing. “

This clearly indicates that retail and HNI investors may not be the target base for the Global Bond Index narrative,” he added.

The frequent tax reforms are also affecting long-term investment decisions.

“Post-tax returns are always a key consideration for long-term investments. When the tax landscape changes frequently, it creates anxiety, especially around budget time, and impacts asset allocation decisions,” Gabriel said.

For investors looking to navigate the current debt space, Gabriel suggested hybrid mutual funds with dynamic asset allocation strategies, such as asset allocator fund of funds (FoFs), which still offer CG tax benefits.

“REITs, InvITs, and well-rated listed bonds can also serve as quasi-debt options. And for those preferring simplicity, they can still invest in debt MFs, despite the less favourable tax treatment, along with FDs and debt-heavy hybrid funds,” he advised.

India’s inclusion in the Global Bond Index is a promising sign for the country’s economic stability. “The inclusion itself reflects India’s financial strength,” Gabriel remarked.

He noted that it is likely to reduce the government’s borrowing costs and boost capital expenditure, especially in infrastructure, while also helping manage the current account deficit (CAD).

Additionally, foreign inflows from this inclusion are expected to strengthen the rupee.

Gabriel also addressed the anticipated $30-billion inflow into the debt space following the announcement of India’s inclusion in the index. “The increased demand for government bonds from foreign investors will drive bond prices up, and yields will contract. This is good news for investors holding portfolios skewed towards government bonds or highly-rated corporate bonds,” he explained.

According to Gabriel, long-duration debt funds, TMFs, and investment vehicles like portfolio management services (PMS) and alternative investment funds (AIF) that focus on this mix will stand to benefit as bond yields align with future RBI policies.