Why are debt funds worth over Rs 1 lakh crore under stress?

Debt mutual funds have assets worth Rs 1.08 lakh crore under stress. This has been revealed in a stress testing analysis done till March 2023. This type of pressure has been seen on the assets of about 14 mutual funds.
According to a report, out of the total assets under management (AUM)  of Rs 10.95 lakh crore of debt funds tested till March, pressure was seen on about 1.08 lakh crore i.e. about 10 per cent of the assets.

Why was the test done?
As per SEBI norms, stress test of all open-ended debt schemes is done on monthly basis. This test is done to assess the impact of various risk factors such as rate risk, credit risk, liquidity risk and redemption risk.
According to the information given by the Reserve Bank in this stress report, 24 out of 295 debt schemes are under some kind of credit interest rate and liquidity risk. Earlier in September 2022 and March 2022 also when such tests were done, no such risk was found, reports BusinessLine.

What has changed?
In fact, there has been huge withdrawal from debt funds in March. The government had abolished the indexation benefit on long-term capital gains tax while changing the tax rules on debt funds. Earlier, selling a debt mutual fund unit after three years attracted long-term capital gains tax of 20 percent and also got the benefit of indexation. Because of this, investors withdrew about Rs 81,015 crore from debt funds in the March quarter. Due to outflows, debt funds faced Redemption at Risk i.e. RaR and Conditional Redemption at Risk i.e. CRaR from time to time. All funds have to maintain liquidity ratios like RaR and CRaR above a specified limit.