Debt funds' exposure to G-Sec hits 11-month high on rate cut hopes

Rally in expectation of change in monetary policy, with bulk of assets having moved to longer-duration bonds

The country’s fixed-income fund managers are seen loading on government securities (G-secs). The latter are seeing a sharp rally, in anticipation of a reversal in the Reserve Bank's monetary policy stance. G-secs accounted for nearly 10 per cent of total assets under management (AUM) in debt last month, the highest in 11 months.

Mutual fund (MF) exposure to government paper rose from 6.24 per cent of AUM in March to 9.87 per cent last month. The gradual increase in exposure coincides with a drop in yields, from 9.1 per cent in April to below 7.9 per cent at present. In absolute terms, G-sec holdings at MFs was Rs 77,870 crore in November of the total debt AUM of Rs 7.89 lakh crore.

Bond yields and prices move in opposite directions. A fall in yields boosts the return for debt schemes, as it results in capital appreciation. “G-secs have already rallied a lot. Yields have fallen more than 50 basis points in the past three months. But there can further downward movement if interest rates are eased,” said Akhil Mittal, senior fund manager (fixed income) at Tata MF.

A global drop in oil and commodity prices has raised expectation that interest rates and, thus, G-sec yields could be headed downward for the long term.

“The drop in international oil prices will benefit all oil importing countries, especially India. The decline in consumer inflation appears sustainable, given the long-drawn pricing cycle of commodities. Benign inflation over the next few years will lead to lower interest rates in the future,” said Sujoy Das, head of fixed income, Religare Invesco MF.

Most fund managers have been opting for longer duration debt paper, as these are likely to benefit the most from a reversal in the monetary policy stance. Fund managers say fixed-income products with high duration — between three and five years — are poised to benefit the most. Interestingly, about 90 per cent of the G-sec investments are in papers with maturity of more than a year.

“Investors should consider investing in long-duration gilt and income funds to benefit from falling interest rates over the next few years,” said Das.

Fund managers have been advising investors to add duration to their existing investments in debt products. According to them, from a six-month to 18-month perspective, fixed income products can deliver double-digit returns.

“We continue to run high-duration debt across schemes and believe the time is right for investors to continue building duration in their portfolios,” said Rahul Goswami, chief investment officer, fixed income, ICICI Prudential AMC.

“Since over time the curve is expected to steepen, products like short-term plans and credit funds like corporate bond funds, focused on the medium duration, are also very attractive.”

November saw a rise of about six per cent in gilt funds investors' base to 54,487 over October. The period saw gross sales of Rs 1,236 crore. As on end-November, the MF sector offered 46 gilt funds to investors.