The sudden rise in bond yields last week has forced mutual funds (MFs) to take a relook at their rising exposure to government securities. Most of the funds plan to stay put for the time being and make fresh investments only by the end of this week, which will see Rs 9,000 crore advance tax outflow.
Over the last one month, ending on December 7, gilt funds have yielded returns between 0.18 per cent to 6.44 per cent. However, for the past one week the returns have been negative as prices have stopped going northwards.
Debt fund managers said they are putting their money in long-term papers of 10-15 years. Dhawal Dalal, debt fund manager at DSP Merrill Lynch Mutual Fund said, "Liquidity is of paramount importance," and papers at the long-end offer better liquidity than papers at the shorter end - where the yield curve is flat." Dalal said they were reducing their exposure to gilts from 43 per cent to 28 per cent.
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Birla Mutual Fund has also reduced its gilts exposure to 26 per cent, while it is holding cash equivalent assets of over 10 per cent in income and gilt funds.
Most of the funds had over the past one month increased their exposure to long term papers in the range of 8-15 years, while reducing their exposure to short-term papers. Milind Nandurkar, fund manager at Sun F&C said that inflows into gilt funds have been lower in the last one month than previously - a fact agreed to by other fund managers.
Last Friday's OMO auction by the Reserve Bank of India has propped up the yield of 10-year paper to above 8 per cent after it touched a low of 7.77 per cent last week.
Pru-ICICI Mutual Fund is another fund which is waiting until the end of the week to increase its exposure to long-term papers.
A market watcher at Birla Mutual Fund said that a large part of the rally over the previous month in the long bonds could be ascribed to the easy liquidity situation. "The tendency of the majority of the players over the past month has been one of buying assets as and when liquidity is available," and this brought in a situation where the sovereign yields were out of sync with other interest rates in the system. For the time being, the 10-year paper is expected to trade in the 8-8.25 per cent band.