)
Mutual fund (MF) managers are putting a lot of money in government securities (G-secs), amid expectation of further rate cuts by the Reserve Bank of India. Exposure of all debt assets under management (AUM) to G-Secsurities was a little less than eight per cent in July 2014. It is now 13 per cent, on the back of strong inflows from investors in gilt schemes, which invest in government paper. About Rs 1.1 lakh crore is in G-Secs’ a year before, it was a little less than Rs 50,000 crore, show statistics from the Securities and Exchange Board of India.
A global drop in oil and commodity prices has raised expectation that interest rates and, thus, G-Sec yields could be headed downwards for the long term. Fund managers expect benign inflation over the next few years, leading to lower interest rates.
S Naren, chief investment officer of ICICI Prudential AMC, says: "The fixed income market was expecting volatility because of the Greek situation and a potential rate increase by the US Federal Reserve. Recent developments have settled these concerns. Yields in the US could stabilise, as they have increased from two per cent to 2.4 per cent. Greece, too, has settled, with the European Union agreeing to a fresh bailout. We believe that towards the end of the year, there is likelihood of an interest rate cut."
Sujoy Das, head of fixed income at Religare Invesco MF, says: "The allocation towards gilts has been increased to benefit from the rate easing cycle of RBI. Lower headline inflation and benign commodity prices create a case for further rate easing."
Gilt schemes, in particular, have seen a steep rise in asset size. The AUM has risen from Rs 5,492 crore last June to Rs 15,193 crore at end-June this year. Total gross sales in the gilt segment were Rs 9,000 crore in the first half of the current calendar year, one of the largest in recent years.
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. According to them, fixed income products with high duration - between three and five years - are poised to benefit the most. About 97 per cent of the allocation in government papers is in securities with maturity of a year or above.
"We believe duration funds might prove an attractive investment over the next one year. The shorter term rates have already fallen and this could be an opportune time to invest in funds with a three year and above maturity profile. Also, the yield curve is flat at the longer end of the curve; hence, the opportunity lies there," adds Naren.
According to him, deflationary forces are strong all over the world and in such an environment, the preferred asset class to invest in is fixed income, with focus on higher duration. India could be a huge beneficiary from this and inflation will be very low in the coming months. "Another important thing to note is that credit growth is very low and banks will be forced to invest incremental deposits into gilts, rather than lend to already distressed corporates. This improves the demand/supply dynamics for G-Secs,” he says.
