By Himank Sharma
MUMBAI (Reuters) - Fund managers in India continue to prefer domestic debt and gold, expecting markets to recover from their recent sell-offs and to prove sturdier investments than stocks, according to a Reuters poll.
Debt funds have attracted 497.06 billion rupees this year, more than six times the amount invested in such funds in the same period last year, given expectations that the Reserve Bank of India would cut interest rates.
Although rate cut expectations have receded in the near term as a slump in the rupee to record lows spurs inflationary concerns, fund managers are still keeping their faith in bonds - particularly longer-term debt.
Fund managers also expect gold prices to recover after domestic August contracts have slumped around 15 percent this year on the back of government action to curb imports.
Out of 15 managers polled by Reuters last week, 12 expect government and corporate bonds to gain in the second half of the year, while seven of nine expect bullion prices to recover.
"As we see some stability on the global front, domestic factors will again start to dominate, which are broadly supportive of lower interest rates," said Gautam Kaul, fixed income fund manager at IDBI Asset Management Ltd.
Despite recent heavy foreign selling, benchmark 10-year bond yields in India are still down about half a percentage point this year. Yields move inversely to prices.
Data from funds tracker Lipper shows longer-term debt funds have gained an average of 3.8 percent this year. By contrast, equity funds have provided negative returns of 6.4 percent in a year in which the BSE Sensex is largely flat.
Whether investors would switch out of debt into equities has been a much debated point that will likely intensify after industry data on Wednesday showed investors redeemed 45.01 billion rupees from debt funds in June.
The Association of Mutual Funds in India (AMFI) data also showed equity funds attracted a net 9.37 billion rupees in inflows, the first month of purchases since March.
Bonds have been under pressure as the weak rupee, the narrowing differential with U.S. Treasuries and a high current account deficit are seen preventing the RBI from easing further after cutting rates by 75 basis points this year.
However, fund managers say equities in the second half will remain too volatile to perform better than debt, given expectations for weak corporate earnings in an economy that grew at 5 percent in the year ended in March, the lowest in a decade.
Furthermore, foreign investors own a relatively higher proportion of Indian stocks than debt, making equities more vulnerable to outflows from emerging markets, according to fund managers.
Overseas funds have sold a net $1.72 billion in shares since June, but still have net purchases of $13.63 billion this year.
"We expect continued volatility in the foreseeable future; our strategy is to essentially diversify into different asset classes and geographies to hedge that risk," said Chandresh Nigam, chief executive of Axis Mutual Fund.
Gold could also benefit from aversion to equities and more attractive prices even as AMFI data shows bullion-linked exchange traded funds (ETFs) saw 2.06 billion rupees in redemptions in June, the highest in a year.
"Gold ETFs as a category have seen outflows for three consecutive months, though it is not an alarming trend in light of the build-up seen over the last 5-6 years," said Chirag Mehta, fund manager of Quantum Mutual Fund.
Some 96.12 billion rupees were invested in gold ETFs in India as of June end.
(Additional reporting by Siddesh Mayenkar in MUMBAI and Patturajaa Murugaboopathy in BANGALORE; Editing by Rafael Nam & Kim Coghill)
