Debt assets swell 32% to Rs 11 lakh cr amid easing of rates

Top 10 fund houses cornered over 80% of AUM growth

The last one year has been good for debt mutual funds, with the segment’s assets under management growing 32% to Rs 11 lakh crore at the end of June 2017 quarter (Q1) from Rs 9 lakh crore a year ago. The country’s top fund houses managed to cash in the most on this growth. The top 10 asset managers added Rs 1.5 lakh crore of debt assets, amounting to 83% of the total debt assets added by the sector in the past year, data collated from Value Research shows. 

In absolute terms, Birla Sun Life MF has added the most by way of debt assets in the past year, with assets increasing 29% to Rs 1.34 lakh crore as of June 30. ICICI Prudential MF remained the largest debt fund manager with its assets growing 19% to Rs 1.4 lakh crore. Reliance MF and UTI MF also saw a robust growth in their debt assets, according to data from the Association of Mutual Funds in India (Amfi). 

The dip in interest rates over the past few years had helped the sector attract money in long-duration debt products. But, with the prospects of further interest rate cuts going down significantly, inflows in these products have reduced and the action has shifted to short-term bond funds. 

“While long-duration bond funds saw significant interest in 2015 and 2016 on falling interest rates, these products have become less attractive this year since government bond yields have remained largely range-bound and risen a bit from the lows set in December last year. On the other hand, inflows into the money market, short-term bond funds as well as credit opportunity funds, have increased in 2017,” said R Sivakumar, head–fixed income, Axis MF. 

Bond prices and interest rates are inversely correlated. When rates fall, bond prices rise and vice versa. A decline in interest rates benefits long-duration debt funds the most. In the past year, gilt medium- and long-term funds have topped the returns chart with returns of 11%. 

The Reserve Bank of India (RBI) has reduced the repo rate by 200 basis points since January 2015. 

Debt assets are not considered as sticky as the bulk of the money typically comes from institutional investors, which is typically short-term money. 

With the RBI opting for a 25-basis point rate cut this year, debt fund managers are advising investors to move from duration to accrual funds.

Duration funds make money out of predicting interest rate movements. The higher the duration, the more money the fund will make when interest rates fall. Accrual funds invest in companies with a lower credit rating, often with an expectation that ratings will improve.

Yields on the benchmark 10-year government bonds have slid to 6.5% from 7.1% a year ago. 

According to a recent survey by Icra Online, while individual investors show high preference for equity funds, institutional investors prefer debt-oriented funds, of which typically one-third are liquid schemes.