Debt mutual funds cut exposure to debentures issued by PSUs

Move amid rising concerns over deteriorating financial health

Debt mutual funds (MFs), which account for the bulk of sectoral assets, have cut exposure to debentures issued by public sector undertakings (PSUs) by nearly 200 basis points (bps) since April.

This comes amid deteriorating financial health of some of the state-owned institutions, particularly banks.

At the end of March, exposure to PSU bonds and debt issuances stood at Rs 1.33 lakh crore or 11.7 per cent of the total of debt assets under management (AUM). By July, fund managers had pruned it to Rs 1.26 lakh crore or 9.9 per cent of the AUM.

On the other hand, debt funds added more government securities (G-secs) to their portfolios. Since April, fund managers have stepped up buying of government paper, raising the allocation to Rs 1.33 lakh crore or 10.45 per cent, from Rs 1.13 lakh crore or 8.9 per cent in April.

“Banks were seen gravitating towards g-secs during demonetisation. Fund managers might have felt there is scope for a further rally in G-secs, prompting them to increase exposure,” says Killol Pandya, head of fixed income at Peerless Mutual Fund.

Till a few months earlier, fund managers had been downsizing their exposure to G-secs. Now, the proportion of corporate bonds in portfolios might further reduce, while that of G-secs might go up, say those in the segment.

“G-secs help in eliminating the risk of default. There is a constraint of supply, as the government has not been raising funds via this route. Rather, it is asking state companies to issue bonds on their own. This makes G-secs attractive once again,” says a debt fund manager with a mid-sized fund house.

The debt categories of funds have been doing well in recent years. In the past one year, their average return has been between 6.5 per cent and 10 per cent, much higher than what a bank fixed deposit is offering. Funds in credit opportunities and gilt funds, medium and long, are leading the performance chart with returns in excess of 9.25 per cent.

Currently, nearly 65 per cent of the sector’s overall assets, worth Rs 20 lakh crore, is in the debt category.