Gilt funds account for over a tenth of debt MF assets

These now account for over a 10th of debt MF assets, as fund managers raise exposure to govt paper on hope of reversal in interest rate cycle

India’s debt mutual fund managers are increasing their exposure to government securities (g-secs).

The share of government paper in debt funds’ total assets under management (AUM) crossed 11 per cent in December, the highest in 2014. At the year's start, gilt holdings accounted for 6.2 per cent of the total AUM. This is only the third time in recent years that fund managers have an exposure to g-secs of more than 10 per cent of total debt assets.

MFs have been lapping government paper on hope of a reversal of monetary policy stance by the Reserve Bank of India. The central bank had unexpectedly cut interest rates by 25 basis points (bps) on January 15. Economists expect it to cut interest rates by up to 100 bps during the coming year.

In absolute terms, the AUM in gilt funds is Rs 81,811 crore, according to data from the Securities and Exchange Board of India. This is probably the highest in absolute terms for many years. As on end-December, the average debt AUM was Rs 7.39 lakh crore.

Interestingly, nearly 94 per cent of gilt AUM is in funds with tenure of at least a year or above. Showing investors are adding duration in their debt funds, as had been advised by fund managers for the past few months. A global drop in oil and commodity prices has raised expectation that interest rates and, thus, g-sec yields could be headed downward for the long term.

“The drop in international oil prices will benefit all oil importing countries, especially India. The decline in consumer inflation appears sustainable, given the long-drawn pricing cycle of commodities. Benign inflation over the next few years will lead to lower interest rates in the future,” said Sujoy Das, head of fixed income, Religare Invesco MF. 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.  Managers say fixed-income products with high duration — between three and five years — are poised to benefit the most. “Investors should consider investing in long-duration gilt and income funds to benefit from falling interest rates over the next few years,” added Das.

Fund managers have been advising investors to add duration to their existing investments in debt products. According to them, from a six-month to 18-month perspective, fixed income products can deliver double-digit returns. According to Rahul Goswami, chief investment officer (fixed income) at ICICI Prudential AMC, “We continue to run high-duration debt across schemes and believe the time is right for investors to continue building duration in their portfolios.” There was a nearly 15 per cent rise in investors' folios in gilt funds over the October-December 2014 quarter. Currently, the sector offers 46 gilt funds and has an overall folio base of 58,437.