Mutual fund houses load up on government securities and treasury bills

Mutual funds (MFs) have been increasing their exposure to government securities (G-Secs) and treasury bills (T-bills) among debt schemes to ensure enough liquidity buffers are in place to deal with systemic troubles in debt markets.

MF schemes deployed Rs 1.8 trillion in G-Secs and T-bills in August, which is 52 per cent higher than in last August, before the IL&FS crisis led to panic across debt markets.

The data sourced from the Securities and Exchange Board of India (Sebi) showed that in August, 12.78 per cent of funds deployed by debt schemes were in G-Secs and T-bills. The share was a little over 8 per cent last August. Fund managers say the exposures have gone up due to a combination of factors. 

“There has been a flight towards safety in the light of recent events in debt markets. Also, the spreads on ‘risk’ assets have narrowed, so there is not enough reward for taking the additional risk on credit papers or ‘risk’ assets,” said Mahendra Jajoo, head, fixed income, Mirae Asset Management Company (AMC). 

A fall in interest rates and moderating yields can further push up returns of schemes holding a significant exposure to G-Secs. Fund managers say there is scope for a rally. 

“Over the past one year, the yield outlook has changed in the light of the falling inflation rate, lower growth, and interest rate cuts by the Reserve Bank of India. Even as we might be closer to the bottom of the yield curve, we could see another 40 basis point (bps) rate cut till December and another 15 bps fall in G-Sec yields,” said Akhil Mittal, senior fund manager, Tata AMC.

In the one-year period, long-duration schemes, which largely invest in G-Secs, have gained 18.4 per cent. Meanwhile, credit-risk funds, which typically invest in “risk” assets, have just yielded a 1 per cent return in the same period. 

“Investments in G-Secs have not only delivered strong returns, they have also helped some debt schemes to manage liquidity more efficiently in a period when a fund crunch had dried up the market for credit papers,” said a fund manager. 

Since the IL&FS crisis last September, credit-risk funds have come under heavy redemption pressure, with some schemes caught off guard because these had a relatively low exposure to liquid instruments such as G-Secs and T-bills, which can be easily sold to meet redemptions. 

These exposures may rise further in the next few months because Sebi has recently stipulated that liquid schemes should park 20 per cent of their corpus in G-Secs, T-Bills, and cash and repo instruments. The new norm comes into force in April nect year. 

Experts say debt markets are now seeing lower participation by non-banking financial companies (that were raising funds through commercial papers) or banks’ certificate of deposits. “Due to lack of credit off-take, banks have also been sluggish in tapping the debt markets,” the fund manager said. 

“So MF flows have gravitated towards G-Secs and T-bills, with lack of participation from private corporate entities,” he added.